How many times have you read tweets and threads about de-dollarization this past week?
I bet it is coming up everywhere more than you expected. There are reasons why pundits are thinking about the status of the dollar as an international reserve currency. We will talk about that by explaining what India is doing with their Rupee Settlement Mechanism.
What is dedollarization?
There is no official definition to explain this process or phenomenon. We can try to explain what happens during de-dollarization. In our current international economic system, the USD is a global currency reserve. The currency is used for international trade and more than 50% of global reserve is in the USD. The USD represents 50% more currency reserves compared to the second placed Euro. The de-dollarization happens when the USD is replaced from all of its use cases such as international trades and reserves.
This does not mean that the dollar system will go away in the next 4-5 years. It is a process that economists and experts are keenly looking at in the context of growing discussion around the world to find a way to transact outside of the dollar system to avoid sanctioning and geo-political reprimand.
The de-dollarization represents the growing share of other currencies instead of dollars in the form of bonds, international energy transactions and reserves.
Why now?
The push to find trade options outside the existing dollar system came to prominence after the US government used the payment mechanism as one of the weapons to punish Russia during Ukraine war.
This event not only impacted how Russia traded with other nations but also warned developing countries other than Russia including BRICS countries to seriously consider their dependency on the US dollar system.
The sanctions on Russia reminded other economies that this could easily happen to them if they rely too much on USD. In addition to that, the USD became more stable and stronger against other major currencies due to the ongoing sanctions and higher federal interest rates boosting the USD demand. The strong USD means the developing countries were short in US reserves.
What's happening with China and India?
China as the second biggest economy is seizing this opportunity to get countries to trade with them outside of the dollar system. They are hoping to garner more soft power and diplomatic privilege in the global geopolitical system. Their brokering of peace between Iran and Saudi Arabia and pushing BRICS countries to look for their own settlement currency is huge in terms of de-dollarization.
India received flaks for buying Russian oil amidst western sanctions. They have been working on Rupee Settlement Mechanism to avoid using the USD when they are depleting the already scarce resources.
There are 18 countries that agreed to settle their bilateral trades with India in Indian Rupee. Bangladesh became the latest country to agree to this system.
How huge are these trades?
The trades that Indian and China are doing right now are not significant in terms of value but could signal what is to come next. This trend signifies the interest among developing countries to settle using their own currencies to avoid geo-political sanctions. It will be important for these countries to not allow the United States to use the international payment hegemony as a weapon against others will.
The dedollarization is still at a really early stage. This may mature or may not mature as everybody is suggesting.
What do I think?
I feel the USD system of international payment is definitely dwindling. Even the US government accepted the fact the weaponization of USD could weaken the supremacy USD has enjoyed until now.
It does not mean that Euro or Yuan will replace USD in the short term. It will take time for other currencies to challenge the USD as a global currency reserve. But a multipolar world where there are multiple lead currencies existing together may become a reality. I don't know where crypto assets would fit in this model of coexistence of leading currencies. I look at the effort of BRICS, ASEAN and other growing economies' push to create something new to get out of the dollar-based payment system as an evolutionary sign to represent the dwindling influence USD.
What do Hivers think?
I will dive deep into the Rupee Settlement Mechanism next. Wait for that post as well