The Saudi decision not to renew the 50-year-old petrodollar system is both a symptom of the gradual erosion of the US-led and US-centred global financial order and indicates the imminent arrival of alternative systems of financial transactions in currencies other than the USD. This is, at one and the same time, both a collapse of the existing world order and the establishment of a new, alternative, multipolar world order. Whereas policymakers in the West appear to have spent too much time denying such possibilities, Riyadh seems to have already begun to adjust itself to new realities, leaving the space open for other countries to follow. Ironically, Washington has only itself to blame for the mess.
Who is the real “pariah” now?
It was the mid-1970s when the US, facing high inflation, an oil crisis, and recovering from a defeat in Vietnam, entered into what came to be known as the petrodollar system – a system that would make the USD the central currency for financial transactions related to the sale of oil. This pact cemented the US-Saudi partnership. Fast-forward to 2019-2020. Joe Biden, a presidential candidate in the US, vows to make Saudi Arabia a “pariah” state due to the Kingdom’s poor record of human rights. In 2022, President Biden discovers the foolishness of his campaign promises and, bowing to reality, flies to Riyadh to make amends. But that appears already too late to change anything. Then came Israel’s war on Gaza, which further caused the US rapprochement with Saudi to collapse, instead accelerating the Saudi drift away from the US towards China and Russia. This has now culminated in the Saudi decision not to renew the petrodollar pact, thus finalising the divorce between the USD and oil sales. The USD is no longer the central currency managing the sale and purchase of a commodity that remains the key to the economies of almost all countries in the world.
The Second Coming
As such, the USD is now on the verge of becoming a ‘financial pariah’, with the Saudis having already found potential alternatives. They have already joined BRICS, and they are already part of Project mBridge – a cross-border experiment with central bank digital currencies (CBDC) for international trade that already includes China, Hong Kong, the UAE and Switzerland. Saudi is now a full participant in this project, which means that this project now has the world’s largest oil producer. Its impact is not hard to anticipate: it is a major elevation for non-USD financial platforms that will soon rival the US dollar, negatively impact the US economy, and badly hit the US financial markets.
Project mBridge, while initiated by the Switzerland-based Bank for International Settlements, is now dominated by China. China is already running the largest CBDC pilot project that now reaches almost 260 million people and covers multiple types of financial scenarios. While the CBDC seems to be in full experimental swing, we know now that a BRICS currency is also on the horizon.
While analysts in the US continue to stress the fact that the USD remains the main currency of BRICS countries, their analysis seems to be perpetually suffering from an underestimation of the concerted push for alternative systems. Most media reports in the US stress that BRICS currency and/or de-dollarization face an enormous – and almost impossible – challenge of undoing the domination of USD.
A recent report by Carnegie noted the difficulty in these terms:
“Indeed, for many emerging markets, the dollar is more stable and more commonly accepted as a medium of payment in cross-border trade than the local currency. Exports from and imports to emerging markets, particularly commodities, are often priced in dollars”.
This might be a fact. But there is nothing that makes it permanent and/or unchangeable. The centrality of the USD was tied to the centrality of the US in the global political system. This is now changing due to the multiple geopolitical setbacks Washington has faced in the recent past. Its defeat in Afghanistan; the debacle in Iraq and Libya; its failure in Syria, and its failure in preventing a genocide in Palestine at the hands of its closest ally in the world point to the growing US inability to single-handedly dominate the world. As far as the combined West is concerned, it has failed, even after trying for more than two years, to militarily defeat Russia in Ukraine. On the contrary, Russia is at the centre of the politics of alternative currency systems to offset the dominance of the USD.
On top of these setbacks is also the fact that China is now the biggest economic player across almost all continents. If countries are doing more trade with China than the US and Europe, there is little reason for them to peg their economies to the USD. Instead, they understand that using local currencies and/or any currency other than the USD not only brings economic but also political benefits. First, access to these currencies is not a problem. Second, it allows trade without the fear of US sanctions.
End of Petrodollar: Not an Isolated Episode
Thus, the end of the petrodollar is not an isolated incident tied to the poor state of the US-Saudi bilateral relations. Bad bilateral ties may have accelerated the de-dollarization of the oil industry, but the wider international context in which the US dominance has been successfully challenged on multiple occasions accounts far more for this tectonic shift than any other factor(s). This shift has happened despite various US efforts to pre-empt it by initiating different crises, including the push to expand NATO to include Ukraine. This war was meant to weaken Russia as a means to weaken the bid to develop a new world order. Various sanctions on China and/or the so-called ‘trade war’ were to weaken Beijing for the same purposes. But none of this has worked, or is likely to work, for Washington, quite obviously. It is for this reason that Europe, too, will drift away from the USD. It is only a question of when rather than if.
Salman Rafi Sheikh, research analyst of International Relations and Pakistan’s foreign and domestic affairs, exclusively for the online magazine “New Eastern Outlook”.