Who could’ve known that one of the unintended consequences of the Ukraine war would be the first signs of a shift that could dethrone the dollar as the world’s reserve currency? So far the headlines have revolved around western efforts to sanction and isolate Russia’s financial system on the one hand and a US-European rush to arm and train Ukraine’s military on the other.

And even if Washington had calculated that a frustrated President Putin would resort to the nuclear threat when it provoked the Russian bear into war in Ukraine – by breaking the promise made at the time of the dissolution of the Soviet Union and expanding Nato eastward all the way to the Russian border – it’s clearly been caught off guard by a majority of leading countries in what is called the Global South taking a non-aligned position. Also, much worse from its point of view, that Russia would be able to circumvent the stiffest sanctions and succeed in trading oil in currencies other than the dollar.

India, for example – Uncle Sam’s new gendarme in Asia-Pacific as its principal partner in the Pivot to Asia to contain China – is leading the trend out of the dollar since it emerged as Russia’s top outlet for seaborne crude; after EU cut Russian oil imports in a show of solidarity with Kyiv.

It’s now turning out, according to Reuters, that Delhi and Moscow were able to sidestep the turmoil from the sanctions and the oil price cap imposed on Russia in early December by working out a payment mechanism in UAE dirhams and Russian roubles.

These transactions, spanning over just three months, already amount to the equivalent of several hundred million dollars, establishing a trend that could prove lasting and force a revision of the sanctions regime. They’ve also reportedly developed a framework for payments in Indian rupees in case the sanctions expand to cut off dirham and rouble transactions as well.

There is plenty of worrying news, for the US and the USD, coming out of Saudi Arabia as well, the so-called central bank of black gold that uses its petrodollar superpower to play Riyal politik well beyond the Middle East. Saudi Finance Minister Mohammad al-Jadaan told Bloomberg at Davos in January that the kingdom was indeed “open to talks about oil trade arranged in non-dollar currencies”.

“There are no issues with discussing how we settle our trade arrangements, whether it is in the US dollar, whether it is in the euro, whether it is in the Saudi riyal,” he said, adding that they were not “ruling out any discussion that would help improve trade around the world.”

Let’s not forget that Riyadh, just like Delhi and Abu Dhabi, also crossed Washington by not condemning Moscow at the UN. And that al-Jadaan’s revelation came at the heels of a historic agreement with China to boost crude oil trade as the two countries upgraded their relationship to a strategic partnership during President Xi Jinping’s trip to Saudi Arabia.

China has developed its own set of differences with the US, of course, and has been eager to push the yuan to the fore in international oil trade. And now America’s involvement in the war in faraway Ukraine, especially the sanctions it has forced its partners to impose on Russia, is fast-forwarding the process that will encourage other countries to ditch the dollar and bolster currencies like the yuan and rouble.

There are already rumours that Brics countries (Brazil, Russia, India, China and South Africa), with a combined GDP worth more than that of the G7 grouping (Canada, France, Germany, Italy, Japan, UK and US), are exploring ways to exploit these developments to expand the jurisdiction of the New Development Bank to develop an alternate system of trade for the Global South; including the possibility of non-dollar commerce.

Brazil’s President Lula da Silva, too, is expected to breathe fresh life into ALBA (Bolivarian Alliance for the peoples of Our America), which aims to speed up the political and economic integration of Latin American and Caribbean countries.

All this does not mean that financial markets are ready to price in an ultimate demise of the dollar anytime soon.

America boasts by far the strongest economy in the world and the greenback is still firmly entrenched at the head of the currency food chain. But it’s also true that this primacy owes largely to the fact that the international oil trade has been denominated in dollars; especially since President Nixon abandoned the Gold Standard in 1971 and midwifed the Bretton Woods twins – the IMF and World Bank – to exercise unprecedented control over the global financial system.

It’s also finally being accepted that America took its “shock and awe” to Iraq and even partnered with al-Qaeda in Libya because both Saddam Hussein and Moammar Qaddafi made no secret of pricing their oil exports out of the dollar – euro in Iraq’s case and special ‘gold dinar’ in Libya’s. And that America’s habit of leveraging its position as the sole superpower to act as a global bully, promoting conflicts all over the world and freezing dollar funds of countries it doesn’t agree with – Afghanistan and Russia being the latest examples – has at last triggered a kind of pushback that has not been seen before.

With its own economy headed for a recession as hawkish comments from Federal Reserve Chairman Jerome Powell send equity indexes into a tailspin and push the US Treasury yield curve to its deepest inversion since 1981 – a time-honoured recession signal – and questions mount over routing billions of US taxpayer dollars to a draining war on the fringes of Europe, there are signs that America might have created more problems for itself than its enemies this time; with much of the world not responding to its calls for support. Especially that it might, unintentionally, have shot the dollar in the foot.

Copyright Business Recorder, 2023