José Miguel Amiune*
War accelerates the decline of the dollar as the world’s sole currency
Dear reader, the title and subtitle of this article may surprise you, alarm you, or make it difficult for you to see the connection between the war, the decline of the dollar and China’s role as a new international power. This obliges me to tell you a story that few know and that remains hidden from most of the world’s public opinion. I will tell it to you, as succinctly as I can.
A story you have never been told: “dollar and oil”.
In 1974, President Richard Nixon was facing an oil crisis, runaway inflation, recession and a stock market crash. This, to some extent, was the result of the decision Nixon himself had taken in 1971 when he decided to abandon the gold standard for good and free the issuance of dollars independently of the gold reserves deposited as collateral for the currency at Fort Knox. From then on, the quantity of dollars issued and in circulation bears no relation, nor any proportion whatsoever, to the gold reserves held by the US Treasury. In other words, the dollar has no gold backing and therefore most of the dollars in circulation have no backing at all. It is what is called “wallpaper” in common parlance and what economists call “fiat money”. The gold reserves at Fort Knox (valued at market value) are currently estimated at about $270 trillion (in US denomination), while the dollars in circulation plus bank deposits in checking and savings accounts (M2) amount to $21 trillion of the same denomination. These data are taken from the US Treasury in 2023. This allows us to calculate that, for every dollar backed by gold, there are 77 unbacked or “fiat” dollars in circulation in the world.
This is the beginning of the story I want to tell you. Aware of the need for a new backing for the dollar, President Nixon sent his Secretary of State Henry Kissinger and Undersecretary William Simon to Saudi Arabia, which led the Organisation of Petroleum Exporting Countries (OPEC), created in 1960 in Baghdad, in July 1974.
What was Kissinger and Simon’s mission? The Shah Reza Palevi of Iran was, at the time, the US’s strategic ally in the Gulf area and the entire Middle East, with the support and military protection of the US. The Shah, who was Persian and Shiite, viewed with suspicion the growing role of the Saudi Royal House, who were Arab and Sunni, because of their increasing involvement in oil production and marketing. In turn, the Saudi monarch feared the military superiority of the Shah of Iran, which threatened the territorial integrity of his country and the security of members of the Saudi Royal House.
The difference between the two kingdoms was that Reza Palevi was beginning to be harassed by the clerics for the rapid “westernisation” he had imposed on Iranian society, while the Saudi monarch was tightly controlling his society and increasing his influence among the Sunni-majority Gulf states. One was declining and the other emerging.
Kissinger’s mission, he suggested, was therefore to offer the Saudi monarch a strategic arrangement whereby the US military would defend the royal family and the kingdom itself, in its territorial integrity, from any regional or extra-regional threat. The quid pro quo demanded by the US was that Saudi Arabia, in its capacity as president of OPEC, would require all member countries to fix the international price of oil in US dollars, preventing all transactions in oil, gas and other fuels from being denominated in any currency other than the dollar.
The Jeddah Agreement, signed in July 1974, established a long-term strategic alliance between the US and Saudi Arabia that has endured to the present day. This alliance, enshrined in the Petrodollar Agreement, saved US finances. Because everyone needed oil, everyone needed dollars to buy it. The huge demand for petrodollars that followed the Jeddah Agreement became the backing for the dollar, replacing “metallic gold with black gold, oil”.
The backing for the newly issued dollars was no longer gold, but the demand generated by the obligation to denominate oil and gas sales and purchase contracts in US dollars on a global scale. The world was covered in petrodollars which, by the magic of the power of finance capital, became the external debt of developing and emerging countries. Through US and European commercial banks, these dollars, which the oil-producing countries deposited in the financial system, were recycled and turned into the external debt, whose weight on the peripheral world would soon explode.
In Latin America, the debt problem exploded, led by Mexico in 1982. Between 1989 and 1996, the Brady Plan, in the countries that adhered to it, restructured the debt by transferring it from the banks to thousands of private bondholders. However, in the 1990s, crises in Mexico, Southeast Asia, Russia, Brazil, Turkey and Argentina could not be avoided. This situation, aggravated by financial globalisation, persists in most of these countries, with successive renegotiations and extensions.
This was also the origin of the US’s unbridled emissionism, which has made it the world’s biggest debtor, fuelling an accumulated external deficit that exceeds its GDP, but has allowed it to artificially maintain the seigniorage of the dollar against all other currencies.
The war in Ukraine and the decline of the dollar
Barely four weeks into the war in Ukraine, Blackrock owner Larry Fink made two predictions that sent shivers through international markets. He said: “The Russian invasion of Ukraine has put an end to the globalisation we have experienced over the past three decades” and, before reporters could catch their breath, he finished: “A carefully designed global digital payments system can improve the settlement of international transactions, (supplanting the dollar as the standard for international trade) while reducing the risk of money laundering and corruption.
Larry Fink’s views never go unnoticed as he manages the world’s largest investment fund and manages an asset portfolio of more than 10 trillion dollars, equivalent to more than 10% of the world’s GDP. A close reading of his statements hinted at a warning of the structural changes that the European war would accelerate. He was anticipating the decline of the dollar as the hegemonic currency and the necessary transformation of the global payments system.
The dollar’s monetary seigniorage in international trade and as a store of value may not end in the short term, but its lack of backing and the privilege of the United States to issue the universal currency of exchange is beginning to be discussed. The Wall Street Journal itself offered concrete proof of this shift by publishing, through its correspondents in Riyadh and Dubai, the capital and business centre of Saudi Arabia, that negotiations have accelerated for the oil power to start selling barrels of crude oil to China, receiving yuan instead of dollars. This would be the platform for the large-scale projection of the digital “petro-yuan” in cross-border transfers, i.e. payments made across borders.
What The Wall Street Journal announced has already happened. The figures for this exchange are not small. Saudi Arabia exports oil worth around 150 billion dollars a year and China buys a third of that total. The second biggest seller is India, a country that is also keen to develop a digital currency system of its own, which could have real-time settlement and compatibility with the digital yuan network. This was absolutely predictable, China’s economy accounts for about 20% of the world’s GDP, but its currency is used in less than 3% of global trade. If China’s economic and trade growth continues to accelerate, in the words of Ray Dalio, head of one of the world’s largest hedge funds: “The yuan will play an increasingly important role as a store of value and international exchange. It’s a natural.
Iran, Saudi Arabia and China: triangle of détente
On 10 March 2023, barely a year after the Russian-Ukrainian conflict, the Islamic Republic of Iran and the Kingdom of Saudi Arabia, (seemingly irreconcilable) rivals for hegemony in the Persian Gulf region, re-established diplomatic relations. Steps towards détente began in 2021, when the parties agreed to move forward in secret talks to resolve differences rooted in political, economic and religious issues. But the most astonishing aspect of the surprise announcement is that the agreement between Tehran and Riyadh was reached through the diplomatic efforts of the rising diplomacy of the People’s Republic of China.
The question is: what brought about this change in the geopolitics of the region? There are several concurrent causes for the successful resolution of the peace process:
China’s “mediating role” stands out, which responds to several factors. a) Firstly, both countries maintain intense trade relations with China, particularly in the energy-petroleum field; b) Since 2017, China has become the world’s largest oil importer, surpassing the United States, so crude oil from the Middle East and the Gulf countries is a critical input to sustain its industries, production and consumption. c) Saudi Arabia is the largest exporter of crude oil to China, followed by Russia, Iran, Iraq, Oman, Angola and the United Arab Emirates.
China’s active public and non-public diplomacy in the region since the middle of the last decade has borne fruit. Aimed at guaranteeing adequate supplies of crude oil, occupying spaces of influence ceded by the US and securing supply routes through the Persian Gulf, the Strait of Hormuz and the Gulf of Aden, China’s active public and non-public diplomacy in the region since the middle of the last decade has borne fruit. In this sense, Iran has officially joined the Chinese Silk Road project (OBOR/BRI). In turn, China is Saudi Arabia’s largest trading partner and Chinese investments are valued in the framework of the Kingdom’s so-called ‘Vision 2030’, which is to achieve its development goals. Bilateral détente is also serving to reinforce expectations of deeper engagement with China on the part of the members of the Gulf Cooperation Council. Saudi Arabia also hopes to join the Silk Road project in the Jizan region in order to attract foreign investment.
On the Iranian side, talks with Western powers to revive the 2015 nuclear deal (signed by President Obama) are frozen and the economic sanctions imposed by the West have made relations more strained. Moreover, Russia, Iran’s main international ally, is at war with Ukraine, which gives China a greater role as a mediator, diplomatic and strategic actor in the Gulf region.
Specifically, under the New Deal, the parties’ commitments reaffirm mutual respect for sovereignty, the principle of non-interference and the revival of a security cooperation agreement signed in April 2001. They also agree to cooperate in the fight against terrorism, drug trafficking and money laundering, and to reactivate a trade and technology agreement signed in 1998.
Many observers consider it important to analyse the role played in this agreement by Crown Prince Mohammed bin Salman (MBS), the de facto ruler of the Saudi kingdom, given the advanced age of his father, the 87-year-old King Salman bin Abdulaziz. According to one observer, while the Biden administration has been detrimental to its Gulf allies, threatening to make the Saudis “pariahs of the system” and curbing arms supplies, MBS has reportedly found more pragmatism in China’s ascendant diplomacy.
According to this interpretation, the announcement of the resumption of diplomatic relations between Riyadh and Tehran should not have come as a surprise to the White House, as it was the inevitable result of US diplomatic constraints, the relative decline of US leadership, the Russian-Ukrainian war and China’s quest to expand its influence as a global power.
Finally, the most striking feature of the Saudi-Iranian deal is that the mediator was Beijing, a role traditionally exercised by Washington. The Financial Times noted the extent to which China’s renewed geopolitical aspirations were exposed. It noted that for years Beijing had limited its attention in the Middle East to economic and trade issues, without venturing into the political and security realm. Events, the true masters of history, seem to confirm the structural trend of the times. To the point that, strategically, in distant geographies such as Ukraine and the Persian Gulf, Beijing is demonstrating a diplomatic vocation for mediation and global protection, in keeping with its status as the world’s economic superpower.
De-dollarisation as a trend
One of the global effects of the war in Ukraine has been the widespread rise in food and fuel prices, which has led to very high inflation rates in most economies, including the US. In the US, the decline of the dollar and the growth of its debt are two sides of the same coin. The US dollar has lost 96% of its value since the Federal Reserve was created in 1913, while public debt has soared to more than 120% of its GDP. This is why the world is “de-dollarising”. Many countries are reducing the incidence of the dollar in their reserves, opting for metalliferous reserves: gold, to a lesser extent, silver and other assets denominated in different currencies.
To these economic causes, which predate the war, must be added the sanctions against Russia, which exclude it from SWIFT as a system of international payments, preventing the fluidity of its transactions with European countries, forcing it to redirect its trade towards Asia, Africa and Latin America. The same trend can be seen in China which, as we have seen, is redirecting its trade to the member countries of the Gulf Cooperation Council, the Middle East, the ASEAN countries, Africa and Latin America, areas in which the yuan is trying to stealthily displace the dollar.
A recent meeting of ASEAN finance ministers and central bank governors in Indonesia on 28 March 2023 focused on reducing dependence on the dollar, euro, yen and pound sterling for their domestic and cross-border transactions in the region by replacing them with their national currencies. This means that the digital cross-border payment system would further expand and allow ASEAN countries to use their currencies for intra- and extra-regional trade. Such a cooperation agreement had already been reached between Indonesia, Malaysia, Singapore, the Philippines and Thailand in November 2022. In addition, the Central Bank of Indonesia has prepared its own national payment system as part of this trend, as declared on 27 March 2023.
Indonesian President Joko Widodo, at the same meeting, urged regional administrations to establish the use of credit cards issued by local banks and, gradually, to cancel international cards such as Visa and Mastercard and other means of payment linked to the Western payment system. He argued that Indonesia needs to shield its financial system from geopolitical disruptions, citing as an example the sanctions imposed on Russia by the US, the EU and its allies in the wake of the conflict with Ukraine. Exiting the Western payments system is necessary to protect its transactions “from possible geopolitical consequences”, Widodo said. In Asia, only Singapore has joined the sanctions on Russia, with all other countries continuing to trade with Russia.
In Africa, China’s presence is notorious in most African countries, through the financing and construction of transport, energy and telecommunications infrastructure. Most of these works are financed through swaps, which generate as counterparts trade flows and the provision of commodities in yuan such as oil, gas, copper, minerals and precious metals: gold and diamonds. In the two decades from 2000 to 2020, China invested 160 billion dollars in Africa, built 61 ports and 10,000 km of railways (equivalent to the distance between Buenos Aires and Madrid). The type of investment is the Angola model, a major oil exporter, in which it invested 42.6 billion dollars. China has a predilection for Africa (the forgotten continent), which worries the former colonial metropolises of Europe. Mao had already financed the construction of the Zambia-Tanzania railway in the 1970s.
China’s advance in international trade tends to change the old model of exchange between countries. This is also true in Latin America, where almost all the countries have China as their first or, in some cases, second trading partner. The recent agreement between the region’s leading country Brazil and China establishes that the yuan and the real will be the currencies of exchange for bilateral trade. This means that 150 billion dollars will no longer be traded in dollars, but in yuan and real. This important agreement will be formalised during Lula’s upcoming visit to Xi Jinping in Beijing.
Brazil had adopted the same solution for its trade with Argentina in the framework of Mercosur. It is worth mentioning that the BRICS Group (Brazil, Russia, India, China and South Africa) is moving towards a new currency to replace the US dollar, starting with the use of their local currencies.
In short, the exponential growth of Chinese trade worldwide is leaving less room for manoeuvre for the US currency, which has been the arbiter of trade exchanges since 1944 (Bretton Woods) until today.
Exordium
Dear patient reader, I hope I have fulfilled my promise to link the current war in Ukraine with changes in the international monetary and payment system that tend to accentuate the decline of the dollar in international trade and the key role of China as a new commercial, technological and political world power. If he had succeeded in doing so, the objective of this article would have been achieved.
But if you save or hold assets in US dollars I would feel guilty about adding one more worry to those you probably already have. Let me tell you something: one should never think of the future from the perspective of fear. First of all, we should not take to heart what the Global Times says when it states: “Big history tells us that the decline of hegemony begins with its currency and de-dollarisation is inevitable”. Nor when it adds: “If two axes of US hegemony deteriorate. One, the absence of the monopoly on nuclear weapons and its military superiority, and the second, the accelerated decline in the dollar’s position as a store of value and exchange, hegemony will end”. This, in any case, is a very slow and haphazard process, which the United Kingdom went through with its hegemonic status and its currency, the pound sterling, from 1919 at the Versailles Conference until 1944 with the Bretton Woods Agreements. It is true that, as Buddha said, the things of this world are “impermanent” and what does not happen in a century may happen in three decades.
It is also true that the “European pilgrimage to Beijing” has already begun. First, Spanish Prime Minister Pedro Sánchez to support the 12-point peace proposal to negotiate détente between Russia and Ukraine; then European Commission President Ursula von der Leyen to make Xi Jinping aware of the new “European Doctrine” on China; and then President Emmanuel Macron of France to proclaim to the four winds Charles De Gaulle’s slogan: “Europe must have an autonomous foreign policy and a collective defence system distinct from NATO, so as not to be a satellite of the US”. Not to be outdone, Latin America, through the visit of President Lula da Silva, will present the region’s integrationist vocation, its adhesion to world multipolarity and its plan for peace between Russia and Ukraine. All of this is true, but one question remains to be answered: what will the US do to preserve its hegemonic political, economic and monetary position? That, as Rudyard Kipling would say, is the subject of another story. Or another article. I’ll tell you about it in the next one.
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DeePL automatic translation
*PhD in legal and social sciences from Universidad Nacional del Litoral, Argentina. Postgraduate studies at Harvard and Tufts Universities. Master’s degree in international relations from The Fletcher School of Law and Diplomacy. Former Ambassador and Secretary of Public Works and Services of Argentina.