Is dollar collapsing? No. It’s doom for petrodollar
Interestingly, the dollar faced a similar fate around this time last decade, when the US and its closest ally Europe imposed oil sanctions on Iran in 2012.
The latest fear gripping the global financial markets is the death of the dollar. But no, the mighty US dollar isn’t collapsing or it’s nowhere near the boneyard. Rather, it’s the petrodollar, which helped build the greenback’s hegemony, that’s under siege. Several countries including China, Russia, India, and Brazil are increasingly trading oil and energy in local currencies, ditching the dollar. If key countries like Saudi Arabia join, the collapse of the petrodollar first, and subsequently the dollar cannot be completely ruled out.
Interestingly, the dollar faced a similar fate around this time last decade, when the US and its closest ally Europe imposed oil sanctions on Iran in 2012. The very sanctions that intended to strengthen the dollar’s world supremacy have sowed the seeds of self-collapse. Ten years later, the 2022 Russian oil sanctions seem to have firmly put the ‘decline of the petrodollar’ back into the spotlight. Consider a sample of deals struck recently.
If China and Brazil agreed to trade in respective currencies last week, this week saw a similar India-Malaysia pact. Last month, Chinese President Xi Jinping met Russian President Putin and renewed their decade-old deal to trade without dollars.
As it is, two-thirds of the bilateral trade between China and Russia is already being done using yuan and ruble. In February, Iraq and China agreed to trade using yuan, while China and France completed their first yuan-settled LNG trade, eliminating dollars for energy trades.
Among all, the biggest break will likely come from BRICS, which will decide on the membership of two major oil-producing nations -- Saudi Arabia and Iran -- this year. Incidentally, Saudi Arabia recently confirmed its willingness to trade in currencies alongside the dollar. This is huge because that’s where the petrodollar was born.
In 1973, years after the gold standard was junked, US and Saudi Arabia agreed to accept only dollars for oil and to invest profits in US treasury bonds, notes and bills. And before we knew it, petrodollars spread beyond oil and to every facet of global trade becoming invincible. As of 2022, the dollar accounts for about 50% of global trade and about 60% of global currency reserves, according to the Bank of International Settlements. In contrast, the world’s second-largest economy China’s currency yuan accounts for a piffling 2.7% each in both global trade and currency reserves. This means, the much-feared de-dollarization is unlikely, though not impossible.
For over two decades, emerging economies have been making efforts to reduce the dollar’s reliance. The IMF too argued the need for a new global reserve currency. Whether that role will be filled by yuan, a BRICS currency or a basket of national currencies, countries are readying for a de-dollarized world.
In 2012, the US and EU imposed sanctions on Iran’s oil trade and the country was shut out of the global Swift payments system. Iran hit back halting shipments to Germany, Spain, Greece, Britain and France, which together bought some 18% of its oil. Though Tehran’s official oil sales dipped, Iran used imaginative ways to sell and empty its oil tankers despite sanctions. Russia-China, and China-Japan began their ruble-renminbi, yuan-yen trade, while India bought Iranian oil with gold and rupees. A new agreement among Brics to use national currencies for trading was also floated.
Ten years later in 2022, similar events repeated with Russia at the centre. But this time, the hit to dollars’ supremacy will be acute for two reasons. One, oil sales sans petrodollars is here to stay. Countries led by India and China have tasted the benefits of inexpensive trading in rupees and yuan without dollar as an intermediary.
Two, China, which has been harboring hopes of world dominance has gained heft compared to the last decade and is a now serious contender to de-throne the US. The US still remains the world’s largest economy with $23 trillion GDP, but China is closing in fast at $17.7 trillion. Coincidentally, China owns the largest US currency reserves at $3.18 trillion. If it wants, China can simply offload just a fraction of the reserves to dent the dollar’s strength.
All said, the world’s biggest oil-trading partners China and Saudi Arabia still use the petrodollar and the crucial December 2022 meeting between both nations sparked enough speculation. Regardless of whether Saudi-China local currency trade deal materializes, Saudi Arabia’s proposed BRICS membership, if it happens, will be a big blow and mark the beginning of the end of the petrodollar.