When Saudi Finance Minister Mohammed al-Jadaan announced in January 2023 that Saudi Arabia is open to using currencies other than the U.S. dollar in oil contracts, he probably did not expect his comment to attract so much media attention. He should not have been surprised that it did.
Since he made this comment during the annual meeting of the World Economic Forum, Saudi Arabia has found itself caught up in a controversy about de-dollarization along with China, Russia, Iran, and Brazil. The political leaders of these four countries have openly advocated for reducing the role of the U.S. dollar as the main global trade currency due to recent geopolitical tensions with the United States. But Saudi Arabia is different because of its unique relationship with the U.S. and its role as a pillar of the world oil trade.
The two countries have had an implicit understanding for decades that in return for U.S. military and security support, Saudi Arabia would use the U.S. dollar as the standard currency for oil sales. Riyadh also has historically invested a portion of its oil revenues in U.S. government bonds, which further strengthens the dollar.
Al-Jadaan’s comment came as a shock because it suggested that the Saudis were considering revising this commitment. His remark was taken seriously by commentators that worry about the adverse consequences of de-dollarization on U.S. economic interests, as well as by proponents of de-dollarization in light of recent U.S.-Saudi tensions.
After the October 2018 killing of journalist Jamal Khashoggi by Saudi agents in Istanbul, many in the U.S. harshly criticized Crown Prince Mohammed bin Salman (MBS), the de-facto leader of the country, for ordering the assassination. While then President Donald Trump tried to tone down the reaction, other U.S. politicians were very vocal. The Saudis were shocked by the criticism, which followed an equally harsh U.S. response when Saudi Arabia and the United Arab Emirates imposed an economic blockade on Qatar.
In response to these “unfriendly” U.S. policies, Saudi Arabia strengthened cooperation with China and Russia. It was in this context that Al-Jadaan’s remark was seen as another sign of diplomatic strains between the two countries. The significance was heightened by the fact that it was preceded and followed by calls for de-dollarization by other governments. Chinese leaders, in particular, openly welcomed the Saudi stance.
For several months, there were no further comments from Saudi officials. Then in June 2023, an official of the International Monetary Fund (IMF) named Aleksei Mozhin issued a report in which he claimed that Saudi Arabia, Iran and Brazil had started using Chinese yuan in their international transactions with China and other countries. Since Mozhin is Russian and heads the IMF’s Russia desk, this report was regarded with some skepticism.
In ensuing months, while the leaders of Brazil, Iran and Russia have expressed their desire to reduce dependence on the U.S. dollar, Saudi officials have been silent.
Other developments in Saudi foreign policy, however, suggest that the threat of making oil contracts in other currencies might be a component of a multifaceted bargaining strategy with the United States. For example, Saudi Arabia announced in May that it had conducted normalization negotiations with Iran under Chinese mediation. This was followed by concrete steps toward a resumption of normal diplomatic relations between the two countries. Embassies reopened and Iran’s foreign minister visited Saudi Arabia in August. The Chinese mediation also reflected expanding bilateral ties between China and Saudi Arabia. The Saudis have also maintained close cooperation with Russia in OPEC+ since the Russian invasion of Ukraine in 2022, to prop up the price of oil despite U.S. protests about the impact of high gas prices on inflation.
The combination of these postures and pressures appears to have motivated the Biden administration to adopt a more positive attitude toward Saudi Arabia. The U.S. has increased its diplomatic contacts with Riyadh and has shown a willingness to take Saudi demands more seriously, especially in the context of a push to normalize relations between Israel and Saudi Arabia.
For several years, the Saudis have been frustrated by a perceived U.S. neglect of four of their long standing demands: 1) A stronger U.S. commitment to Saudi defense, including sales of advanced weapon systems, 2) stronger and more effective steps to contain Iran. 3) Solid steps to promote a two-state solution for the Palestinian conflict. 4) U.S. restraint in criticism of Saudi human rights violations. Frustration over U.S. inability or reluctance to address these issues appears to have motivated Saudi Arabia to develop closer relations with China and Russia and to take the recent steps toward rapprochement with Iran.
Now it seems that Saudi Arabia has finally managed to get Washington’s attention. In a July 2023 article, New York Times columnist Thomas Friedman revealed that high level negotiations were underway on a comprehensive security agreement that would address many Saudi concerns in return for a limit on Saudi relations with China and steps toward Saudi-Israeli rapprochement.
In the meantime, Russia and China have continued their charm offensive towards Saudi Arabia. During the August 2023 annual meeting of BRICS leaders in South Africa, Saudi Arabia was one of six nations formally invited to join the organization. While the leaders of the other five invitees — Argentina, Iran, the UAE, Egypt and Ethiopia — immediately expressed their gratitude, the Saudi response was more reserved. In his first reaction to the invitation, Saudi Foreign Minister Prince Faisal bin Farhan said that the Kingdom would carefully study the terms of membership before making a decision.
This “wait and review” response could be yet another signal to the United States. Middle East expert Sami Hamdi believes that “Riyadh will first gauge the reaction of Washington, and consider any offers from the delegations that Biden will send to Riyadh, before moving ahead with accepting the [BRICS] invitation.”
Saudi diplomacy in recent months suggests that a solid and strong strategic relationship with the U.S. is still one of Riyadh’s top priorities — assuming that Washington does not take Saudi Arabia for granted. At the same time, the Saudis are demonstrating that they have other options in the new multipolar world order. The BRICS leaders have announced that de-dollarization will be on their agenda for next year’s summit in Moscow. The outcome of U.S.-Saudi negotiations is likely to influence the level of Saudi participation in BRICS and its de-dollarization agenda.
Nader Habibi is an Iranian-American economist and Henry J. Leir Professor of Practice in the Economics of the Middle East at Brandeis University.
