The World Trends Toward De-Dollarization
The mechanism underlying today’s “dollar standard” is widely known and the term “petrodollar” describes it well. This system is based on an informal agreement the US and Saudi Arabia arrived at in the mid-1970s. The result of this deal: Oil, and consequently all other important commodities, is traded in US dollars — and only in US dollars.
Oil producers recycle these petrodollars into US treasuries. This circular flow of dollars has enabled the US to pile up a towering mountain of debt of nearly $20 trillion — without having to worry about its own financial stability.
At present, no world economy can completely abandon the dollar for the simple reason that the dollar absolutely dominates in international settlements. And dollar holdings make up a large share of official foreign exchange reserves. Currently, 70% of all world trade transactions account for USD, 20% — with the euro, the rest of Asian currencies are divided, especially Chinese yuan. As a result, the value of the US dollar is exceedingly high in comparison with other currencies, that’s why consumers in the United States receive imported goods at extremely low prices.It provides the United States with significant financial profit, while high demand for dollars in the world allows the US government to refinance its debt at very low interest rates.
The approximate U.S. dollar’s share of global currency reserves is about 63% — 65%. If we talk about the calculations, the international system of interbank payments and transfers SWIFT dollar share is estimated at about 40% — 45%. Since not all international settlements and payments now go through the SWIFT system, the real dollar share in international settlements is even higher and takes about 70%.
SWIFT currently links more than 10,000 banking and finance organizations in 210 countries around the world. Every year 4 billion payment orders are transmitted through the SWIFT network. And the daily gross payments are measured in trillions of US dollars. The main share of all cross-border payments in the world passes through SWIFT.
United States aggressive foreign policy, the imposition of sanctions, instruments for regulating import substitution and the reduction of imports led to the launch of the de-dollarization process in the world. According to experts, the international financial architecture must change significantly in the next decade.
Central banks and governments have long been aware that the dollar has a sell-by date as a reserve currency. But it has taken until now for the subject to be discussed openly.
An increasing number of countries are seeking to break free of Dollar dependence and creating alternative financial, settlement systems, reserve currencies.
Spurred by American economic sanctions, many countries in Europe, Asia and the Middle East have embarked on domestic programs to exclude the US currency from international trade transactions. The appropriate financial decisions were made at the Federal level in China, Iran, Turkey and Russia.
In April of this year, Tehran abandoned the US currency and transferred all international payments to the euro. The dollar in Iran is already out of the question, traders prefer alternative currencies for their transactions. Tehran has been pursuing the goal of eliminating the dollar in its trade and has been trying to sign currency swap agreements with a few target countries.
In recent months, China has also become an active member of this “anti-dollar” campaign, since it has signed agreements with Canada and Qatar on national currencies exchange, which resulted in Canada becoming the first offshore hub for the yuan in North America, while doubling or even tripling trade between these two countries. 200- billion-yuan currency swap (about 30 billion US dollars), the countries currency will be used not only in trade, but also in the implementation of investments.
China’s agreement with Qatar on direct currency swaps between the two countries are the equivalent of $ 5.7 billion and has cast a heavy blow to the petrodollar becoming the basis for the usage of the yuan in Middle East markets. It is no secret that the oil-producing countries of the Middle Eastern region have little trust in the US dollar due to the export of inflation, so one should expect other OPEC countries to sign agreements with China.
At the same time, China is preparing to launch a crude oil futures contract denominated in Chinese yuan and convertible into gold. Since China is the world’s largest oil importer, the move could deal a major blow to the global influence of the United States dollar.
China and Iran’s rial-yuan’s bilateral monetary agreement can have a significant role in increasing the volume of trade between the two countries. In 2017, trade between Iran and China grew by 22 percent compared to 2016, reaching about $ 30,5 billion. Basically, China’s crude oil imports from Iran. Remember that, Iran holds the world’s fourth-largest proved crude oil reserves, this is about 10% of the world’s reserves. Iran’s exports to its top trading partner China witnessed a 25.2% rise compared to 2016 to reach $ 2.7 billion.
The United States is preparing a new package of sanctions against Russia. There is a high probability of full freezing of dollar assets and disconnection from dollar transactions of seven Russian state banks. When such sanctions come into force, these banks will not be able to accept and send payments in dollars.
In March, Russia’s central bank opened its first office in Beijing. Russia set to Issue Government Bonds in Chinese Yuan. Both sides have intensified efforts in recent years to settle bilateral trade not in US dollars, but in rubles and yuan. In 2017, the trade turnover between China and Russia reached $66 billion.
The inevitable transition from the undivided dominance of the US dollar to a multipolar monetary arrangement has several important consequences. The oil exporting countries are not inclined to maintain oil prices high, but maintain and increase its market share. They are increasingly able to choose which currencies they want to trade. At the same time, oil-producing countries are no longer interested in turning their revenues into “petrodollars”.
All of the above clearly indicates the fact that the global trend of de-dollarization of national economies kills the dominance of the US dollar. The last one mentioned is rapidly losing its position as the world’s reserve currency and may give way to national or cryptocurrency in the foreseeable future.