Possibly the biggest, most fundamental shift that has been happening in the last year, that gets overshadowed by whatever the current event of the moment is, is the determined shift away from de-facto dependence on using the US Dollar as the medium of exchange in international transactions of all sorts. This is still under construction but the financial systems that are being designed to circumvent the use of the US Dollar will play a huge role in not only the way the world transacts but in global relations, for many decades to come.
There have been many attempts in the past to break away from this dollar hegemony by nations and they have not succeeded- that much is true. Conspiracy theorists will have you believe that Iraq and Libya both experienced ‘regime change’ because they were trying to move away from the Dollar pricing and payment of oil. That may be exaggerated since nothing prevented them from converting their Dollars to Euros or Yen or any other currency with high liquidity and acceptability. But it is a matter of record that the US zealously guards its seigniorage in the Dollar being used and there is more than a passing coincidence that the US spends more on its defence every year than the next ten countries combined.
What is driving the change this time? Two things mainly: the first is that the US has possibly committed a significant act of hubris in its ‘policing’ role with regards to blocking Russia from accessing its own reserves, the second is that the move away from the Dollar is being pushed forward by multiple players and regions- from Latin America to Asia to trans-continental entities like the BRICS grouping- not single leaders of single nations.
What did the US do to trigger this reaction? It confiscated Russian foreign exchange reserves held in US Dollars (US$ 300 billion in fact) and put a stop to all transactions conducted with Russia through the SWIFT payment system. That money does not belong to the Americans. It isn’t a loan or held in lien- it was a deposit by a sovereign nation in the debt of another nation. It was held in US Treasuries meaning it actually helped fund US borrowings. There is no justification for what the US is doing in financial terms- it is unlawful to conflate a political stance with a financial obligation. Since the US has not itself declared war on Russia this is illegal under US Law itself. And it isn’t as if it is the first time that the US has done this either: Iraq, Venezuela, Iran, Libya, even Afghanistan are just some examples of this type of overreach.
So, it’s no wonder that nations have decided that they would like to maintain absolute control of their FX reserves and not have to be concerned about falling foul of a self-appointed policeman of global activity. Given that 60% of the world’s FX reserves are maintained in US Dollar denominated assets, 90% of all OTC transactions in currency markets involve the Dollar and 80-90% of all exports in South East Asia (for example) were invoiced in US Dollars, any shift in these percentages will have a big impact on dollar demand. With China and Saudi Arabia- two of the largest holders of US$ denominated reserves and assets, and the US seemingly always at loggerheads with them (over human rights violations or security concerns) there are many motivated countries looking to wean themselves away from US ties.
Prior to 2000, the US was the largest trading partner for 80% of all other nations. Today it is down to 30%, with China now the largest trading partner for most countries. This just needs to be translated into 3rd currency invoicing and this will deal a blow to the Dollar. The reduced exposure to the US in terms of market dependence is also a compulsion to diversify holdings. Studies show that exports of differentiated products tend to be invoiced in the exporter’s currency (when not involving the US) and homogeneous goods (oil, commodities for example) tend to be priced in an international currency- namely in USD. With the growth in intra-regional trade and bilateral arrangements even this link to the US$ can be done away with- witness the arrangement between India and Russia or China and Russia to buy Russian oil without going through the dollar route.
The motivation to move away from the US Dollar is backed by three factors: US arbitrary and potentially lawless behaviour, reduced trade relations and thirdly, the damaging effects of being held to ransom by US monetarist policy- especially when nations hold a lot of Dollar denominated debt both privately and publicly. Nations are having to contend with the Fed’s simultaneous hiking rates/ cutting liquidity policy to tackle domestic inflation. This is threatening to submerge many fragile indebted nations.
The broad-based consensus of lowering dollar exposure or reliance is the main reason that it is likely to succeed. Russia and China are highly motivated because of the political tensions between them and The US. India, Brazil, South Africa- the other members of the BRICS group, are taking action both on their own or within their regions- by creating alternative payment mechanisms or driving trade arrangements that skirt the use of the Dollar. So, the Latin American nations are now looking to create the SUR- a Euro style currency that will replace their own currencies through a monetary union and allow the integration of their domestic markets without the need for the Dollar. At the same time, BRICS is also pushing for a non-Dollar based exchange mechanism to replace existing arrangements between themselves. There will be hiccups along the way: the Russia-India Rupee trade is already running into trouble because India is increasing its dependence on Russian oil without increasing its exports to Russia. This is creating a build-up of Rupee reserves which Russia cannot use. But this is early days yet. Russia has little choice but to persist and find a workable solution. And that persistence will show that the end of dollar hegemony is closer than most people think.