From Russia to China and now Saudi Arabia, cracks are forming in the US’ dollar hegemony

beijingwalker · Apr 16, 2023

From Russia to China and now Saudi Arabia, cracks are forming in the US’ dollar hegemony

Apr.16,2023 10:49 KST Modified on : Apr.16,2023 10:49 KST

The US’ weaponization of the dollar has impressed upon other countries the need to reduce their dependence upon the dollar

Brazilian President Luiz Inácio Lula da Silva (left) speaks to Argentine President Alberto Fernández in January 2022 at the government complex in Buenos Aires. (AP/Yonhap)

American hegemony in the world order is propped up by military might and the almighty dollar.

The dollar is the medium of exchange in international trade and the bulk of most countries’ foreign exchange reserves. A country with no dollars cannot do anything in the global economic order as it currently stands.

But recent events are putting dents in the tyranny of the dollar.

On Mar. 29, Brazil and China struck a deal to replace the dollar with their own currencies — the yuan and the real — in bilateral commerce. That deal can be seen as the biggest achievement in China’s campaign to unseat dollar supremacy through the internationalization of the yuan.

Brazil, the biggest country in South America, acceded to China’s offer despite being a friend of the US —and being in the US’ own backyard.

The international trend toward de-dollarization was triggered by US-led sanctions against Russia after it annexed the Crimean Peninsula in 2014 and was accelerated by Russia’s invasion of Ukraine in 2022. The US’ sanctions barred Russia’s foreign exchange and financial transactions by excluding it from the dollar trading system.

The US’ weaponization of the dollar impressed upon other countries the need to reduce their dependence upon the dollar. As a consequence, many have been reducing the dollar’s share in their trade and foreign exchange reserves.

Defection of Saudi Arabia, a pillar of dollar supremacy

What began as tentative moves by Russia (as the subject of sanctions) and China (as the US’ challenger) has expanded into a trend of de-dollarization with the addition of Saudi Arabia, the guarantor of dollar payments in petroleum deals — a mainstay of dollar supremacy.

Since 2018, Russia has divested all of the approximately US$150 billion in US treasury bonds it held in 2012. China’s US treasury holdings amounted to around US$1.3 trillion in 2013, but it reduced those holdings to US$1.1 trillion in Jan. 2022, shortly before the outbreak of war in Ukraine. And Saudi Arabia cut its own holdings from US$185 billion in February 2020 to US$119 billion in January 2022.

In March 2022, in the days after Russia’s invasion of Ukraine, the Wall Street Journal reported that Saudi Arabia and China were in serious discussions about using yuan for oil purchases. Saudi’s efforts bore fruit with the China National Offshore Oil Corporation’s purchase in yuan of 65,000 tons of liquefied natural gas (LNG) from the United Arab Emirates at the Shanghai Petroleum and Natural Gas Exchange — the first time the yuan had been used in an LNG trade.

That purchase took place on the same day that China and Brazil announced they would conduct commerce in the yuan and real.

The Export-Import Bank of China announced on March 14 that it had finished preparations for loaning yuan to Saudi Arabia’s state-run banks. That paves the way for using the yuan in bilateral trade.

Saudi Arabia’s steps toward de-dollarization could blow the system of dollar supremacy wide open.

The dollar faced a major crisis when the US government stopped redeeming dollars for gold in August 1971 after its trade deficit ballooned in the 1960s. Things got even worse during the 1973 oil crisis.

But in 1974, the US managed to consolidate dollar supremacy by establishing the “petrodollar” system with Saudi Arabia, the leader of the Arab oil producers that were behind the oil crisis.

Under the agreement, oil deals would only be conducted in dollars, and Saudi Arabia would invest dollars earned from oil sales to buy US treasury bonds and US-made weapons. For its part, the US provided the Saudis with a robust security commitment.

By rerouting oil producers’ dollar-denominated earnings back to the US, the deal greatly improved the US’ international balance of trade while also reinforcing the strength and value of the dollar.

As the linchpin in the petrodollar system, Saudi Arabia’s activities coincide with the de-dollarization campaign of the China-Russia front.

Chinese President Xi Jinping and Russian President Vladimir Putin promised to accelerate efforts to build an independent financial network that is not influenced by third countries — namely, the US — in a virtual summit in November 2021, while the crisis in Ukraine was heating up. That made clear the two countries’ intention of withdrawing from dollar-denominated transactions.

When the US adopted sanctions aimed at booting Russia out of the international financial network for its invasion of Ukraine, China and Russia shifted to widespread adoption of yuan-ruble deals in bilateral trade.

Warning to the US: Alternative to the dollar is in development

Yuan-ruble transactions between those two countries have increased more than ninetyfold over the past two years — from 2.2 billion yuan in January 2021, before the war, to 201 billion yuan this January.

On Dec. 30, 2022, Russia’s Ministry of Finance instructed the Russian National Wealth Fund, which is worth around US$186.5 billion, to double its maximum share of yuan to 60% and its maximum share of gold to 40%. That basically lowers the fund’s target holdings of dollars, euros and yen to zero.