Biden’s Legacy: The Demise of the Petrodollar

Saudi Arabia's G20 status and leading role in oil exports mark a shift towards non-dollar commodity settlements with advanced technology. Notably, mBridge transactions share the code of China's e-yuan.

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US President Joe Biden fist bumps Saudi Crown Prince Mohammed bin Salman upon arrival for a high-stakes visit, July 15, 2022

The Deep State should have been alert five years ago when Candidate Joe Biden announced that he, if elected as president, was determined to make the Saudi rulers “pay the price, and make them in fact the pariah that they are.”

Biden was blunt to the point of being brutal about the Saudi royal family, saying there was “very little social redeeming value in the present government in Saudi Arabia” under King Salman’s rule.  

But, instead, the Deep State felt delighted that Biden was just the man to succeed Donald Trump and reverse the Trump-era practice of forgiving Saudi human rights violations in order to preserve jobs in the American arms industry.

Biden probably knew by then that the American intelligence had concluded about the role of Mohammed bin Salman, the Saudi crown prince and the de facto leader of the country, in the killing of the dissident-journalist Jamal Khashoggi, who was a ‘strategic asset’ of the CIA for navigating the next Saudi succession and the ensuing regime change to a happy ending. Khashoggi’s decapitation crippled Washington’s game plan to instal a pliable ruler in Riyadh. 

Today, all that is history. But unlike the Bourbons, the Saudi royals never forget or forgive. They also have infinite patience and their own concept of time and space. And last Sunday, June 9, they struck. 

In great royal style, last Sunday, Riyadh simply let the 50-year-old petrodollar agreement between the US and Saudi Arabia to expire. 

To recap, the term “petrodollar” refers to the US dollar’s pivotal role as the currency used for crude oil transactions on the world market per the US-Saudi deal dating back to 1974 shortly after the US went off the gold standard. 

In the history of global finance, few agreements have wielded as many benefits as the petrodollar pact did for the US economy. At its core, the agreement stipulated that Saudi Arabia would price its oil exports exclusively in US dollars and invest its surplus oil revenues in US Treasury bonds — and, in a quid pro quo, the US would provide military support and protection to the kingdom.  

The ‘win-win’ deal ensured that the US gained a stable source of oil and a captive market for its debt, while Saudi Arabia secured its economic and overall security. In turn, the denomination of oil in dollar elevated the dollar’s status as the world’s ‘reserve currency’. 

Since then, the global demand for dollars to purchase oil has helped to keep the currency strong, not only made imports relatively cheap for American consumers but in systemic terms, the influx of foreign capital into US Treasury bonds supported low interest rates and a robust bond market.

Suffice to say, the expiration of the 1974 US-Saudi ‘oil-for-security’ deal has far-reaching implications. At the most obvious level, it highlights the shifting power dynamics in the oil market with the emergence of alternative energy sources (eg., renewables and natural gas) and new oil-producing countries (eg., Brazil and Canada) challenging the traditional dominance of West Asia. But this is more the optics of it. 

Crucially, the petrodollar’s expiration could weaken the US dollar and, by extension, the US financial markets. If oil were to be priced in a currency other than the dollar, it could lead to a decline in global demand for the greenback, which, in turn, could result in higher inflation, higher interest rates, and a weaker bond market in the US.

Suffice to say, going forward we may expect a significant shift in global power dynamics with the growing influence of emerging economies, the changing energy landscape and a tectonic shift in the global financial order as it enters a “post-American” era. The bottom line is that the US dollar’s dominance is no longer guaranteed. 

There is no question that Saudi Arabia has a roadmap worked out. Four days before the expiration of the oil-for-security deal, Reuters reported that Saudi Arabia has joined a China-dominated central bank digital currency cross-border trial, “in what could be another step towards less of the world’s oil trade being done in U.S. dollars.” 

The announcement on June 4 came from the Switzerland-based Bank for International Settlements [BIS], an international financial institution owned by member central banks. It means that Saudi  central bank has become a “full participant” of Project mBridge, a collaboration launched in 2021 between the central banks of China, Hong Kong, Thailand and the United Arab Emirates. 

The BIS announcement took note that mBridge had reached “minimum viable product” stage — that is, it is ready to move beyond the prototype phase. By the way, 135 countries and currency unions, representing 98% of global GDP, are currently exploring central bank digital currencies, or CBDCs.  

The entry of Saudi Arabia, a major G20 economy and the largest oil exporter in the world, signals a scaling up of commodity settlement on a platform outside of dollars in a near term scenario, with a new technology behind it. Interestingly, the mBridge transactions can use the code China’s e-yuan is built on! 

The intention is to modernise payments with new functionality and provide an alternative to physical cash, which seems in terminal decline anyway. China dominates the mBridge project and is carrying out the world’s largest domestic CBDC pilot which now reaches 260 million people and covers 200 scenarios from e-commerce to government stimulus payments. 

Indeed, other big emerging economies, including India, Brazil and Russia, also plan to launch digital currencies in the next 1-2 years while the European Central Bank has begun work on a digital euro pilot ahead of a possible launch in 2028.

Now, add to this Russia’s master plan to create a new BRICS payments system bypassing the dollar altogether. Moscow stock exchange announced on Wednesday that it will stop trading dollars and euros from Thursday, June 13.  

Thus, the expiration of the US-Saudi deal last weekend is emblematic of a cascading challenge from various quarters to the dollar’s pre-eminence as ‘reserve currency.’ In particular, the end is nearing for the unfettered freedom America enjoyed to print dollar currency at will and living it up far beyond its means and imposing the US’ global hegemony. 

There is growing unease among US elites that good life may be ending as the crushing debt burden sinks the American economy. In a CNBC interview yesterday, Treasury Secretary Janet Yellen warned that high interest rates are also adding to the burden as the US manages its massive $34.7 trillion debt load.  

Of course, there are no clear alternatives yet to the US dollar as the world’s leading reserve currency but the writing on the wall is that global trade strains and increased use of tariffs or sanctions could undermine its role sooner than later, as foreign investors’ concerns are rising about America’s public debt sustainability. 

The FitchRatings noted last week that “Large primary deficits and higher interest service costs will keep the U.S. sovereign debt burden increasing after November’s elections, regardless of who wins.” 

In sum, what seemed hitherto a geopolitical rivalry over NATO expansion and Taiwan — or setting trade/technology standards in the Fourth Industrial Revolution — is taking on an existential dimension for Washington as the future of dollar is at stake. There are enough hints testifying to coordinated moves by Moscow and Beijing to accelerate the “de-dollarisation” process.

On the one hand, Russia is pulling all stops to present to the world at the forthcoming BRICS summit in October a non-dollar payment system to settle trade, while, on the other hand, China is systematically dumping its holdings of US treasury bonds that will give it a freer hand when the crunch time comes.  

M. K. Bhadrakumar

M. K. Bhadrakumar was a career diplomat by profession. Roughly half of the 3 decades of his diplomatic career was devoted to assignments on the territories of the former Soviet Union and to Pakistan, Iran and Afghanistan. Other overseas postings included South Korea, Sri Lanka, Germany, and Turkey. He writes mainly on Indian foreign policy and the affairs of the Middle East, Eurasia, Central Asia, South Asia and the Asia-Pacific.

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