For more than a half-century dollar ruled the world and dominated the global economy, oil trade and foreign exchange reserves. It provided the United States (US) immense geopolitical power to use it as a foreign policy tool to control international trade. However, in recent years, there has been a growing trend globally among countries to seek alternatives to avoid dependence on the US dollar, and this process is known as de-dollarisation. It is well said by America’s well-known investor James Rogers “the dollar may have ruled the world for decades, but today it, through its sanctions and its monetary policy, is shooting itself in the foot”. Due to the transition of the world towards multipolarity, many countries around the world are in the process of replacing the dollar as the primary currency, which would ultimately result in the stealth erosion of dollar hegemony.
The main drivers contributing to de-dollarisation are the changing patterns of global trade and investment, great power competition, rapid globalisation, the development of alternative currencies and payment systems and the rise and acceptance of digital currencies. However, the triggering factor considered for this trend was cutting off Russia from the global financial messaging system, the Society for Worldwide Interbank Financial Telecommunications (SWIFT). This move was incurred by the Russia-Ukraine crisis when the US imposed unilateral sanctions on Russia, crippling its economy. In the past the same happened with Iran in 2018 after the reimposition of sanctions, when dozens of Iranian banks were ousted from the SWIFT system to suppress Iran’s nuclear program. Similarly, in 2019 former US President Donald Trump imposed new economic sanctions on Venezuela to freeze all the property and assets of the Venezuelan government in the US, mounting his campaign to remove President Nicolás Maduro from office. Such actions accelerated the realisation in states that the dollar could be used as a financial weapon by the US anytime. Although de-dollarisation is complex, states have decided to take action and are striving to develop effective solutions.
China is leading the way for de-dollarisation, and many countries are following it, which would enhance China’s influence in the global financial system.
To alter the financial system dominated by the US dollar, BRICS (Brazil, Russia, India, China, and South Africa) nations will announce BRICS common currency at the forthcoming BRICS Summit happening in August 2023 in South Africa. The new currency adoption will further strengthen the de-dollarisation process, ensuring economic stability and protection from future sanctions. Jim O’Neill, the former Goldman Sachs Group Inc. chief economist, believes that “If BRICS expands to include ‘other emerging nations with persistent surpluses’, a globally fairer, multi-currency global system could emerge.”
Likewise, to circumvent the only dominating system, SWIFT, Russia and China are actively working on developing their own payment system to smoothen their cross-border transactions. Russia has developed the System for Transfer of Financial Messages (SPFS). At the same time, China has been promoting its own Cross-Border Interbank Payment System (CIPS), since its establishment, for transactions in yuan. Moreover, India plans to link such a service with Russia’s SPFS, which can further connect with China’s CIPS. To overcome the reliance on Western financial institutions such as the World Bank and International Monetary Fund, Malaysian Prime Minister Anwar Ibrahim revived a decades-old proposal of the Asian Monetary Fund during a visit to China in March. Xi Jinping also expressed openness to discussing the proposal.
Similarly, more than 100 countries’ central banks are exploring central bank digital currencies (CBDCs) to pursue de-dollarisation. China initiated the development of its digital currency, called digital yuan, in 2014. Its trials started in 2020 in several cities in China to provide a secure and efficient payment method to use in China and beyond. Venezuela is also promoting its own cryptocurrency called petro to overcome the financial obstruction created by the US. To move towards digitisation, JKPOAY, a Taiwanese QR and barcode payments processor, has partnered with payment technology, InComm, in Japan, providing additional payment options for customers and will be accepted at more than 18,000 retailers across Japan. Moreover, InComm is also seeking partnerships with other QR service operators in Thailand, Indonesia and Singapore.
The dollar’s dominance in global trade faces challenges as countries promote trade in their currencies for international trade and investment. In 2022, Russian company Gazprom and China’s company China National Petroleum Corporation signed an agreement to pay for Russian gas in yuan and ruble. Recently, the proportion of yuan/ruble currency pair trading on the Russian exchange market reached 39% while the pair of dollar/ruble decreased to 34%, as per the report shared by the Bank of Russia. Brazil and China moved ahead to conduct their trade and transactions in their respective currencies, reducing trade costs by connecting Rio-based Chinese banks to China’s payment system CIPS. Furthermore, India is also taking steps to internationalise their rupee. In July 2022, the Reserve Bank of India (RBI) announced a “rupee settlement system” for international trade between India and other countries.
In global trade, the increasing significance of the Chinese yuan can be seen after the first renminbi loan cooperation was completed in March between the Export-Import (Exim) Bank of China and the Saudi National Bank. Additionally, Iraq and Iran also decided that trade from China would be settled directly in the renminbi. On the other hand, China National Oil Company completed its first purchase of liquefied natural gas from French TotalEnergies through the Shanghai Petroleum and Natural Gas Exchange in yuan. According to an annual survey conducted between April and June 2022 by UBS-Union Bank of Switzerland of 30 leading central banks, the respondents showing interest in the renminbi has increased from 81% to 85% compared to the previous year.
Formerly, many countries held a considerable amount of their foreign currency reserves in dollars, but central banks started looking to diversify to other currencies to counter the dollar’s influence. According to the data revealed by IMF, the proportion of the dollar as a foreign reserve currency has declined to 60%, which was 71% at the beginning of the 21st century. To reduce bilateral trade transactions in the dollar and conduct trade in local currency from 2009 to 2020, China’s central bank signed bilateral currency swap agreements with 41 countries around the world, including countries from Asia, Central Europe, the Middle East and South America.
China is leading the way for de-dollarisation, and many countries are following it, which would enhance China’s influence in the global financial system. According to Chris Leung, an economist at DBS Bank, “Yuan internationalisation is speeding up as other countries seek an alternative payment currency to diversify risks and as the credibility of the Federal Reserve is not as good as before.” So from all of the statements mentioned above and examples, it can be inferred that breaking the current unipolar currency system is likely to occur. Although the transition to a multipolar currency system will not happen overnight, their efforts for de-dollarisation would lead to a gradual decline in dollar dominance.