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Asean, Middle East, India hop onboard the ‘De-dollarisation Express’
There is an inexorable shift away from the US dollar as the world reserve currency.Rahul Menon - 14 Apr 2023, 8:30am
Experts say BRICS nations and other emerging economies will face hurdles to supplant the US dollar in global trade.
PETALING JAYA: When US general Douglas MacArthur’s military career ended in 1951, he was given the honour of addressing a joint session of the US Congress. He ended his speech with this memorable line: “Old soldiers never die – they just fade away.”
Seventy-two years later, MacArthur’s famous quote seems to have new resonance. “World reserve currencies never die – they just fade away” may well be the rallying cry for those who want to see de-dollarisation picking up pace.
The prospect of the mighty dollar sliding into irrelevance was unthinkable just a few years ago. Yet, the drumbeat calling nations to hop on the “De-dollarisation Express” keeps getting louder as economies from Asia, South America, Africa, the Middle East, and even Asean reduce their dependence on the US dollar for trade.
According to the International Monetary Fund (IMF), the dollar’s share of global foreign exchange reserves fell below 59% in the final quarter of 2021, extending a two-decade decline.
‘Shock and awe’ sanctions
What really accelerated de-dollarisation was the West’s “shock and awe” sanctions imposed in the wake of Russia’s special military operation against Ukraine in February 2022.
The US and the EU quickly froze around US$300 billion (RM1.32 trillion) of Russia’s gold and foreign reserves, and cut off its major banks from the SWIFT international payments network, in a bid to cripple Russia’s economy.
The US’ weaponisation of the dollar and SWIFT has freaked out many countries around the world. The thinking behind this is that “if you can do it to Russia, China, Iran, Cuba, Venezuela, you can do it to us one day”.
India and Malaysia agreed last month to settle trade in Indian rupees. This followed earlier reports that India and Russia were pushing for a local currency settlement mechanism to move beyond the US dollar.
Brazil and China also announced at end-March they had agreed to no longer use the dollar and would instead settle trade in local currencies. This sent shockwaves to the US as bilateral trade between Brazil and China hit a record US$150 billion (RM660.6 billion) last year.
The BRICS nations – Brazil, Russia, India, China, and South Africa – also announced plans to develop a new reserve currency to better serve their economic interests.
The news last month that 18 countries had struck a deal with India to trade in rupees has led to questions whether the move goes beyond purely economic reasons.
What is interesting about India’s trade settlement deal is that countries seen as traditional US allies – the UK, Germany, New Zealand, Israel and the United Arab Emirates (UAE) – also signed up to by-pass the greenback in their trade with India.
Petrodollar system under threat
Another big surprise was the news that China National Offshore Oil Corporation and France’s TotalEnergies completed China’s first purchase of liquefied natural gas (LNG) from Total’s UAE portfolio. The deal was settled in yuan through the Shanghai Petroleum and Natural Gas Exchange on March 28.
It needs to be emphasised just how historic this is: For five decades, virtually all energy from the Persian Gulf was sold in US dollars. Now China is buying a French company’s LNG from the UAE in yuan. The US economic hegemony that heavily relied on the petrodollar system since the 1970s appears to be breaking apart.
The China-France-UAE deal will certainly be eclipsed by the impending move by Saudi Arabia to accept yuan instead of dollars for Chinese oil sales. On March 15, the Wall Street Journal reported Saudi Arabia is in “active talks with Beijing” to price some of its oil sales to China in yuan.
It will be a seismic event if Saudi Arabia ditches the dollar for its oil sales to China and the rest of the world. This is because Saudi Arabia is the reason the petrodollar system exists, where all oil sales globally are traded in US dollars.
A breakdown in the petrodollar system will be disastrous for the US, its economy, and undermine its position as the world’s leading superpower. And that is exactly what Russia and China are hoping for, and working towards.
Asean sticks the knife in?
Nearer home, the 10-nation Asean bloc is studying ways to lessen its dependence on the world reserve currency.
When Asean finance ministers and central bank governors met in Indonesia on March 28, top of the agenda was discussions on reducing dependence on the US dollar, euro, yen, and pound sterling from financial transactions and shifting to settlements in local currencies.
At the meeting, Indonesian President Joko Widodo argued that Indonesia needed to shield itself from geopolitical disruptions, citing the sanctions targeting Russia’s financial sector from the US, EU, and their allies.
Azmi Hassan, senior fellow at Akademi Nusantara, agreed that volatile geopolitical patterns were underpinning the economic decision by nations to ditch the greenback.
Citing the sanctions on Russia, he said: “If you take the example of India and China purchasing crude from Russia in local currency, it should naturally be an economic decision, given the crude is being sold at a discount.
“However, when you frame decisions made by India and China within the backdrop of the war, there are evident geo-political underpinnings in the decision to bypass the greenback.”
Azmi noted that Asean’s move to reduce dependence on the US dollar should not be misconstrued as “anti-American”.
“I don’t think Asean moving away from dollar dominated trade will affect our relationships with US or the West, because this is not a show of Asean’s preference for China or the BRICS over the West,” he said.
Parallel financial systems
Much has been made about Prime Minister Anwar Ibrahim’s announcement on his recent trip to China regarding an “alternative international financial order” and the setting up of an Asian Monetary Fund to rival the IMF.
Azmi said such moves could eventually lead to the formation of parallel global financial systems.
“If the de-dollarisation currents gather greater momentum, and with more nations convinced of ditching the greenback, I foresee the West pinning the blame on adversarial nations,” he said, adding such polarisation could eventually lead to the formation of two blocs.
Interestingly, Oh Ei Sun, principal adviser at the Pacific Research Center of Malaysia, said while geopolitical calculations are considered by governments, trade was primarily a matter of economic interactions between businesses.
“The major economic benefit for de-dollarisation of trade is the avoidance of incurring losses due to currency exchange.
“Given many emerging economies now have extensive trading relationships with countries apart from the US, using local currencies to conduct trade is a natural choice to keep costs down,” he said.
However, experts warn against expectation that transitioning to a multi-currency global trade system would be straightforward.
Center for Market Education CEO Carmelo Ferlito said there is currently no clarity around how countries will firmly construct and operate a new trade settlement system.
“And it is difficult to move from a position of certainty to uncertainty. Any new bilateral trading currency will first need to generate trust,” he said.
Oh concurred, adding the transition would be an extremely “painful one” given countries like China still impose controls on their currency.
