The probability of global instability and confusion cannot be set aside in the process of de-dollarisation
By Sayani Rana, Dr Karamala Areesh Kumar
Since the beginning of the Russia-Ukraine War, one element which has been struggling continuously is the global economy. As Western nations imposed sanctions on Russia, the country weaponised its enormous energy reserve forcing its buyers to import Russian oil only in rubble. This tactical move not only stabilised the Russian economy for a momentary period but also marked the beginning of the trend otherwise known as de-dollarisation.
The term ‘de-dollarisation’ implies neutralisation of the impact which the dollar or rather the US dollar possessed in the global market economy. The US dollar is the standard currency of exchange in the global market, ie, any international trading activity, either import or export, occurs (mostly) with the US dollar as the common currency for exchanging goods and services. Hence, Russia’s decision to exchange directly through its national currency undermined the position dollar held in the international energy market.
Currency and Power
Being the standardised currency of exchange leads other countries to increase their reserve for the US dollar, which inevitably stabilises the power dollar holds in the global market economy. The US dollar is the world’s most dominant reserve currency accounting for 59% of the total global foreign exchange reserves.
Before the dollar, the British pound was the common currency of exchange. This was justified by the vast colonial spread that the British held.
However, as the Second World War weakened the Great British Kingdom, the US rose in power. In 1945, the Bretton Woods Conference facilitated the formulation of international financial institutions such as the International Monetary Fund (IMF) and the World Bank. The concept of the exchange rate was also introduced at the conference, where the value of individual national currency would be determined by comparing it with the US dollar. This provided the dollar and the US with an imbalanced scale of superiority. Globalisation has played a significant role in strengthening the position of the dollar. With the US promoting its capitalistic market values and emerging victorious in the Cold War, the influence of the US and its currency in the global market economy was not questioned often. Dollarisation created the opportunity for exerting soft power as well, where sanctions placed by the US could push a country into a situation of economic distress.
What’s happening
Although sanctions were placed on Russia, European union countries due to their dependency and a lack of alternatives had to start importing oil from Russia. This forced the countries to build back their reserve on the ruble and the competitive advantage of the dollar over the ruble declined in the EU. Even though the influence of the dollar in the EU’s reserve stayed relatively stable, the desperation of the countries to acquire Russian oil weakened the image of the dollar.
However, it is not just the ruble being a threat to the dollar, the Chinese yuan is also playing a significant role in it. After the latest set of sanctions, Russia has turned to China to sustain its domestic market. Trading activities between Russia and China happened mostly in the yuan. As the global economic market was in a shambles due to the fluctuations in energy transactions, it gave China a unique opportunity to promote its currency. China’s Belt and Road Initiative have also factored in the trend of de-dollarisation. Although a decade old, the BRI has promulgated better connectivity between China and the rest of the world, which has become evident especially during the ongoing Ukraine war. In Latin America, Brazil and Argentina have begun settling their Chinese imports via yuan.
Consequently, Saudi Arabia has also announced accepting yuan for exporting oil and natural gas to China. The Iraqi Central Bank has further allowed private enterprises to settle their imported Chinese goods in yuan. Bangladesh and Pakistan, which are one of the largest receivers of BRI investments in South Asia have also played a role in promoting yuan in the region.
India too has participated in the trend of de-dollarisation by promoting its UPI (Unified Payments Interface) abroad. In July 2023, India signed a deal to link its UPI with UAE’s IPP (Instant Payment Platform). In the bilateral meeting, the UAE also announced accepting the rupee in their trade. Previously, Russia signed an agreement with India allowing UPI transactions to be facilitated within Russia. New Zealand is expected to introduce the UPI to improve bilateral trade between the countries.
The trends of de-dollarisation which was earlier considered a myth have been confirmed by analysts from JP Morgan and Goldman Sachs. The BRICS nations (Brazil, Russia, India, China, and South Africa) can be witnessed actively participating in it. The introduction of a new “International Reserved Currency” was the focal point of discussion during the 2022 BRICS summit, an idea further deliberated in the 2023 meeting. The impact of the ongoing Russia-Ukraine War can be felt again in it, as the idea was proposed by Russian President Vladimir Putin.
Why now?
De-dollarisation is not a new concept. In the 1945 Bretton Woods Conference where 43 of the participating countries agreed on promoting the US dollar as a standard currency, the USSR was the only country opposing this idea. In 2014, de-dollarisation emerged as a priority for Russia as it encountered US sanctions for invading Crimea. As most Russian imports arrive from China, Russia has been slowly replacing the dollar with the yuan, sustaining the Russian domestic market against the frequent sanctions of the West.
But another reason for the increasing de-dollarisation is the growing instability of the dollar. The US dollar hitting the glass ceiling in May this year has further made countries question the power which the domination holds over their national currencies. In today’s globalised world, multiple countries, particularly the BRICS nations, have emerged as strong players in the international system. China has become the largest trading partner to over 121 countries, whereas India has become a pharmaceutical giant with immense soft power and the youngest population. Russia’s power over its natural energy resources too has been constant. Although Brazil has witnessed economic instability in recent years, its access to the Amazon still makes it a valuable player in international politics.
Hence the time has come to finally replace the dollar with some other currency. However, the probability of global instability and confusion cannot be set aside in the process of de-dollarisation. A war among other countries on promoting their currencies as the dollar’s perfect replacement can also be expected.
(Sayani Rana is Research Scholar and Dr Karamala Areesh Kumar is Head, Department of International Relations, Peace and Public Policy, St Joseph’s University, Bengaluru)