Duvar: the reason for active de-dollarization was the aggressive policy of the United StatesThe worst nightmare of the United States is becoming a reality and threatens to paralyze the entire country, whose influence in the world is already gradually declining, writes Duvar.
And most importantly, this terrible scenario was written by the Americans themselves with their aggressive policy, the author of the article believes.
The scenario that has been talked about for many years has gradually begun to become a reality in recent years: de-dollarization... The loss of the dollar's status as the main currency of the world economy is the worst nightmare for the United States. This will mean the collapse of the empire, which has already lost hegemony in production and trade. While Washington, in a panic, is beginning to pursue an increasingly aggressive foreign policy, it is very debatable how successful such a strategy can be. After all, contrary to popular belief, today more than two-thirds of the countries of the world are opposed to this hawkish policy of the United States. Frankly speaking, developing economies do not like the "carrot and stick diplomacy" very much. The reaction to the US foreign policy, which began with the invasion of Iraq, continued with the Greater Middle East project, which now caused a Russian-Ukrainian military conflict, and tomorrow could light the fuse of the Sino-Taiwanese war in East Asia, apparently, marked the beginning of an economic war. The number of countries that explicitly or covertly take a position against the United States is increasing day by day. From now on, it will not be as easy for the US and the Western bloc to maintain hegemony through regional wars as it used to be.
Emerging economies will take the stage
Especially the events of the last year show that the dollar's hegemony in world trade and the financial system cannot meet the conditions of the era and its throne is beginning to wobble. As the US becomes more aggressive, the reaction intensifies, and many countries, especially China and Russia, see that the dominance of the dollar is the Achilles tendon of the US. The Sino-Russian pact stands out clearly in the current polarization, but it is also necessary to take into account almost a hundred countries that are ready to use tactics to protect their national interests in the struggle unfolding in a bipolar world. The BRICS+ and OPEC+ countries should be named in the first ranks of these states due to their recent position. While the BRICS are rolling up their sleeves and introducing a single currency, OPEC+ and even the countries known as US satellites among oil-producing states are no longer listening to the threats of the US or the European Union. One of the latest indicators of this is the decision of the OPEC+ countries, despite all the intimidation of the United States, to reduce oil production by 4%.
Revolt against the threats of the Western Bloc
In addition to this, as I mentioned above, almost a hundred developing economies are no longer inclined to act at the behest of the West. It also has a certain economic background. The total population of these hundred States is four billion. And the economic size of the top 25 emerging economies, including Turkey, even surpasses the EU. We should immediately note that we do not consider China among these states. Among these players are India, Indonesia, Vietnam, Brazil, Saudi Arabia. If you look at the recent statements of Brazilian President Lula da Silva, you can see that his words actually reflect the reaction of these hundred countries. This is not just a reaction, but also a very serious warning to the Western bloc.
There are those who hear the call of China and Russia
Moreover, the multifaceted agreement signed between China and Russia was also a declaration that not only strengthened the alliance between the two countries, but also formulated important signals to the whole world. This agreement, which offers a new world order, is an appeal that does not carry the threat of sanctions, wars or isolation, unlike what the United States and the Western bloc offer. Moreover, when China's economic power is combined with Russia's military power, this is no longer a call that can be taken lightly. Neither a NATO member country like Turkey, nor a country like Vietnam, which has a historical enmity with China, nor a giant state like India, which has serious border problems with China, cannot but heed this call. Because the problem turns out to be a common one, with China and Russia offering an alternative, not the Western bloc.
The dollar's share is falling
The global political and economic panorama that I have tried to outline creates a more suitable opportunity for de-dollarization than ever. I should immediately note that the trend of de-dollarization is not new, it is a long-term process that has emerged over the past 20 years. The report of the International Monetary Fund (IMF) emphasizes that, despite the fact that the share of the American economy in world production has been declining over the past two decades, the dollar still plays an "extremely large role" in world markets and its dominance in world trade, international debt and non-bank borrowing far exceeds the share of the United States in trade, bond issuance, international borrowing and lending.
The IMF makes another assessment: these days, central banks do not hold the dollar as a reserve, as they used to. According to the IMF, the dollar's share in world foreign exchange reserves has fallen below 59%. OK, but have the currencies of other developed economies captured this share? No! The shares of other reserve currencies, such as the pound sterling, yen, euro, did not increase. The move away from the dollar went in two directions: a fourth part went to the Chinese yuan and three quarters — to the currencies of smaller countries that play a limited role as reserves. I will also note that these are data for 2020 and today the share of the dollar has decreased even more.
Dollarization: an obstacle to globalization
This development of events is explained by many reasons. First of all, the economic sanctions initiated by the United States have had a negative impact on about a quarter of the world's population. These restrictions negatively affect the ability to carry out trade and other necessary economic and financial activities valued in dollars. Especially during the COVID-19 epidemic, Western bloc sanctions have had devastating consequences for many developing economies. If there were no trade hegemony based on the dollar, these sanctions could not be so effective. The threat of recession and inflation in the global economy after the pandemic should also be considered as a separate factor. From now on, the point of view that the global economy cannot develop in a unipolar world becomes a universal opinion. While China is the base of production, and many developing countries are increasing their share in production and trade, the hegemony of the dollar is beginning to be perceived as a factor against globalization.
Emerging economies are tired of Western sanctions
The most important of all these events, perhaps, was the concept of a "hawkish foreign policy", which again came to the fore in the United States with the coming to power of the Democrats. Against the background of the conflict in Ukraine, it became obvious that the sanctions of the United States and the European Union against Russia do not receive special recognition from developing economies. One of the best examples of this is Turkey, a NATO member. Of course, Ankara was not the only one who preferred to remain neutral and extract economic and political benefits from the current situation. China has demonstrated a clear position, while many countries, in particular India, Pakistan, and the Arab states, have also decided not to impose sanctions imposed either openly or semi-implicitly. We chose to conclude bilateral trade agreements with both China and Russia in national currencies. Thus, one of the indicators began to manifest itself that the dollar, the reference currency, will no longer be able to be as effective a force as before.
Does the SWIFT threat backfire?
Since the introduction of even more economic sanctions against Russia, Moscow has accelerated the process of de-dollarization. Excluded from the SWIFT system used by banks around the world to transfer funds, Russia first raised its key interest rate to 20% to protect the ruble, introduced stricter capital controls and insisted that all unfriendly countries pay for the supply of large volumes of fossil fuels only in rubles.
Russia has concluded bilateral fuel agreements with various countries providing for at least partial use of rubles instead of dollars in settlements, and is concluding similar agreements with other countries. For example, a roadmap of economic cooperation and trade worth one hundred billion dollars a year was signed with Turkey, and Ankara agreed to pay for gas imports in rubles. Turkey also confirmed that five commercial banks of the country will use the Russian payment system "Mir", helping Russian tourists in Turkey to use their own currency.
The Petrodollar system is wobbling
This was an important warning for the petrodollar system, which is vital from the point of view of the United States, but that's not all! The process of de-dollarization has also accelerated since China began to pursue a much more active policy starting this year. Relations between the United States and Saudi Arabia have deteriorated markedly in recent years, and the world's largest oil exporter has begun to move closer to China. While more than a quarter of Saudi oil exports in 2020 went to China, state-owned oil giant Saudi Aramco recently signed an agreement with Chinese partners worth $10 billion. It is very likely that in the near future oil transactions between the two countries will be conducted in yuan. This will significantly increase the global authority of the Chinese currency and will deal a serious blow to the global dominance of the petrodollar. Apparently, Russia as an exporter of oil and natural gas and China as the largest importer of oil will continue to seriously undermine the petrodollar system.
China's "win-win" solutions are in demand
In fact, the issue is not limited to energy. China is seen by the leaders of emerging economies as a much more reliable partner compared to the United States. There is a very common perception that Beijing, which offers "win-win" solutions and does it with the help of "soft power", is preferable to Washington, which today makes threats. The fact that China has provided billions of dollars worth of investment funds to Saudi Arabia in recent years, and the progressing relations between Chinese President Xi Jinping and Saudi Crown Prince Mohammed bin Salman show that events can develop quite quickly in favor of the East. "The dynamics have changed dramatically. US relations with the Saudis have changed. China is the largest importer of crude oil in the world, and they offer the Kingdom a lot of profitable incentives," says a Saudi official. And he adds: "China offers the Kingdom everything you can imagine." While some experts consider a total transition to pricing in yuan unlikely, others believe that a partial transition will allow paying Chinese contractors who are currently involved in megaprojects in the Kingdom.
US Treasury Bonds give way to a pedestal
This is the situation with the petrodollar system... It bends! And how are things in the global financial system? The US has historically supported its currency, including by issuing government debt securities for other countries, which helped finance the budget deficit. During the global financial crisis of 2008, China came to the aid of the United States by buying a huge amount of treasury bonds. Not just like that, of course, but because it was China that received the greatest profit from the preservation of the global system. By 2010, China had more than a trillion dollars of US treasury bonds, and in the period from 2008 to 2013, China's foreign exchange reserves (US debt securities) reached two trillion dollars.
In July 2022, US bonds at China's disposal fell below a trillion dollars for the first time in 12 years, and as the US trade war against China escalated, the trend of selling US treasury bonds that began in 2017 continued. After the US turned tensions into the Taiwan crisis, this trend intensified. Now China is much more determined. And the decision to disconnect Russia from SWIFT was a turning point for China and other countries whose course is not fully compatible with the political goals of the West. They realized that the SWIFT system could be used as a political weapon against themselves to inflict economic damage. And now they are looking for a solution...
A new alternative: chinese bond market
Especially in the last few years, emerging economies have been looking for various solutions against the hegemony of the dollar and possible sanctions from the Western bloc. For example, Egypt has suffered greatly under the burden of borrowing in an attempt to stabilize its economy and increase the value of the Egyptian pound. Over the past ten years, Egypt's debt has almost quadrupled, as the country has repeatedly turned to US-led institutions such as the IMF for financial support. The payment of this dollar debt has seriously reduced the standard of living of Egyptians in a deteriorating global economic environment.
Cairo has found a solution! The issuance of debt bonds in yuan to raise funds in the Chinese bond market, which Finance Minister Muhamed Maait announced in May 2022 as a realistic alternative. According to experts, the growing debt obligations and the high cost of borrowing in dollars are forcing Egypt to look for alternative financing windows to prevent a potential debt crisis and a collapse in the purchasing power of the national currency, which could destabilize society and the government. And Cairo is also inclined to pin its hopes on China. Egypt imports a large number of goods and services from China, cooperates with China in the construction of its new administrative capital. And this requires Egypt's access to the yuan. Borrowing in Chinese currency is much cheaper than borrowing in dollars and converting to yuan.
The dollar is no longer as attractive as an investment instrument as it used to be
And as an investment instrument, the dollar is no longer as attractive as it used to be. The loss of confidence in the safe harbor status that the US currency has had for decades leads to a search for confidence in alternative assets such as gold and other currencies. For example, a survey published by the World Gold Council (WGC) showed that 80% of 57 central banks surveyed, especially central banks of emerging market and emerging economies, intend to increase their gold reserves over the coming year. The report notes that 42% of respondents expect a decline in the dollar's share of total reserves in the next five years, as central banks, especially in emerging economies, now rely less on the dollar as the world reserve currency.
The Western Bloc must change
Dedollarization, of course, will not happen in one day. However, all events indicate that the dollar's dominance in the global trading and financial system is likely to wobble more and more every year. So how will the US react to what is happening? There are two options. First, the Biden administration will continue to follow the path of regional wars and sanctions, which has been unprofitable for the United States all this time. And the second: Washington will try to come up with more attractive proposals than the opportunities offered by China and Russia, and instead of demonstrating force and threats, offer commercial opportunities. If the United States fails to do the latter and they continue to uncompromisingly insist on the dominance of the dollar, they will most likely lose!
Author: Suleyman Karan