Ditching the Dollar (Editorial)

Editor

Shawwal 27, 1440 2019-07-01

Editorials

by Editor (Editorials, Crescent International Vol. 48, No. 5, Shawwal, 1440)

There is a perceptible shift away from using the US dollar in international trade transactions as well as a reserve currency for central banks. The move has been underway for many years but has quickened pace in recent months because of the Trump regime’s imposition of sanctions on so many countries. The victims are fed up of US bullying and have decided to strike back.

China and Russia, both contenders for world power status, have voiced concern about “inequalities” in the global economic system that unfairly benefits the US. Russian President Vladimir Putin and his Chinese counterpart, Xi Jinping, have said the global economic system must change in such a way as to stop the US from exerting economic pressure on other countries. Addressing the St. Petersburg International Economic Forum on June 7, Putin said Washington was seeking to “extend its jurisdiction to the whole world” and condemned the “rhetoric of trade wars and sanctions,” calling for reconsideration of the role of the US dollar in global trade.

While the Russian and Chinese leaders pledged to boost cooperation between their countries, they have also taken steps to reduce dependence on the dollar. In addition to using their respective currencies for trade, they have significantly increased their gold reserves. In the first five months of 2019, the People’s Bank of China purchased 70 tons of gold, while Russia acquired 78 tons. Last year, Russia purchased 274 tons of gold. The story elsewhere is equally revealing: gold reserves of central banks around the world surged by 651.5 tons or 74%.

The move toward gold holdings is indicative of the fact that countries are getting fed up of US bullying through sanctions and trade wars. Ever since Richard Nixon delinked the dollar from gold when the precious metal was priced at $35 an ounce, the US Federal Reserve Bank (a privately-owned entity) has printed dollars at the expense of the rest of the world. Today, gold is trading at more than $1,400/ounce.

The other advantage the greenback has enjoyed over the years is that oil is traded in US dollars. This is what the US cash cow Saudi Arabia agreed to in 1974. While US debt — both internal and external — has soared to $60 trillion ($22 trillion internal and $38 trillion external), Americans have been cushioned from inflationary pressures because the costs have been passed on to other countries.

This is beginning to change. Since 2013, China has reduced its US treasuries bond holdings from $1.3 trillion to $1.1 trillion. They are moving cautiously in order not to create panic in the market that would hurt their economy.

Russia has successfully decreased the use of US dollars in its settlements with foreign trade partners, significantly increasing the number of deals in Russian rubles and euro. This is primarily the case for exports, as selling goods for the national currency is relatively easy. Between 2013 and 2018, Russia reduced its foreign trade transactions using the dollar by 12.6%, before Western sanctions were imposed (2014). During the same period, Moscow managed to expand foreign trade deals settled in euro by 26.6% and 14% in rubles.

Looked at another way, in the same five-year period (2013–2018), the share of Russia’s trade settlements in US dollars decreased to 56.1%, accounting for $388 billion. The share of euro-dominated trade transactions rose to 21.9% or $151 billion while trade settlements in rubles increased to 20%, or $136 billion.

Russia-China “de-dollarization” policy has resulted in increasing the share of settlements in rubles and yuan (Chinese currency) in trade between them. Russia has increased by more than fivefold its ruble-based settlements with China, while yuan-based trade settlements in China’s exports have grown by nearly nine times.

If oil can be traded in yuan — already floated on the Shanghai Stock Exchange — that would end dollar’s hegemony and with it US economic blackmail through sanctions.