In early June, a rumor began to circulate — which was widely reported in the Indian press as true — that the government of Saudi Arabia had allowed its petro-dollar agreement with the United States to lapse.
This agreement, made in 1974, is quite straight-forward and fulfills various needs of the U.S. government: the U.S. purchases oil from Saudi Arabia, and Saudi Arabia uses that money to buy military equipment from U.S. arms manufacturers while holding the income from the oil sales in U.S. Treasury debt instruments and in the Western financial system. This arrangement to recycle oil profits into the U.S. economy and the Western banking world is known as the petro-dollar system.
This non-exclusive arrangement between the two countries never required the Saudis to limit their oil sales to dollars or to recycle their oil profits exclusively in U.S. Treasury securities (of which it holds a considerable $135.9 billion) and Western banks. Indeed, the Saudis are free to sell oil in multiple currencies, such as the Euro, and participate in digital currency platforms such as mBridge, a trial initiative of the Bank of International Settlements and the central banks of China, Thailand, and the United Arab Emirates (UAE).
Nonetheless, the rumour that this decades-long petrodollar agreement had come to an end reflects the widespread expectation that a seismic shift in the financial system will overturn the rule of the Dollar-Wall Street regime. It was a false rumour, but it carried within it a truth about the possibilities of a post-dollar or de-dollarized world.
The invitation extended to six countries to join the BRICS bloc last August was a further indication that such a shift is underway. Among these countries are Iran, Saudi Arabia and the U.A.E., although Saudi Arabia has yet to finalise its membership.
With its expanded membership, BRICS would include the two countries with the largest and second-largest gas reserves in the world (Russia and Iran, respectively) and the two countries that accounted for nearly a quarter of global oil production (Russia and Saudi Arabia, all figures as of 2022).
The political opening between Iran and Saudi Arabia, brokered by Beijing in March 2023, as well as the signs that U.S. allies U.A.E. and Saudi Arabia seek to diversify their political linkages, demonstrate the possible end of the petrodollar system. That was at the heart of the rumour in early June.
However, this possibility should not be exaggerated, as the Dollar-Wall Street regime remains intact and significantly powerful.
Data from the International Monetary Fund shows that, as of the last quarter of 2023, the U.S. dollar accounted for 58.41 percent of allocated currency reserves, which is far more than the reserves held in euros (19.98 percent), Japanese yen (5.7 percent), British pound sterling (4.8 percent), and Chinese renminbi (short of 3 percent).
Meanwhile, the U.S, dollar remains the main invoicing currency in global trade, with 40 percent of international trade transactions in goods invoiced in dollars despite the fact that the U.S. share of global trade is just 10 percent.
While the dollar remains the key currency, it nonetheless faces challenges around the world, with the share of the U.S. dollar in allocated currency reserves declining gradually but steadily over the last 20 years.
Three factors are driving de-dollarisation:
- the U.S. economy’s lack of strength and potential that began with the Third Great Depression in 2008;
- the aggressive use of illegal sanctions — especially financial sanctions — by the United States and its Global North allies against one quarter of the countries in the world;
- and the development and strengthening of relations among countries of the Global South, especially through platforms such as BRICS.
In 2015, BRICS created the New Development Bank (NDB), also known as the BRICS Bank, to navigate a post-Dollar-Wall Street regime and to produce facilities to further development rather than austerity.
The creation of these BRICS institutions and the increased use of local currencies to pay for cross-border trade created an expectation of hastened de-dollarization. At the 2023 BRICS summit in Johannesburg, Brazil’s President Luiz Inácio Lula da Silva repeated the call to increase the use of local currencies and perhaps create a BRICS-denominated currency system.
There has been a vibrant debate about de-dollarization amongst those who have worked in the BRICS institutions and in the large countries that are interested in de-dollarization, such as China, about its necessity, prospects and the difficulties of finding new ways to hold currency reserves and invoice global trade.
