In a rare joint statement in late March, China and Russia doubled down on earlier pledges to upend the global reliance on the U.S. dollar, and the long-standing global financial system that enables the U.S. to strong-arm them.
Will the Sino-Russian strategy succeed? My research suggests “dollar hegemony” is stable for many reasons, primarily due to the United States’ financial centrality and ability to secure investments. The measures announced so far, such as de-dollarization, renminbi digitalization, and alternative financial settlement and messaging systems, are unlikely to kick the dollar to the curb. But the reaction from America’s rivals underscores the limits of the dollar as a tool of deterrence.
If China and Russia devise successful alternatives to the dollar-centered financial system, and if these alternatives gain significant international traction, we would be witnessing a cataclysmic moment in great power rivalry. Currency unipolarity has been a defining feature of the entire postwar era — no currency, not even the euro, has ever come close to rivaling the scale of U.S. dollar use around the world.
An end to America’s dollar primacy and status as a financial hub could mean an end to U.S. macroeconomic perks. And a declining role for the dollar could also undermine the practice of dollar deterrence — the U.S. government’s ability to threaten or deny foreigners access to dollar clearing and, therefore, dollar settlement.
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This is not the first time countries have railed against dollar primacy. In the 1960s, French Finance Minister Giscard d’Estaing denounced the United States’ “exorbitant privilege” while economist Jacques Rueff decried the “monetary sin of the West.”
However, frustration with the system’s inequity pales in comparison with their ire over the discretion it gives the U.S. to exercise dollar deterrence. Should the U.S. lose this unique form of financial leverage, its ability to benefit from the current international order, and influence countries within it, will be sharply curtailed.
What is dollar deterrence?
U.S. dollar transactions are either cleared through the Federal Reserve or through U.S. financial institutions, which means foreigners depend on the U.S. financial infrastructure when settling dollar transactions. The United States’ ability to turn off the tap on foreign banks’ dollar funding can inflict significant costs on those who evade compliance with U.S. sanctions, given this extraterritorial reach.
Global dollar dependence provides the U.S. government with a powerful lever to police geopolitical behavior without intervening militarily. The U.S. has, for instance, sought to thwart Iran’s bid for regional hegemony, particularly its development of nuclear weapons and missile programs, not only by sanctioning Iran but by imposing secondary financial sanctions on countries dealing with Iran.
As Russian Foreign Minister Sergei Lavrov started a two-day trip to China on Monday, days after senior Chinese and US officials clashed openly during a bilateral meeting, a major topic in talks with Chinese State Councilor and Foreign Minister Wang Yi is how to counter US sanctions — not just on China and Russia but a growing list of other countries — using its dollar hegemony, analysts said.
As the new US administration under President Joe Biden signals its intention to continue his predecessor Donald Trump’s confrontational approach by wielding sticks, many countries around the world are faced with the risk of a weaponized, dollar-centered global payment system and a growing urgency to find alternatives.
While ending the greenback’s dominance remains an almost impossible mission at the moment, there are ways for countries to find ways to at least avert certain sanctions and slowly chip away at the dollar’s dominance, analysts added, noting that the trend of de-dollarization in certain areas is on the rise.
Only recently in this latter context, for example, Leonid Mikhelson, chief executive officer of Russian oil major, Novatek, said that future sales to China denominated in renminbi are under consideration and that U.S. sanctions accelerate the process of Russia trying to switch away from U.S. dollar-centric oil and gas trading and the damage from potential sanctions that go with it.
“This has been discussed for a while with Russia’s largest trading partners such as India and China, and even Arab countries are starting to think about it… If they do create difficulties for our Russian banks then all we have to do is replace dollars,” he said. “The trade war between the U.S. and China will only accelerate the process,” he added.
Moreover, under the auspices of former U.S. President, Donald Trump, when a sea-change in foreign policy occurred that meant that U.S. dollar-centric sanctions changed from being merely an instrument of policy against countries to the policy itself, momentum has built in many key petro-states for a change away from dependence on the U.S. dollar, said Emadi.
“For a long time there was no real alternative for big oil producers such as Iran, Venezuela, and even Russia that were on one of the U.S.’s sanctions lists to sell their oil in any other currency than the U.S. dollar but increasingly there will be other options, with China leading this strategic shift,” he told OilPrice.com. “The U.S.’s view is that its dollar is the only game in town but to use its currency to punish other countries is highly likely to work in favour of the decisive marginalisation of the power of the U.S. dollar, and therefore also of the U.S., within the next decade,” he concluded.
Saudi Arabia reportedly owes billions of dollars to some of the largest construction companies in the world in unpaid bills for work completed on the Riyadh metro project, which is key to Crown Prince Mohammed bin Salman’s plan to modernise the Kingdom.
Several global firms, including the US-based Bechtel Corp, have said that they are pursuing billions of dollars in unpaid bills, according to five people familiar with the matter cited in Al Jazeera.
Bechtel is reportedly owed around $1 billion for the transport system according to four of the people. Companies working on the project — which also involves French, Spanish and Italian firms — are also said to be pursuing several billions of dollars in unpaid bills in total, two of the people said, with Bechtel owed the most.
The Royal Commission for Riyadh City, which oversees the project, said in a statement that payments to contractors “have been made in a timely manner” and “the aforementioned claims are being assessed as per a dispute resolution process stipulated within the contract.”
Officials in Riyadh are also reported saying that they are committed to paying on time and have taken significant steps to resolving the problem.
h/t Digital mix guy