Gulf states and the de-dollarisation trend

The US dollar is not on the verge of collapsing. However, it is in a gradual decline. Not long ago the US dollar losing its undisputed dominance in global trade was unthinkable. Today that’s no longer the case.

In the past 25 years, the US dollar’s market share has decreased from more than 70 percent to less than 60 percent. In 2001, the share of global reserves held in US dollars was 73 percent. This year it is 58 percent.

Russia’s February 2022 invasion of Ukraine and the West’s response to Moscow’s aggression marked a major turning point in the movement against the US dollar.

As a result of Washington imposing sweeping sanctions on Moscow, freezing Russia’s US dollar reserves, and removing major Russian banks from SWIFT, de-dollarisation has accelerated.

By waging all-out financial warfare against Russia, Washington has pushed more countries across the Global South to seek alternatives to the US dollar.

China has long wanted to see its own currency gain greater traction in international trade. Beijing has spent years attempting to increase the adoption of its currency across the world.

“China’s push for settling trade and investment in yuan – also known as the ‘internationalisation of the renminbi’ – began around the 2007-2008 global financial crisis, when Chinese officials became convinced that using the dollar as the country’s main intermediary could render the country’s financial position more exposed to international market fluctuations,” Dr John Calabrese, a Senior Fellow at the Middle East Institute, told The New Arab.

Since February 2022, China has greatly benefited from the acceleration of de-dollarisation with a host of countries including Argentina, Brazil, Russia, the United Arab Emirates (UAE), and others completing trade settlements with China in yuan instead of US dollars this year.

Too many US-imposed sanctions

Put simply, Washington’s addiction to sanctions is largely responsible for the acceleration of de-dollarisation. Ultimately, the risk of being sanctioned has pushed a growing list of countries – including not only adversaries but also allies and partners – away from the dollar.

“Setting up a non-dollar trade relationship acts as insurance against US sanctions,” Dr Jim Krane, the Wallace S. Wilson Fellow for Energy Studies at Rice University’s Baker Institute for Public Policy, told TNA.

“The US has been overusing secondary sanctions to penalise countries and businesses for consensual transactions that don’t involve the US in any way, other than being completed in dollars. Sanctions are starting to make dollarised trade a liability, due to Washington’s freewheeling attitude toward penalising trade relations that take place way outside US jurisdiction.”

Tom Czitron, a former portfolio manager, recently wrote in The Globe and Mail that “we seem to be entering a new epoch where the rest of the world, with the exception of US satellites such as Canada, are actively looking to move away from dollar-dependency, as the US administration increasingly uses its reserve currency status as a weapon to achieve its political goals”.

Dr Calabrese suggested that de-dollarisation may be reflective of “concerns about the long reach of US secondary sanctions and the desire to use the yuan as a hedge against the dollar and euro and thereby shield themselves against such sanctions”.

Implications of ‘de-dollarisation’ for Gulf states

In March, China completed its first energy deal in yuan, involving approximately 65,000 tons of liquified natural gas (LNG) imported from the UAE. China National Offshore Oil Corporation and TotalEnergies carried this transaction out via the Shanghai Petroleum and Natural Gas Exchange.

Given that this transaction was the first of its kind, its significance must not be dismissed. Yet, as Rachel Ziemba, an Adjunct Senior Fellow at the Center for a New American Security, told TNA, the deal is “more proof of concept and [a] pilot project than a sign of volumes to come. It’s an example of the experimentation that is underway in the area of currencies and payment systems”.

It is important to note that the UAE and the other GCC members are not the key drivers of this movement away from the dollar. Instead, countries which the US heavily sanctions such as Russia and Iran are leading it.

“The GCC states are highly compliant countries in the global economic system. They favour stability and rules-based oversight. They have no interest in contributing to upheaval. Therefore, if any transition [away from the US dollar] occurs, they should be considered as secondary or tertiary actors, not leaders,” said Dr Omar Al-Ubaydli, the President of the Bahrain Economists Society, in an interview with TNA.

Yet, GCC states are responding to de-dollarisation pragmatically. “If a new system is emerging, it makes sense to be able to engage it, as a matter of economic prudence,” added Dr Al-Ubaydli.

At the start of this year, Saudi Arabia’s Minister of Finance Mohammed al-Jadaan spoke to Bloomberg at the World Economic Forum in Davos about the Kingdom’s openness to improving trade by trading in non-dollar currencies. In 2022, Saudi officials also announced that they were considering selling oil to China in yuan.

Yet, at the time many analysts suggested that such talk was probably more about trying to gain greater leverage over Washington by raising concerns among US officials of Saudi Arabia taking steps to further accelerate de-dollarisation and less about a true intention to begin exporting the Kingdom’s oil to China in yuan.

Ziemba explained that Gulf states might benefit from better deals or more consistent pricing on their purchases in the Chinese currency or other non-US dollar currencies. “The GCC/Arab countries import a lot from China and some swap lines or other predictable CNY terms may help manage currency risk,” she told TNA. “However, in practice, China would likely benefit more that GCC/Arab countries.”

Outside of the GCC, other countries in the Middle East are also giving signals that they are part of this movement against the US dollar. Israel has added the yuan to its foreign reserves, and the Central Bank of Iraq has also indicated that it would conduct trade in the Chinese currency.

Currently, it is unclear how far the GCC states might go in terms of moving away from the dollar.

There are geopolitical factors in play as Beijing becomes a more influential actor in the Middle East against the backdrop of declining US hegemony.

The GCC members have vested interests in strengthening their relationships with China as they increasingly call into question the wisdom of being so tied to Washington throughout the future.

More yuan-denominated trade could help bring about even deeper ties between Gulf states and Beijing. Thus, GCC members have come under some pressure to move in this direction.

“The Gulf countries’ moves on the currency front could also be read as one of several tools used to send the message to Washington that they are not pawns, that there are alternatives, and that they expect stronger US security guarantees,” Dr Calabrese told TNA.

But Beijing’s currency controls and manipulation of valuations have left policymakers in Gulf nations preferring to avoid the Chinese currency. “Their preference is to keep oil and gas exports denominated in dollars, which are far easier to spend,” according to Dr Krane.

“Gulf currencies are affixed to the dollar. For that reason, they might be wary of yuan settlements on a large scale, if only to prevent a stampede that would backfire,” Dr Calabrese told TNA.

“In addition, one of the long-standing concerns international investors have about using the yuan is China’s strict foreign exchange controls, which by limiting capital flows might dampen the ‘enthusiasm’ to de-dollarise.”

Other experts have similar assessments. “It remains to be seen how much China will facilitate the use of their currencies both in direct trade (in which its likely to be more comfortable) or with third countries (in which its likely to be less comfortable),” explained Ziemba.

“In order to really facilitate trade in other currencies, GCC countries would need to also be able to shift their savings in other currencies. Chinese capital controls may make this more difficult.”

A post-dollar future

The de-dollarisation trend appears ‘unstoppable’. The question is about when, not if, the hegemony of the US dollar will end.

With the Global South seeking a new trading system in which they are shielded from the US dollar’s hegemony as well as Washington’s weaponisation of it, demand for the US dollar will decrease over time regardless of America’s opposition to this trend.

Perhaps for GCC states, key questions relate to how quickly this decreased demand for the US dollar will occur and whether countries in the Middle East and beyond will have sufficient time to make necessary adjustments.

Regardless of how de-dollarisation pans out in upcoming years, policymakers in Gulf countries recognise that US power in the world, which is more about its currency’s status than its military might, will decrease as demand for the US dollar goes down.

Giorgio Cafiero is the CEO of Gulf State Analytics.

Follow him on Twitter: @GiorgioCafiero