The currencies we all use are reliant on the strength and performance of the US dollar, and that dollar is backed up by debt and the global trust in itself and its delicate monetary system. There was a time, half a decade ago, when the dollar and other prominent currencies were backed by gold, that secure and stable asset largely immune to the wild swings and falls of today's debt-based system.
That was until US President Richard Nixon took the dollar off that gold standard in 1971, in a pivotal and momentous move which both secured America's supremacy in the global economy – at least until now – and deemed Washington and the subsequent monetary system to a future of inevitable crashes, and many say an eventual collapse.
Since then, especially in this digital age, fiat money consists of little more than digits on a screen, based on a system of automated calculations and manual interventions. Businesses procure money and employees are paid it, yes. Consumers spend it and it is essential to survival and attaining basic necessities, true. Yet the fact remains that at any time, the amount can be seized, altered, or removed from an account with little immediate impact on an economy, as it is not backed by any material or tangible assets subject to limitations.
We deal with mere numbers on a screen, which a bank can quite literally edit at will. With physical cash, this is not entirely the case, but even that is subject to that reality. As our world becomes ever more digitalised and less reliant on cash, this will only grow. As the Wolf of Wall Street popularised, our current monetary system, along with its markets and stocks, are simply "fugazy".
A major part of that system and America's hegemony over it, of course, has been the 'petrodollar' – the payment of US dollars for the trade and sale of oil globally from Saudi Arabia and other member states in the Organisation of the Petroleum Exporting Countries (OPEC) – following the deal struck between Washington and Riyadh in 1974, coincidentally a mere three years after Nixon took the dollar off the gold standard.
That deal not only secured military defence of the kingdom through guarantees by the US, but also secured a stable stream of foreign purchase of US Treasury bonds and debt – a strategy of recycling the petrodollars back unto Washington – through the Gulf state's reserves. Like any good business, that stable stream successfully resulted in many more streams of reserves, powered by the subsequent rolling success of the dollar and the increase of global trust in its stability. It was one of the machine's most essential components.
So when it was revealed last year that Saudi Arabia is considering trading its oil with China in the yuan, it was no small matter or minor shift. Many analysts at the time – largely pro-Western – played it down as merely a symbolic gesture, a tactic to pressure the US or send a political message. Almost a year on, however, the kingdom seems to be serious in those potential intents. At Davos in January, Finance Minister Mohammed al-Jadaan revealed Riyadh's willingness to trade in not just the yuan, but also a variety of other currencies.
Saudi Arabia has not been the only country, as other considerable US allies such as India, Pakistan, and UAE have also struck deals with Russia or China to pay for oil or other commodities in their various respective local currencies. Iraq was the latest to distance itself from dollar dominance, announcing this month that it plans to regulate foreign trade from China directly in yuan.
Those states' decisions – predicted soon to be joined by many more – have represented a huge shift towards a more decentralised global monetary system away from the dollar, primarily due to a major miscalculation by Washington in its hard-hitting sanctions against Russia at the outset of Moscow's invasion of Ukraine.
Without defending the Kremlin and its so-called 'special military operation', and without condemning sanctions which do have their uses as a non-physical measure and financial pressure, the US seems to have scored a devastating self-goal against its currency when it cut Russia off from the SWIFT payment system and froze over $350 billion of its gold and foreign exchange reserves. That act alone massively reduced trust in the dollar-based monetary system amongst many countries, especially those in the Global South which have long been sceptical of US hegemony, causing them to further question the viability and risk of holding their reserves in the mighty dollar.
That is exactly why the Ukraine war is such a pivotal issue – it is a gamble the US is willing to take to re-secure the dollar's fortunes, having the potential to restore trust in it as a stable currency worthy of remaining the dominant global reserve exchange. That is if Ukraine wins and lands a Russian defeat. If Kyiv loses and Moscow scores a victory, though, it would spell a further disaster for the dollar. There lies one of the primary reasons why so much is reliant on the results of the war in Ukraine.
In that equation, Saudi Arabia does not intend to rely on the outcome of the war to determine its foreign and economic policies. It insists on maintaining excellent relations with the US while at the same time expanding its ties with Russia, China, and other powers to the east. it will continue to trade largely in dollars in the foreseeable future, but will at the same time be open to accepting other currencies even if that comes at the apparent expense of American hegemony and represents a breach of the petrodollar agreement with Washington all those decades ago.
The kingdom's interest in joining BRICS – the economic bloc consisting of Brazil, Russia, India, China, and South Africa – is part of that policy outlook, along with Iran's, Turkiye's, Algeria's and Egypt's who also aim to join the bloc. Rather than an exclusive club for the developing world's fastest-growing economies, they view BRICS as an opportunity for countries in the Global South to band together to either match the dominance of the US dollar or secure a place in the attempt to do so.
Due to discuss the expansion of the bloc this year, BRICS is soon to decide on the potential membership of those nations. If Saudi Arabia is accepted and joins it, it would be hailed as a momentous blow to the dollar and the end of petrodollar recycling, as the kingdom would then be more economically interconnected with the likes of China and India in particular.
Already, analysts and economists are speculating on potential of countries selling their US dollar reserves, particularly the effects of a mass dump by some of the most prominent holders. China, for instance, is the largest at $3.184 trillion in reserves, while India's numbers $573.7 billion and Saudi Arabia's $457.66 billion. If they were to sell or drop even a fraction of their reserves, especially in a coordinated effort, it would severely dent the US dollar's strength and reputation even further.
This is not certainly not the first time the American currency's dominance has been threatened, nor is it the first time total global dollar reserves held by central banks have dropped significantly, as they have been declining for the past two decades or so and were at some of the lowest levels even prior to the Ukraine war.
Now it is different, however, and there has never been a threat to the dollar's supremacy as significant as this. There is a good reason central banks throughout the world last year bought the most gold on record since 1950, in an effort to combat rising inflation and financial instability. They know best the fragility of our precarious monetary system, as they aim to stabilise themselves with the asset that would forever remain valuable.
Whether the counter to the US dollar will be the yuan, a BRICS currency, or some other gold or asset-backed currency in the future, Saudi Arabia sees that the current global reserve may be on the decline for good. The kingdom is preparing to diversify its reserves and trade practices for whatever may lay ahead.
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