Although this was long coming as US politicians starting abusing the dollar which should be a public good and has been a world’s reserve currency through sanctions, nobody expected the collapse of the dollar as International reserve currency will come very soon as different countries look for ways to avoid being targeted by US sanctions.
Since 1998, US has placed sanctions on more than 20 countries around the world and has placed sanctions on 8 countries in 2021 which was last year alone. Its this that has forced many countries in Asia, Africa, Latin America and middle East to start considering alternatives to US dollar dominated International trade systems.
In 1944, under the Bretton woods system, the dollar was pegged to gold and most other currencies were pegged to the dollar. As a result of this agreement which was signed by 44 allied countries, the dollars were used as the main intervention currency and hence a reserve currency.
As a result of energy crisis in mid 1970s when oil prices spiked to record levels, the Petro dollar system was established. This Petro dollar system helped in exchange of oil for US dollars between countries that buy oil and price it which helped increase the stability of oil prices dominated in US dollars.
Its said that when US president Richard Nixon visited Saudi Arabia, it was agreed that Saudi Arabia which was then the biggest produce of oil start pricing oil in only US dollars. Because Saudi Arabia started accepting only US dollars as only payment in its oil sales, other countries which had started producing oil also followed and oil from then on wards started being priced in dollars globally.
On Wednesday, Russia’s finance minister said that Russia approved a temporary measure allowing banks to make payments in Yuan to pay off 117 million dollars in two dollar dominated bonds which are due today.
Russia also warned that if sanctions hinder the ability of banks to pay their debts using foreign currencies, the finance ministry will attempt to do so with rubbles whose value has almost callapsed due to sanctions imposed on Russia by US and its allies.
Russia also accused the US-led west of trying to organize an artificial default like what happened after 2008 financial crisis which led to invasion of Libya when UK and other Western countries including US cancelled all their debt after failing to pay when war with Libya started in 2011.
Russia’s financial crisis started after US and its allies imposed the toughest sanctions on Russia to-date which blocked Moscow’s ability to carry out International transactions, crashing its economy.
After Russian president announced military operation in Ukraine,US and its allies imposed sanctions on Russia which caused its currency to de-volue more than 40% which become even worse after US banned the import of Russia’s oil.
Although Russia’s economy experienced shock at first, its expected to adapt in long term with the help of China and India and other countries which would like to get around sanctions and trade with Russia. This same situation was seen in Venezuela after US imposed harshest sanctions on the country accusing it of being currupt and undemocratic which almost destroyed Venezuela economy before China come to rescue.
Today Venezuelan economy had started showing signs of getting back to growing which can also be said of Zimbabwe and Iran which are also under US sanctions for different reasons but have managed to get around those sanctions and continue trading with the world.
The offshore Yuan climbed as much as 0.1% to 63.3867 per dollar closing a session peak it reached during Asian trading as reports indicated that Saudi Arabia was in active talks with Chinese officials and was considering to start accepting Yuan as payment for its oil or pricing part of its oil in Yuan which may force other oil producing countries to follow.
US dollars is preeminent currency of exchange in International trade and oil markets in particular but other currencies like China’s renminbi as its known is also making headway in cross border payments which will likely be accelerated by West’s imposition of sanctions on Russia and if Saudi Arabia agrees to start pricing its oil in Yuan.
The outbreak of war in Ukraine has put forward questions about creating an alternative to US-currency based markets and Chinese Yuan in particular has been in consideration due to good relationship between China and Russia and poor relations between US and Saudi Arabia due to the killing of journalist in Turkey and ongoing war in Yemen.
The fact that Saudi Arabia is even considering switching to start trading some of its own oil in Yuan is huge and this will boost the Internationalization of Yuan in addition to Russia which has almost switched to Yuan dominated cross-border payment system even though it is seen as a risky move if China allows trade with Russia to continue.
The decline of dollar started in 2020 during covid-19 out break and was given a push after Russia and China signed a 30-year oil and gas agreement dominated in Euros but if Saudi Arabia means business in addition to ongoing Ukraine war, then the decline of US dollar has been accelerated.
It was expected that Ukraine war will buy US dollar more time as world reserve currency but as things look at the moment, this may not fully materialize even though dollar dominated International trading system is expected to remain in place for some years a head but will have competition from other currencies especially Chinese renminbi.