'De-dollarisation' gathers steam amid Russia-Ukraine war

As tensions escalate between Russia and Ukraine, Russia’s foreign currency reserve of $300 billion was frozen while Russian banks have been restricted from the Swift international payment system. This however created a strong wave for the 'de-dollarisation' of global trade, with BRICS and other countries already mulling an alternative payment mechanism.

As the name suggests, 'de-dollarisation' refers to an initiative under which countries attempt to limit their dependency on the US dollar the pre-dominant currency for conducting international trade.

Since World War II, the US dollar has exerted its dominance as a reserve currency. According to the International Monetary Fund, the dollar is the most-used currency for trade and that about 60 per cent of international reserves are kept in assets that are dollar-denominated.

As the West attempts to financially restrict Russia in the global market due to its ongoing war with Ukraine, other nations are becoming increasingly aware of the possible repercussions of being overdependent on the US dollar.

It comes as no surprise that countries including Brazil, Argentina, Bangladesh and India are now looking to use Chinese Yuan and bitcoin to backup currencies and assets and use that for international trade and payments.

According to reports, there are three major reasons for countries increasingly looking to de-dollarise.

1. The US monetary policy has significant control over the rest of the world

According to the Wilson Centre think tank, the dollar is often overvalued because of its hold on the world economy which results from the US being the issuer of the world’s reserve currency. This, in turn, makes the dollar governing currency in international trade and payment systems. The late Valéry Giscard d’Estang, the president of France from 1974 to 1981, believed this gave the US “exorbitant privilege” as the US could potentially avoid a crisis despite not being able to pay its debts. This is because Washington could issue more money should there be a fall in the dollar’s value. However, countries like India do not want to be limited by the world's largest economy's monetary policies. Subsequently, Reserve Bank of India has been pushing for the Indian Rupee to be used for trade.

2. The dollar is expensive for emerging nations

As the dollar gains more strength, imports become expensive for emerging nations. In Argentina’s case, inflation was a result of a fall in US-dollar reserves triggered by declining exports and political pressures. A Reuters report later said that Argentina resorted to trading in Yuan instead of the US dollars for Chinese imports.

Economists at an international financial services firm, Allianz, stated that if access to the US dollar becomes expensive, borrowers will look to trade in other currencies. Along those lines, Brazilian President Luiz Inácio Lula da Silva called for alternative trade settlements by requesting Brazil, India, Russia, China and South Africa to move away from the US dollar.

3. Changing demands in global trade and oil

A major reason for why the US dollar became a reserve currency was because Gulf countries in the Middle East used the currency for trading oil. In 1945, Saudi Arabia and the US had a formal agreement wherein oil was to be sold exclusively in dollars. Eventually, with exports of shale oil, US became energy independent.

Apart from the change in demand for oil, foreign relations remain unstable between the US and Saudi Arabia as seen from an instance where former US president Donald Trump criticized Saudi Arabia for not paying the US a reasonable price for its defense. Another such instance was when President Joe Biden confronted Crown Price Mohammed bin Salman over the murder of a journalist.

Due to these tensions and the shale energy revolution, Saudi Arabia may eventually decide to stop pricing its oil in US dollars, according to Sarah Miller from the energy information company, Energy Intelligence.

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