The de-dollarization is underway, some analysts said after the BRICS group of major emerging economies invited earlier this year several other countries to join, including some of the biggest oil exporters in the Middle East.
Saudi Arabia, the United Arab Emirates (UAE), and Iran joining an expanded BRICS (Brazil, Russia, India, China, and South Africa) group would bring together some of the biggest oil exporters and the world’s largest and third-largest crude oil importers, China and India, respectively.
While a BRICS+ alliance also proposing to include Argentina, Egypt, and Ethiopia would have much larger clout on the global political stage, a BRICS currency is unlikely to de-throne the dominance of the U.S. dollar in oil trade. An alternative to the dollar in the form of some kind of new BRICS currency would need close coordination between the central banks of various economies in mostly “not free” countries, per the Freedom House’s classification.
The Chinese yuan may get a boost in BRICS+ trade, but it’s unlikely that the world’s top oil exporter, Saudi Arabia, would be willing to ditch the dollar anytime soon. The Kingdom’s currency, the riyal, has been pegged to the greenback since the 1980s and the Saudis need dollars to back it. In addition, there has not been any hint from the Saudi rulers that they are willing to make such a big shift, according to some analysts.
BRICS Plans
“The BRICS will change the world, but perhaps more because of their rising share of GDP and divergent political and economic systems than through the realization of policymakers’ grand plans,” Ziad Daoud and Scott Johnson of Bloomberg News write.
The expansion would make BRICS consisting of 11 countries, from five currently, and the bloc will account for 37.3% of the world’s GDP in 2024, which is expected to rise to 37.7% in 2025 and 38.5% in 2028. The BRICS population will also grow from 3.2 billion at present by at least 400 million, significantly higher than the G-7 combined population of 800 million. Related: Saudi Arabia’s Energy Minister Blames Speculators For Oil Price Plunge
BRICS+ could be the counterweight to G7 and G20 on the global political scene in a polarized world.
The end of the dollar dominance is part of the grand plans of an expanded BRICS, but analysts don’t expect this to happen anytime soon.
The sanctions on Russia’s oil are working, Russell Hardy, chief executive of the world’s largest independent oil trader, Vitol Group, told the Asia Pacific Petroleum Conference (APPEC) in September.
“The flip side of sanctions is that it is creating stronger bonds between BRICS countries,” Hardy said, as quoted by Reuters.
Roadblocks To BRICS World Order
Fereidun Fesharaki, chairman of energy consultancy FGE, told the same conference that whatever currency BRICS comes up with would not replace the U.S. dollar because the currencies of top Middle Eastern oil exporters, Saudi Arabia and the UAE, are pegged to the dollar.
A de-dollarization in trade, including oil trade, would directly hurt these oil-dependent economies.
“Nobody can replace the U.S. dollar,” FGE’s Fesharaki said in September.
There is another hurdle to a common BRICS+ currency. The diverging monetary policies of all those mostly authoritarian countries, which makes it very difficult to have a single central bank monetary policy-setting body such as the European Central Bank (ECB), for example.
Then, there is the issue with the Chinese yuan, which the world’s top crude oil importer has been promoting increasingly in its trade to challenge the dollar. China trades in yuan with Russia, also because of the Western sanctions on Moscow because of Putin’s invasion of Ukraine.
But India is reluctant to accept demands from Russian oil companies to pay for Russia’s crude oil imports in yuan. Moscow has a lot of Indian rupees, but it can’t spend them all while it needs yuan.
Some crude cargoes from Russia to India have been recently delayed because the parties have failed to agree on the currency of the payment, sources at refiners told Bloomberg.
ADVERTISEMENT
A de-dollarization will not happen anytime soon, India’s Oil and Gas Minister Hardeep Singh Puri told CNBC in August.
“I don’t know what kind of change [the dollar needs to] be affected but I don’t see it ... It’s not so easy,” Puri added, noting that the international payments, arrangements, and systems have been in place for a long time.
Moreover, Saudi Arabia seems unwilling to either switch to en masse non-dollar oil payments or to remove the dollar peg to the riyal, ING strategists wrote in August.
“Until international issuers and investors are happy to issue and hold international debt in non-dollar currencies – and the take-up of CNY Panda bonds has been very slow indeed – we suspect this will be a decade-long progression to a multi-polar world, a world in which perhaps the dollar, the euro and the renminbi become the dominant currencies in the Americas, Europe and Asia respectively,” ING said.
By Tsvetana Paraskova for Oilprice.com
More Top Reads From Oilprice.com:
- China’s Independent Refiners Look To Boost Output
- Russian ESPO Crude Oil Is Now Trading At A Discount To Brent
- Russia Won’t Abandon Grand LNG Plans
It is probable that by 2030 the yuan would be the main global reserve currency with the petro-yuan becoming the main oil currency along with a proliferation of a few other currencies including the Saudi rial, the UAE dirham, the Indian rupee and the Russian ruble.
Ant with the invitation to three of the world’s biggest oil and gas powers – Saudi Arabia, Iran, and the UAE – to join the BRICS alliance, a new World Oil Order is being created.
The BRICS group currently accounts for 32% of global GDP compared to 27% for the G7 countries. And with the addition of the six invited countries to become members (Saudi Arabia, UAE, Iran, Egypt, Ethiopia and Argentina), BRICS share of the global economy rises to 42%. They are on track to account for more than 55% of the global economy by 2030 with more new members waiting to join.
And with Saudi-led Gulf Cooperation Council (GCC) countries virtually accepting the petro-yuan in payment as China is demanding, the petrodollar’s share in global oil trade will decline by 20%. And with China paying for its imports of 12.0 million barrels a day (mbd) in petro-yuan, Russia selling 8.0 mbd in rubles, Indian rupees and petro-yuans and India paying rupees and petro-yuans for its imports of some 4.5 mbd, the share of the petrodollar in the global oil trade could plummet by 60% leading to a devaluation of the dollar by one third to one half overnight.
Moving oil trade out of the petrodollar into the petro-yuan could take away an estimated $1.62 trillion worth of transactions out of the petrodollar annually based on an average Brent crude oil price of $100.0 a barrel.
In fact, the UAE led the way two months ago when it sold a shipment of liquefied natural gas (LNG) to China and got paid in petro-yuan and also 1.0 million barrels of oil to India for rupees.
And although the currencies of top Middle Eastern oil exporters are pegged to the dollar, their economies are strong enough to de-peg from the dollar and support their own currencies with a mixture of reserves currencies including the yuan, the dollar, the yen and the euro.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert