WHETHER the dollar will cease to be a reserve currency in the coming years hinges on several factors, including the outcomes of the Russian military operation in Ukraine, the state of affairs in Taiwan, or even in Latin America, the latter being the United States' own backyard.
However, the process of dedollarisation has started.
According to data from United Nations, by the early 1970s, the United States's annual GDP made up nearly one-third of the world's economy. Of course, neither the franc, German mark, or the weakened pound could bear the brunt of world trade. However, the unlimited issuance of the US dollar and circulation worldwide required a new anchor.
In 1974, Saudi Arabia committed to pricing its oil exclusively in US dollars in exchange for security guarantees from the US. This petro-link is one of the pillars on which the US dollar rests as the world's primary reserve currency:
Petro-dollar link: The oil-exporting countries would have piles of US dollars and thus would be compelled to invest in US treasuries and borrow in US dollars (assets-liabilities match principle). Obviously, oil-importing countries would need to keep reserves in US dollars, too.
US military power: There have been isolated projects by certain countries to move away from petro-dollars. However, the US military intervention has brutally suppressed such attempts.
International Monetary Fund (IMF): Asset-liabilities matching principle and borrowing in US dollars would demand paying back principle plus interest in US dollars, supporting the perpetual demand for US dollars.
Confidence in US dollars: History shows that trust in US dollars remained strong even when it was wholly delinked from gold and became the same tissue paper as the other currencies.
World economic leadership: The US is still the world's largest economy. According to the 2022 global GDP data, the US makes up a quarter of the world economy. In other words, no other country has comparable assets and financial infrastructure to provide a currency that international trade participants would trust.
US Debt Structure: US debts are held mainly by US authorities and national companies, with foreign investors owning only a quarter of US loans. To default on domestic debts is nearly impossible. This is why the US can continuously run its vast trade deficit.
However, significant global developments have shaken the pillars of the US dollar's world dominance.
Weakening petro-dollar link: If Saudi Arabia starts accepting yuan for oil supplies from China alone, to which it exports more than a quarter of the produced "black gold", this will be a powerful signal to the other Opec and Opec+ countries.
At the same time, Russia, put under sanctions, is forced to switch to payments for oil supply in currencies other than the dollar and the euro.
Russia switches to yuan-ruble settlements with China, Turkish lira-ruble settlements with Turkiye, and settlements in rupees and rubbles with India. The entire Eurasian Union is also ready to abandon dollar settlements for trade completely.
Russia has also indicated that this forced measure of selling oil and natural gas in rubbles is just a "start". Therefore, we should expect to see other highly sought after worldwide commodities produced mainly by Russia, such as wheat, fertilisers, metallurgical products, wood etc., to be traded in Russian ruble soon.
Diminishing US military power: The recent findings by a strategic research institute in the US, The Heritage Foundation, revealed some interesting dynamics. According to their recent report, the "2023 Index of US Military Strength":
"In the aggregate, the United States' military posture is rated as "weak." The 2023 Index concludes that the current U.S. military force is at significant risk of not being able to meet the demands of a single major regional conflict while also attending to various current engagement activities.
"It most likely would not be able to do more and is certainly ill-equipped to handle two nearly simultaneous major regional conflicts — a situation that is made more difficult by the generally weak condition of key military allies."
Reduced reliance on the IMF: As a relatively recent development, South African countries now prefer taking loans from China rather than from the IMF.
The reinvigorated idea of the Asian Monetary Fund is another project that can significantly weaken the IMF's influence.
Blemished confidence in the US dollar: The trade war with China, which limited the purchase and sale of Asian assets on the American market, and the "freezing" (read: simply "writing off") of around US$300 billion worth of Russian foreign exchange reserves became the final wake-up call for the entire world.
No nation can know when and how its national interests might conflict with the world's superpower, and it is better to prepare in advance by diversifying its holdings away from toxic Western currencies and credit system.
According to IMF data, the US dollar share of global reserve currencies has fallen from 79 to 59 per cent from 1999 to 2021.
According to more recent statistics by the IMF, the US dollar share still hovers around 59 per cent. However, according to alternative sources (according to Eurizon SLJ Asset Management), the dollar's status as a reserve currency eroded in 2022 at 10 times the pace seen in the past two decades.
Asset manager strategists also found that the greenback's share of total global reserves fell to 47 per cent last year from 55 per cent in 2021.
Bubble world economic leadership: The US may command a quarter of global GDP, but in essence, it represents the trade of air (financial derivatives upon financial derivatives upon financial derivatives).
According to the theory of money, a currency should be only issued by an entity that produces something of real value (commodity) in demand by many to ensure the currency reflux. In a global context this should be a country richest in natural resources and other globally demanded commodities and products like China, Russia, Iran, South Africa and Saudi Arabia.
According to recent statistics, BRICS's (Brazil, Russia, India, China and South Africa) total population is 3.3 billion, while their total nominal GDP is 26 trillion US dollars (as big as the US). And these countries are talking about creating their own currency and financial token to bypass SWIFT.
Furthermore, we now also talk about BRICS Plus.
If all the interested countries are accepted, the newly proposed BRICS members will create an entity with a GDP that is 30 per cent larger than the US, over 50 per cent of the global population and control of 60 per cent of global gas reserves.
More and more bilateral currency settlement agreements being inked the world over.
We observe a monumental shift gaining significant momentum from the unipolar world with artificially imposed dominance of Western currencies and, by extension, rigidly centralised political and economic power (thus defending the interests of a handful of nations) to a more democratic, natural, balanced and fairer multipolar world with financial settlements in all sorts of national currencies, backed by the things of real value (natural resources or produce), based on mutually beneficial cooperation and respect for national sovereignties.
The dedollarisation process is inevitable. The only question is how long it could take in the context of the global historical process.
The writer is the president and chief executive officer of EMIR Research, a think tank focused on strategic policy recommendations based on rigorous research