Link: https://thetricontinental.org/newsletterissue/de-dollarisation-brics/
In early June, rumors began circulating – widely reported in the Indian press as true – that the Saudi Arabian government had allowed the petrodollar deal with the United States to lapse. This agreement, made in 1974, is quite simple and meets several needs of the US government: the US buys oil from Saudi Arabia, and Saudi Arabia uses the money to purchase military equipment from US arms manufacturers, keeping the proceeds of oil sales in US treasuries and in the Western financial system. This arrangement to launder oil profits into the US economy and the Western banking world is known as the petrodollar system.
This non-exclusive agreement between the two countries has never required the Saudis to limit oil sales in dollars or to recycle oil profits exclusively in US Treasury bonds (of which it holds the considerable sum of $135.9 billion) and in Western banks. The Saudis are in fact free to sell oil in multiple currencies, such as the euro, and to participate in digital currency platforms such as mBridge, an experimental initiative of the Bank for International Settlements and the central banks of China, Thailand and the United Arab Emirates (UAE).
However, the rumor that this decade-long petrodollar arrangement was coming to an end reflects the widespread expectation that a seismic shift in the financial system could topple the dominance of the dollar regime and Wall Street. It was a false rumor, but it carried with it a truth about the possibilities of a post-dollar or de-dollarized world.
The invitation extended to six countries to join the BRICS bloc last August was a further sign that this shift is underway. Among these countries are Iran, Saudi Arabia and the United Arab Emirates, although Saudi Arabia has yet to finalize its membership. With expanded membership, BRICS will include the two countries with the largest and second largest gas reserves in the world (Russia and Iran, respectively) and the two countries that account for nearly a quarter of global oil production (Russia and Saudi Arabia, all data updated to 2022). The political opening between Iran and Saudi Arabia, brokered by Beijing in March 2023, as well as signs that US allies the UAE and Saudi Arabia seek to diversify their political ties, demonstrate the possible end of the petrodollar system. This was the crux of the rumors in early June.
However, this possibility should not be exaggerated, as the dollar-Wall Street regime remains intact and significantly powerful. Data from the International Monetary Fund shows that, as of the last quarter of 2023, the US dollar represents 58.41% of allocated foreign exchange reserves, a percentage far higher than reserves held in euros (19.98%), Japanese yen (5.7%), British pound (4.8%) and Chinese renminbi (just under 3%). Meanwhile, the US dollar remains the main invoicing currency in global trade, with 40% of international trade transactions of goods invoiced in dollars, despite the US share in global trade being only 10%. While the dollar remains the key currency, it nevertheless faces challenges around the world, with the US dollar’s share of allocated foreign exchange reserves having declined gradually but steadily over the past two decades.
Three factors are driving de-dollarization: the lack of strength and potential of the US economy, which began with the Third Great Depression in 2008; the aggressive use of illegal sanctions – especially financial – by the United States and its Global North allies against a quarter of the world’s countries; the development and strengthening of relations between the countries of the Global South, especially through platforms such as the BRICS. In 2015, BRICS created the New Development Bank (NDB), also known as the BRICS Bank, to navigate a post-Dollar-Wall Street regime and produce structures to promote development rather than austerity. The creation of these BRICS institutions and the increased use of local currencies to pay for cross-border trade have created the expectation of rapid de-dollarization. At the 2023 BRICS summit in Johannesburg, Brazilian President Luiz Inácio Lula da Silva repeated calls to increase the use of local currencies and perhaps create a currency system called BRICS.
De-dollarization has been the subject of a lively debate among those who worked in the BRICS institutions and in large countries interested in de-dollarization, such as China, on its necessity, prospects and difficulties of finding new ways to hold foreign exchange reserves and invoice global trade. The latest issue of the international magazine Wenhua Zongheng, a collaboration between Tricontinental: Institute for Social Research and Dongsheng, was published in June. In the introduction to “BRICS and De-Dollarization: Opportunities and Challenges” (Volume 2, Issue 1, May 2024), Paulo Nogueira Batista Jr., First Vice President of the NDB (2015-2017), summarizes his notable reflections on the importance of abandoning the dollar-Wall Street regime and the political and technical difficulties of such a transition. BRICS, he rightly states, is a heterogeneous group of countries with very different political forces in command of the various states. The political agendas of its members – even with the new mood of the Global South – are particularly diverse when it comes to economic theory, with many of the BRICS states remaining committed to neoliberal formulas while others seek new models of development. One of the most important points made by Nogueira is that the United States “will most likely use all the many tools at its disposal to fight against any attempt to dethrone the dollar from its status as the linchpin of the international monetary system.” These tools include sanctions and diplomatic threats, which dampen the confidence of governments that have weaker political commitments and are not supported by popular movements committed to a new world order.
De-dollarization moved at a very slow pace until 2022, when Global North countries began confiscating Russian assets held in the dollar and Wall Street financial system, and anxiety spread in many countries over the safety of their assets in North American and European banks. Although this confiscation was nothing new (the United States had already done it in Cuba and Afghanistan, for example), the scale and severity of these confiscations operated as a “trust-destroying” measure, as Nogueira puts it.
Nogueira’s introduction is followed by three essays by leading Chinese analysts on current changes in the world order. In “What Is Driving the BRICS’ Debate on De-Dollarisation?”, Professor Ding Yifan (senior fellow at the Taihe Institute in Beijing) traces the reasons why many countries in the Global South now seek to trade in local currencies and offload their dependence on Wall Street’s dollar regime. He highlights two factors that cast doubt on the possibility of the dollar continuing to serve as a reference currency: first, the weakness of the US economy due to its dependence on military spending compared to productive investments (the former represent 53.6 % of total world military spending) and secondly, the US history of breaching contracts. In closing his article, Ding reflects on the possibility of countries in the Global South accepting the Chinese renminbi (RMB) as a reference currency, since China’s manufacturing capabilities make the RMB valuable for purchasing Chinese goods.
However, in his essay “China’s Foreign Exchange Reserves: Past and Present Security Challenges,” Professor Yu Yongding (member of the Chinese Academy of Social Sciences) is cautious about the possibility of the renminbi displacing the dollar. For the renminbi to become an international reserve currency, Yu argues, “China must meet a number of preconditions, including the creation of a robust capital market (particularly a deep and highly liquid treasury bond market ), a regime of flexible exchange rates, free cross-border capital flows and long-term market credit.” That would mean China would have to give up capital controls and start offering renminbi treasury bills to international buyers. The internationalization of the renminbi, Yu argues, “is a goal worth pursuing,” but it is not something that can happen in the short term. Distant water,” he writes poetically, “will not quench immediate thirst.”
So where do we end up? In his article “From De-Risking to De-Dollarisation: The BRICS Currency and the Future of the International Financial Order”, Professor Gao Bai, professor at Duke University in the United States, agrees on the urgent need to overcome the dollar regime and of Wall Street and that there is currently no easy path forward. The use of local currency has expanded – such as between Russia and China and between Russia and India – but these bilateral agreements are insufficient. Increasingly, as a recent World Gold Council report shows, central banks around the world have been buying gold for their reserves, thus driving up its price (the spot price of gold is above $2,300 an ounce, well above the $1,200 per ounce it was at in 2015). If there is no immediate currency available to replace the US dollar, Gao argues, then countries in the Global South should establish a “benchmark for settlements in their local currencies and an exchange platform to support those settlements.” The great demand for such value offers the opportunity to create a BRICS currency.”
The new issue of Wenhua Zongheng provides a clear and thoughtful assessment of the problems of the dollar regime and Wall Street and the need for an alternative. The wide range of ideas presented reflects the diversity of discussions taking place in policy circles around the world. We are eager to summarize these ideas and test their technical feasibility and political viability.
It is important to note that two of the BRICS countries have elected new governments this year. In India, the far-right government led by Prime Minister Narendra Modi returns to power, but with a much reduced mandate. Given that the Modi government has proposed a “national interest” policy, it is likely to continue to play a role in the BRICS process and use local currencies to purchase goods such as Russian oil. Meanwhile, South Africa’s governing alliance, led by the African National Congress (ANC), has formed a government with the right-wing Democratic Alliance, committed to US imperialism and uninterested in the BRICS agenda. With Nigeria’s likely entry into the BRICS bloc, the BRICS center of gravity on the African continent may shift northward.
During the harsh years of struggle against the apartheid government in South Africa, ANC member Lindiwe Mabuza (known as Sono Molefe) began collecting poems written by women in ANC camps. Guerrillas, teachers, nurses and other women sent poems that the writer published in a volume entitled Malibongwe (“Be Praised”), which referenced the 1956 Women’s March in Pretoria. In her introductory essay, Mabuza (1938-2021) wrote that in struggle “there is no romance”; there is “only the pounding reality”. This phrase, “pounding reality”, deserves reflection today. Nothing comes from nothing. You have to beat reality to get something, whether it’s a new political opening in places like India and South Africa, whether it’s a new political opening in places like India and South Africa or a new financial architecture beyond the dollar regime and Wall Street.
Cordially,
Vijay Prashad
