The US dollar (USD) as the major currency of international financial transactions and its use as global strategic reserve is key to US hegemony. This monopoly is being challenged for the first time.
Countries outside the collective West desire to shift away or at least diversify from using the dollar for international transactions and as strategic reserve currency. This collective anxiety of the global majority has accelerated after the US sanctioned Russia and froze billions of dollars of Russian strategic reserves.
Sanctions and the Dollar Trap
Countries are concerned about the dollar domination for a number of reasons: The US uses economic coercive measures to ensure its own interests. For example, over the past few decades, the US has sanctioned seventy five countries, 80 per cent of which are from the Global South. So, countries have witnessed that US financial weaponization poses a threat to their sovereignty.
US interest rates, dollar fluctuations and monetary policies impact currencies linked to the dollar. This overreliance on the dollar makes countries vulnerable. Countries repaying foreign debt, end up paying more interest on repayment than they spend on food and energy.
Every time countries conduct trade and settle energy imports they have to use their limited dollar accounts. Since the 1970’s US-Saudi Arabia agreement that oil sales from Saudi Arabia and other Gulf countries be invoiced in US dollars has meant that all countries buying oil from the Gulf have to pay in dollars. This enabled the US to delink the USD from being denominated in gold but retaining that value; facilitated US leverage over the international financial system and institutions; print dollars to fund their internal deficit and to fund its endless wars. In other words, assert imperialist policies internationally.
On the other hand, other countries witnessed capital flight, financial vulnerabilities, inequality, debt, US military interventions, sanctions, and overall misery of their people. No wonder countries are looking for viable alternatives to dollar hegemony.
Significant Shifts for National Currencies
Recent years have witnessed dramatic changes linked to the rise of newly industrialised emerging countries, particularly China while India, Brazil, South Arica, Turkey, Indonesia and others follow. So the GDP combined in purchasing power parity (PPP) of China, India, Russia, South Africa, Indonesia, Brazil, Iran, Turkey, are now larger than that of the combined G7. In addition, surpluses generated by the OPEC, point to a multipolar geo-economic foundation.
Intra-Asian trade in national currencies has increased enormously in the past few decades. Bilateral currency swap lines amongst ASEAN, China, Japan, South Korea are over US$ 400 billion. China which is the biggest trading partner to 120 countries, offers clearing and settlement services for participants in cross-border yuan payments. India trades in national currencies with the UAE, Japan, Turkey, Korea and South Asian countries. The South African rand is used by several African countries and so on.
The sale of oil and gas in national currencies is accelerating currency diversification. Russia after sanctions stepped up the sale of hydrocarbons in rubles, yuan and national currencies – their major buyers India and China are using national currencies for hydrocarbon purchases, which offers mutual benefit to both Russia and India as we explain below.
The US-sanctioned Iran and Venezuela, are putting in place mechanisms to use national currencies for oil sales. So sanctioned countries have developed a mutually dependent group for trade. Other countries who fear and oppose sanctions are ready to join this group. Now Saudi Arabia has signalled that it could sell oil in the yuan or national currencies. This step in progress could be followed by other OPEC countries; greatly assists the development of the Global South and reduce the dependence on the dollar.
The BRICS’s New Development Bank (NDB) since 2015, encourages trade, investment and disburses loans up to 50% in national currencies. But their contingency reserve arrangement remains dollar-denominated. The BRICS proposals to develop their own currency is yet to take shape. The Shanghai Cooperation Organization and Eurasian Economic Union, and countries of the Regional Comprehensive Economic Partnership are setting up processes to conduct financial settlements in national currencies.
Several major economies are developing viable cross border payment systems that are alternatives to the US-dominated SWIFT. The China based Cross-Border Interbank Payment System (CIPS) for international payments, is used by Russia.
Even as the dollar is being bypassed, major challenges remain including: the use of national currencies in trade are mostly driven by governments and markets and are a small and medium sector of economies. Trade and currency swap is one part of the dollar-denominated international financial system. The dollar is still most used for pricing goods and services; majority invoicing of trade is done in dollars; financial, bond, and capital markets use the dollar – though the yen and euro are also in this picture. So, India, for one, would be ready for diversification, and use the Indian rupee for trade, but it still relies on the dollar as strategic reserve.
The Strategic Reserve
The use by countries of the dollar and US treasury bonds as strategic reserve, helps preserve the dollar and US hegemony. To develop an alternative and for a country to make its currency trustworthy as a strategic reserve for others it will have to: liberalize its capital accounts to make their currency freely convertible; capital markets have to be developed and enabled for foreign participation. Such changes involve the transformation of the whole economy. So, countries like India and others are not ready for such transformation, because no economy wants to destabilise as they depend on dollar reserves. India, for example, has US$ 532 billion and China has US$ 1 trillion as reserves. None of these countries can risk rocking the dollar boat. However, once the use of national currencies for international trade increases and dependence on the dollar will decrease, then countries will start use their own and their partner countries’ currencies as strategic reserves.
The Indian Angle
India is actively but cautiously seeking to internationalize its own currency –the Indian rupee (INR) for international trade and investment. India’s foremost partner in this aspiration is Russia. Since 2019, India has been paying Russia (partly initially) for fuel, oil, minerals and specific defence imports like the S-400 Triumf air defense systems in rupees on an informal basis.
In July, 2022 the Reserve Bank of India (RBI) unveiled a rupee settlement system for international trade by allowing ‘Special Vostro Accounts’ in designated Indian banks, as a step towards internationalizing the INR. India’s Vostro accounts enable rupee payments for Russian crude. Indian experts like the former Reserve Bank of India governor D. Subbarao said India can save up to $4 billion a month in foreign exchange outgo when this process is complete. Indian trade with Russia has grown by 400%, (mostly due to 700% increase in petroleum) surging to USD 45 billion in 2022-23. As India’s Foreign Minister S. Jaishankar said about Russia-India: “It has been the steadiest relationship in the contemporary world.” Currently, banks from 18 countries have opened Vostro accounts in India for trading in the INR. This indicates that India is ready to diversify outside the dollar zone.
Countries outside the collective West are engaged in developing process to shift from the dollar. The shift to trade in national currencies is made possible since the bigger economies like Russia, China, India, South Africa and regional bodies like the BRICS are providing the alternate to trade outside the dollar zone.
However, a system that is a complete alternative to the dollar requires longer and sustainable internal financial mechanisms and monetary policies by these economies to become operational. Many countries including India are determined to overcome the challenges for creating viable alternatives.
The use of multiple national currencies in trade, of energy and food imports, are steps towards diversification and risk reduction. This gives countries outside the collective West options and choices that have become available as multipolarity consolidates. As dollar transactions decline, the value of US based strategic reserves will also decline – since the two are linked.
The trend of transactions in multiple currencies is enabling multiple financial circulation systems develop parallel to the dollar. This irreversible trend where the geopolitics and geoeconomics are merging is the material basis of the multipolar international system. In this multipolar international system, nation states of the Global South are determined to preserve their sovereignty, choose their allies and resist pressure from dollar hegemony. India has a stake in this multipolar system.