The US dollar has been the absolute pinnacle of currencies for decades, but as successive US administrations abuse their ability to punish countries with governments that disagree with US foreign policy through sanctions, countries are beginning to explore for alternatives to avoid future US sanctions.
Many countries have been reacting to the US dollar’s depreciation, but the current sanctions placed by the US and its allies on Russia, which is one of the world’s major grain, oil, and gas producers, have hastened the process of de-dollarization.
The sanctions imposed on Russia by the US and its allies have also increased fears of a more fragmented international financial monetary system and as we talk, some of them are starting to surface.
The US dollar as a global reserve currency was in decline even before the war in Ukraine hitting an all-time low at the end of 2021. Its share of global foreign exchange (FX) reserve dropped to 58.8% according to the latest data provided by IMF and Bloomberg.
In 1999, the US dollar was at its peak when the Euro currency was launched and its global foreign exchange (FX) reserve stood at 71% then and slowly, it started declining from that moment until now. The decline of the US dollar as a reserve currency is inevitable as countries like China become bigger in GDP than the US.
On March 31st, Gita Gopinath who is IMF’s first deputy managing director shared her views on sanctions imposed on Russia and the effects they will have on the global monetary system.
“The dollar would remain the major global currency even in that landscape but fragmentation at a smaller level is certainly quite possible”, Gita said as she added that some countries are already renegotiating the currency in which they got to be paid for trade.
Most investors will keenly follow up on the development of sanctions imposed by western countries on Russia as they keep an eye on what will happen with sanctions.
The most important thing to watch is how Europe reacts to oil and gas purchases from Russia as it will have the potential to cause inflation worldwide.
Recently, President Vladimir Putin of Russia demanded that Russia’s gas be paid in rubles instead of US dollars or Euro which upset many leaders in Europe, especially in Germany as its chancellor Scholz said that his government ordered companies not to accept Putin’s ruble payment demand.
Russia said that it will be forced to cut off the gas supply to Europe if importing companies don’t pay for the gas in rubbles. We have less than a month to know if countries Putin has termed as unfriendly due to their participation in sanctions imposed on Russia will accept the ruble payment system.
G7 ministers met after president Vladimir Putin of Russia demanded payment for Russia’s gas in rubbles and rejected such demand saying that Putin and Russia should respect contracts reached between parties where Russian gas was to be paid in Euros or US dollars.
Previous contracts will expire in may which means new contracts for Russia’s gas to be delivered in June must be in rubbles or else there are no gas deliveries to be made and if this happens, it will devastate the EU economy where most homes and industries depend on gas for heating.
The world will be watching closely what the EU will do, will it comply with Putin’s demand for ruble payment or not, and will Russia cut off the gas supply to Europe if they failed to pay in the rubble. We shall have to wait and see what happens in the future between the EU and Russia.
The change in the payment system by Russia may be the final nail in the global dominance of the US dollar as a reserve currency because some oil-producing countries like Venezuela and Iran had already moved away from the US dollars after US sanctions.
Other countries following them include Myanmar, Cuba, Nicaragua, Brazil, India, and most countries neighboring China which has started trading in local currencies instead of using the US dollar.
Recently, reports come out saying that Saudi Arabia was in close negotiations with Chinese officials about accepting part of its oil payment and pricing in Chinese Yuan which may force other oil and gas producing countries to follow Saudi Arabia since most of them have China as their largest trading partner.
Another real threat to the US dollar is the development of digital currencies, especially the one being developed by China.
The Chinese digital Yuan will enable people to buy goods and services from all over the world and pay using the digital Yuan, especially in countries participating in Belt and Road Initiative.
If you observe clearly, most developing countries have rapidly adapted mobile payment systems, especially in South East Asia and Africa will make it easy to transition from mobile payment systems to digital currency like Yuan.
China is the largest trading country in the world, conducting trade with more than two-thirds of countries in the world as their largest trading partner.
Countries will be forced to take Yuan as their reserve currency since they do more trading with China, and we have already seen this in Africa where most central banks are starting to stack the Chinese Yuan.
The US dollar has been a global reserve currency for decades and it will take time to lose that title, but all indications point to one thing, “the decline of the US dollar” is inevitable.