The end of the decades-long petrodollar deal is likely to reduce the significance of the United States Dollar (USD) in cross-border currency settlement for the bilateral trading of merchandised goods and services. The parties engaged in these bilateral deals have stressed the need for local or regional currencies, either for the settlement of trades or as a reserve currency.
Policymakers across several countries and cryptocurrency managers want the demise of the USD to create the demand for the fifth-generation global currency (crypto) without having any confirmation on its origin, handling, supply, and regulation. Several countries have jointly emphasized the need to develop a regional currency and promote it on a global scale as an alternative to the USD, looking primarily at the success of the Euro.
The petrodollar dealThe history of petrodollar system traces its origins to the 1944 Bretton Woods Agreement, which established the USD as the world’s reserve currency, backed by gold. The petrodollar system offered mutual benefits. Under this deal, the United States gained significance as a stable currency and leverage in global finance, while Saudi Arabia received military protection and economic stability. Petrodollars were often reinvested in United States Treasury bonds, further strengthening the USD’s status. This system reinforced the US notes as the world’s reserve currency. However, an economist called the ‘petrodollar deal’ emerging out of an agreement signed between Saudi Arabia and the United States in 1974, which was denied renewal and thus expired on June 9, 2024. The arrangement may have been made due to Saudi Arabia’s swelling petro funds that need to be invested.
According to Paul Donovan, Chief Economist at UBS Global Wealth Management, “The United States and Saudi Arabia did establish a Joint Commission for economic cooperation in June 1974, aiming to help Saudi Arabia spend its sudden glut of dollars on US products. In July 1974, Saudi Arabia agreed to invest oil dollars in US Treasuries, which was kept confidential until 2016.”
| RMB’s share in March 2024 (%) |
| Currency | As a global payment’s currency | international payment’s currency – Excluding payments within Eurozpne |
| US dollar | 47.37 | 59.50 |
| Euro | 21.93 | 12.13 |
| GBP | 6.57 | 5.90 |
| CNY | 4.69 | 4.72 |
| JPY | 4.13 | 3.18 |
| CAD | 2.63 | 3.04 |
| AUD | 1.62 | 1.84 |
| HKD | 1.57 | 1.79 |
| SGD | 1.28 | 1.14 |
| THB | 1.07 | 0.92 |
Sources: SWIFT Watch Analytics, and Polymerupdate Research
Saudi Arabia indicated in January 2023 that it was happy to negotiate oil sales in other currencies. The possibility changes little for financial markets. Saudi Arabia’s Riyal remains pegged to the dollar, as its stock of financial assets are dollar focused. The dollar’s reserve status depends on how money is stored, not how transactions are denominated, Donovan feels. The relationship between the US and Saudi Arabia holds strong despite potential bargaining power for large buyers in the kingdom over currency choices.
BRICS emphasizing on de-dollarizationFollowing the success of the Euro in the European Union, Asian countries also discussed the launch of a different currency for regional trade. However, China continued to promote its currency, Renminbi (RMB) or Chinese Yuan (CNY), for regional or global trade. Presently, RMB is considered as a Reserve Currency, thus prolonging the possibility of the launch of a regional currency.
Meanwhile, BRICS, a regional forum of Brazil, Russia, India, China, and South Africa, is working on a strategy to introduce a common currency for trade and investment between each other as a means of reducing their vulnerability to dollar exchange rate fluctuations. In Johannesburg, Brazil’s President Luiz Inacio Lula da Silva made an official proposal in this regard at the BRICS Summit in August 2023. Officials and economists deliberated difficulties involved in such a project, given the economic, political, and geographic disparities between BRICS members. India supported boosting trade in local currency. At this meeting, Russian President Vladimir Putin stressed, through a video address, the need to trade in the national/regional currencies, and discussed switching trade between member countries away from the USD.
Reports said that BRICS is looking to dominate the food and crops sector to reduce Dollar hegemony for cross-border trade settlements. Russia recently proposed a plan to allow importers to settle trade in local currencies for grain exports. Termed as ‘grain exchange’, the plan allows import and export companies to buy grain directly from farm producers and firms. The settlement of such traders could be done in local currency, side-lining the USD. BRICS have also advocated trading fish in local currencies, not in the USD.
In a recent statement, Sergey Ryabkoy, Russia’s Deputy Foreign Minister and BRICS Sherpa, said, “Many more countries are looking to join our alliance. While 30 countries have formally submitted their applications to join BRICS, another 15 nations have informally expressed their interest in joining the alliance. Developing countries are looking to make their local currencies stronger and cut ties with the USD for trade. Therefore, they believe that BRICS is the only hope that can help them achieve the de-dollarisation agenda. Over the years of cooperation in BRICS, a very positive and unique culture of dialogue has developed. We have established truly trusting relations. Now, this approach is bearing fruit. After the enlargement, we see a growing interest of developing countries in deepening cooperation with the BRICS alliance.”
Russia’s experienceRussia has signed pacts to sell crude oil to India in large volumes and settle these contracts in local currencies i.e. the Rupee, and the Rouble. This move has prompted India to raise crude oil imports from Russia, of course with a discount of US$6-7 a barrel, resulting in New Delhi’s oil imports from Moscow reaching almost half of the entire monthly requirement.
Mukesh Ambani-controlled Reliance Industries Ltd has signed a one-year deal with Russia’s Rosneft to buy at least 3 million barrels of crude oil a month in Rouble. The move comes after India expressed willingness to purchase at least a third of its crude oil demand, of approximately 5.02 million barrels per day, from Russia this year, and the Russian government asked its trade partners to look for alternatives to the Western (the United States and the European Union) sanctions. The increase in crude oil import from Russia has piled up billions of the Rupee in Indian banks, awaiting Russia’s guidance for investment in India.
DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com
