De-dollarisation and emerging global order

Although not much is being talked about it in Pakistan, de-dollarisation is becoming a hot topic for discussion around the globe. The year 2022 became critical in terms of de-dollarisation. The Russia-Ukraine war has adversely affected Eastern Europe and Euro Atlantic countries and organisations. Russian military operations in Ukraine triggered multifarious sanctions against the Russian Federation and its leadership. These sanctions were mainly invoked by the US and EU, and applied globally.

During the prelude to the 2022 Russian invasion of Ukraine, the US developed preliminary possible sanctions against Russia, but excluded banning Russia from SWIFT (Society for Worldwide Interbank Financial Telecommunication). As reported by Bloomberg in August 2014, the UK started pressing EU leaders to consider blocking Russian access to the SWIFT banking transaction system under an expansion of sanctions.

The foreign ministers of the former Soviet governments of Lithuania, Latvia and Estonia demanded that Russia be cut off from SWIFT following the Russian invasion of Ukraine in 2022. Reuters report published in February 2022 suggested that EU member states were reluctant, both because European lenders held most of the nearly $30 billion in foreign banks’ exposure to Russia and because Russia had developed the SPFS alternative. The EU, the UK, Canada and the US ultimately agreed to suspend a few Russian banks from the SWIFT messaging system; the governments of France, Germany, Italy and Japan also issued statements alongside the EU. The Russian Federation outlawed SWIFT use on March 20, 2023.

On September 26, 2022, surreptitious bombing of the Nord Stream 1 and Nord Stream 2 natural gas pipelines took place in the Baltic Sea. Both pipelines, which were constructed to carry natural gas from Russia to Germany via the Baltic Sea, are wholly controlled by Gazprom, the Russian gas firm. Although the identities of the saboteurs and their objectives remained doubtful, Russia started blaming the NATO alliance and US intelligence agencies for the sabotage. As reported by the Time and other international media outlets, American investigative journalist Seymour Hersh published an article on his Substack page on 8 February 2023 in which he alleged that the attack was ordered by the White House and carried out utilising American and Norwegian assets.

The Russian leadership understood that a multidimensional hybrid war was being launched against their vital national interests and they had to survive in the international system by meandering through these sanctions and challenges.

While the war ravaged the better part of Ukraine’s eastern republics, the energy and food crisis hit the globe like a bolt from sky. If one looks at the map of Russia and Ukraine and the battle space east of Dnieper River, it is one of the most productive wheat producing area. This area was the mainstay of Ukrainian wheat exports around the world. Since Russia is a major energy producer in terms of oil and gas, it decided to find a way out since Swift was blocked. It opted for exchange of energy in currencies other than dollar. Larger importers of energy like India and China took the advice and started trading outside US dollar. Even Pakistan is looking for import of cheap oil from Russia.

According to Wall Street Journal, Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, a move that would dent the US dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia.

Similarly, the BRICS countries have felt that in case they have some problems with the US, and they are put under sanctions, the US could freezes their assets in dollars.

Another reason for de-dollarisation is the US economy itself. The US debt at present is more than $32 trillion. It is becoming increasingly difficult for Washington to maintain this level of public debt. Voices are also being raised from countries like South Africa and Malaysia. Kenyan President William Ruto had advised those who were hoarding dollars to stop it because the new market will be very different. Similarly, ex-South African President Thabo Mbeki was heard saying that if two big countries want to trade in local currencies, why they should do it in dollars.

Independent commentators like Gonzalo Lira have analysed the impact of de-dollarisation on global economy. He feels that the Bretton Woods system of monetary management established in 1944 has outlived its utility, especially after the US started weaponising the dollar against competitors through sanctions. Those countries who were building their dollar reserves (China, Japan, KSA, UAE, etc) were not keeping all assets in banks but buying US stocks and bonds. As pointed out by Shobhit Seth in Investopedia, China has steadily accumulated US Treasury securities over the last few decades. In August 2022, China owned $971.8 billion in Treasuries, roughly 13% of the US national debt.

Gonzalo feels that the money will start shifting its destination after de-dollarisation picks up. Let’s say China and Arab countries are trading in yuan and there’s a reserve of yuan being piled up in the Middle East. The rich Arab countries are going to start buying the Chinese stocks or the Chinese assets. Resultantly, major investors will take out their investments from the stocks in New York Stock Exchange, Nasdaq or US treasury bonds and start diverting it to Russian, Chinese or Saudi markets. As the pressure builds up on greenback, the US Federal Reserve will start printing more dollars leading to hyperinflation.

Will the slide-down of dollar be gradual or steep? Gonzalo opines that initially it will be gradual, but after major investors start diverting their investments to other countries, the slide will become steep.

What is there for Pakistan and its business community?

First and foremost is to discuss the de-dollarisation and its global ramifications. In order to analyse the pros and cons of de-dollarisation, Pakistani state institutions, think-tanks and academia should hold seminars to chalk out a financial strategy where Pakistan can get maximum out of the change. For instance, will de-dollarisation ease out pressure on Pakistan’s external debt, especially after greenback starts losing its value? Which other currencies can become reserve currencies? And how can Pakistan integrate its trade and commerce with emerging economies?

Published in The Express Tribune, May 6^th, 2023.

Like Opinion & Editorial on Facebook, follow @ETOpEd on Twitter to receive all updates on all our daily pieces.