Saudi Arabia and China Sign the End of the Petrodollar

Is the trend towards dedollarization overrated? Will the BRICS go all the way? The Sino-Saudi tandem leads the dance. Bitcoin lying in wait.

Dollar is still king

The dollar is the primary global reserve currency. It is also the most widely used currency for trade and other international transactions.

But this hegemony is starkly eroding since the beginning of the war in Ukraine. U.S. sanctions against Moscow played a major role. Notably, the “freeze” of 300 billion euros/dollars.

Since then, many countries reduce their exposure to the greenback. Notably Saudi Arabia, which is the cornerstone of the petrodollar system. Not a month goes by without a country taking its distance, at least in words, from the dollar.

One of the most important macro developments in the past 50 years (global Central Banks stopping sterilizing US deficits [a.k.a. growing UST holdings] in 2014) becoming more mainstream by the month it seems… pic.twitter.com/5opNhLF15e

— Luke Gromen (@LukeGromen) November 17, 2023

The demand of the two biggest creditors of the U.S. – China and Japan – has become less reliable lately. We recently reported about the difficulties of the US Treasury bond issuances.

In the meantime, supply has exploded. The U.S. Treasury has issued a net amount of 2 trillion dollars of new debt this year, a record. Not to mention that the Fed is selling the US debt bought under the aegis of QE at a rate of 60 billion dollars per month.

The continuation of this dedollarization trend will not be painless for the United States. The reduction in demand for the dollar will cause its value to fall and create inflationary pressures through the rise in the cost of imports.

For now, the imperial currency retains its dominant position. It remains involved in 88% of transactions on the foreign exchange market (forex).

The dollar also accounts for 46% of SWIFT payments, against 23% for the euro and 3.7% for the yuan. However, these figures don’t tell the whole story.

The CIPS (China International Payments System) processed a transaction volume worth 100 trillion yuan (~ 14 trillion $), compared to 150 trillion dollars for SWIFT.

Thus, rather than 3.7%, the actual share of the yuan is closer to 13%. This is a significant amount of money that would have otherwise circulated in dollars before the launch of CIPS in 2015.

Cette infographie ne concerne que les transactions réalisées via SWIFT.

Le volume annuel de transactions via le CIPS (China International Payment System) :

~14 000 milliards $ (contre 150 000 milliards $ pour SWIFT)

La Chine est donc plutôt 3# avec ~13 % pic.twitter.com/JmuHkgm2RQ

— Nicolas Teterel (@NTeterel) November 21, 2023

Central banks shun the dollar

While the dollar continues to grease the wheels of commerce, it is clearly in decline in terms of central bank reserves. These are now composed of 58% dollars, compared to 65% six years ago.

Foreigners, including private investors and central banks, now hold about 30% of all U.S. public debt in circulation, down from about 43% ten years ago.

Signs of dedollarization are also showing on the oil markets. An increasing number of oil sales are made in other currencies, such as the yuan.

The explanation is that Russia, the world’s leading energy exporter, obviously no longer accepts dollars. Russian oil is now sold in the currency of countries perceived as friendly.

For example, some Indian refineries have started paying in dirhams for Russian oil bought through traders based in Dubai. Others pay in yuan.

Saudi Arabia is also on deck. The central banks of the kingdom and the People’s Republic of China executed this Monday a currency swap equivalent to 50 billion yuan (26 billion Saudi riyals).

In other words, the purchase of Saudi oil in yuan is imminent. We are witnessing the twilight of the petrodollar.

For JP Morgan, a rapid dedollarization is not on the agenda. “The benefits of a ubiquitous currency are considerable, and the United States has long had a global network of alliances and partnerships.”

Perhaps, but most analyses show that fragmentation is spreading day by day. Huge chunks are detaching from the Western world. And the most significant demographic and economic part of this fragmented structure is called BRICS+.

The BRICS are truly determined to get rid of the dollar as quickly as possible. And the return of Argentina to the empire’s fold following the election of Javier Milei will not reverse the trend.

BRIC+

With its 11 members (if Argentina does not leave), the BRICS+ encompasses 47% of the world population, 32% of the land, 37% of the global economy (by purchasing power parity), 38% of the world’s industrial production and 25% of global trade. Crucially, BRICS+ also controls 45% of oil production.

Moreover, BRICS+ countries are regional hegemons collectively amassing military power that surpasses that of NATO. Iran has just unveiled for the first time hypersonic missiles, joining a very exclusive club alongside the Russians and the Chinese.

BRICS+ represents today the largest economic, demographic, productive, cultural, and military power in the world.

Obviously, each country has its own model and worldview. Prime Minister Modi, for example, chose not to participate in the virtual BRICS summit to discuss the situation in Gaza.

However, it remains that the alliance of Chinese, Indian, Russian, Latin, African, and Islamic civilizations makes it the strongest international organization in the multipolar world of the 21st century.

In contrast, the Western empire seems to want to cling to its strongholds through proxy wars. American billionaire Ray Dalio now estimates the probability of a third world war at 50%…

And while Russia has completely stopped accepting the dollar, there are fears that other countries, starting with China, will do the same. Gold would then return to the center of trade, hence its recent fluctuations around 2,000 dollars an ounce.

But one should not forget Bitcoin, which will officially become twice as scarce as gold next May. Not to mention that it costs nothing to move from one end of the world to the other.