Authors: Divyanshu Jindal and Mehek Bhanu Marwaha *
The USD (United States dollar) has been the dominant currency in the world since the end of World War II. The dollar has also been the most sought-after reserve currency for decades, which means it is held by central banks around the world in significant amounts. The dollar is also primarily used in cross-border transactions by nations and businesses. Without a doubt, the dominance of the US dollar is one of the main reasons for the influence of the United States on public and private entities operating around the world. This unique position not only makes the United States the leader in the financial and monetary system, but also provides unparalleled leverage in the enforcement capacity to shape decisions made by governments, businesses and institutions.
However, this dynamic is undergoing gradual and visible changes with the emergence of China, the slowdown in the American economy, the independent political affirmation of the European Union, the Russian-American detachment and the growing voices around the world for create a polycentric world and financial system in which hegemonic capacities can be weakened. The world is witnessing today attempts and ambitions of de-dollarization, as well as the rise of digital or cryptographic currencies.
With Russia, China and the EU leading the de-dollarization process, one has to wonder if India, currently among the most dollarized countries (in invoicing), will take inspiration from global trends and push towards de-dollarization as good.
The dominant role of the dollar in the global economy gives the United States a disproportionate influence over other economies. As international trade needs a payment and financial system to take place, any nation in a position to dictate the terms and policies of these systems can create disruption in trade among other players in the system. This is how the imposition of sanctions works in theory.
The United States has long used the imposition of sanctions as a tool to achieve its foreign policy and objectives, which involves restricting access to United States-led services in the areas of payment processing and transactions. financial.
In recent years, several countries have started to oppose unilateral decisions taken by the United States, a trend that accelerated under the tenure of former President Donald Trump. He withdrew the United States from the JCPOA agreement between Iran and the United States, aimed at bringing Iran into compliance with nuclear discipline and non-proliferation. Although the United States is pulling out, other signatories like the EU, Russia and China have expressed dissatisfaction with the United States’ unilateral position and have remained committed to the deal and called for continued commitments. with Iran in trade and aid.
Likewise, the sanctions imposed on Russia following the Crimean conflict in 2014 did not find the reverberations among the allies to the extent that the United States had wished. While EU members had switched to INSTEX (Trade Support Instrument) which acts as a special vehicle to facilitate non-USD trade with Iran in order to avoid US sanctions, countries of both the EU and Germany continue to have close trade ties with Russia, and the EU remains Russia’s largest investor as well as Russia’s largest trading partner, with trade taking place in euros rather than dollars .
In addition, despite the close relationship between the US and the EU, the EU has launched its own de-dollarization campaign. This became more explicit when earlier this year the EU announced its intention to prioritize the euro as an international and reserved currency, in direct competition with the dollar.
Trajectories of the Russian, Chinese and EU de-dollarization surge
Russia has become the nation with the most vigorous policies geared towards de-dollarization. In 2019, then Russian Prime Minister Dmitry Medvedev called on Russia’s partners to cooperate towards a mechanism for switching to the use of national currencies for transactions between the countries of the Shanghai Cooperation Organization. (OCS). It should be noted that in the Eurasian Economic Union (EAEU), which functions as a trading bloc led by Russia, more than 70% of settlements are made in national currencies. In addition, in recent years, Russia has also moved to domestic currency settlements with India (for armaments contracts) and the two traditionally strong defense partners aim to explore technology as a means of national currency payment. .
Russia’s pressure to pull away from the US currency can also be seen in the transformative nature of Russia’s foreign exchange reserves, where Russia for the first time had more gold reserves than dollars according to 2018 data. (22 percent dollars, 23 percent gold, 33 percent Euros, 12 percent Yuan). According to the statement by the Russian finance minister in 2021, Russia aims to hold 40% euros, 30% yuan, 20% gold and 5% each of Japanese yen and British pound. By comparison, China holds a significant amount of dollar-denominated assets as foreign exchange reserves (50-60%) and the United States is its main export market with which to trade mostly in US dollars. In addition, Russia has also led the momentum by creating its own financial messaging system – SPFS (The System for Transfer of Financial Messages) and a new national electronic payment system – Mir, which has seen an exponential increase in its use.
While China-Russia trade is significantly dependent on euros instead of their own national currencies (although the use of national currencies is slowly increasing), instead of pushing the Chinese national currency into renminbi (RMB), Beijing aims to establish itself as the first nation to issue a sovereign digital currency, which would help China make cross-border payments without relying on U.S. financial systems. Thus, for China, digital currency appears to be the way forward to counter the dominance of the dollar as well as to increase its own weight by paving the way for an alternative global financial system operating in digital currencies. It should be noted here that the EU has succeeded in internationalizing the Euro and this can be seen in the fact that EU-Russia trade as well as Russia-China trade is now mostly done in euros.
Will India follow?
The dynamics of the Indian economy with the dollar are different from that of other major economies in the world today. Unlike China or Russia (or the EU and Japan) which hold large dollars, India’s reserve does not result from an export surplus. While others accumulate dollars from their trade surplus earnings, India maintains a large reserve of foreign exchange even though India imports less than it exports. In the case of India, dollar reserves come from the injection of foreign direct investment (FDI) and foreign portfolio investment (REIT), reflecting the confidence of foreign investors in the growth prospects of India. However, accumulating dollar reserves through this route (which helps offset the current trade deficit encountered), India remains vulnerable to policy changes by the monetary policies of other countries beyond India’s control. For example, it has often been pointed out that a tightening of US monetary policy leads to capital outflows (capital flight) from India, which has a negative impact on India.
New Dehi has long resisted a surge in de-dollarization. In 2009, when Russia and China launched the push via the BRIC mechanism (Brazil, Russia, India, China), it was argued that New Delhi would not want to upset Washington, especially after the signing of the historic agreement. on the American-Indian civil nuclear power. signed just a year earlier in 2008 – for full civilian nuclear cooperation between the two nations.
In addition, currency convertibility is an important part of global trade because it opens up trade with other countries and allows a government to pay for goods and services in a currency that may not be its own. the buyer. Non-convertible currency creates difficulties to participate in the international market because transactions require longer processing routes (which, in the case of dollar transactions, are controlled by US systems).
Like the Chinese renminbi, the Indian rupee is not yet fully convertible in the foreign exchange markets. While this means that India can control its foreign debt burden and the inflow of capital for investment purposes in its economy, it also means difficult access to capital, less liquidity in financial markets and less business opportunities.
It can be argued that just like in the case of China and Russia, India may also consider having a digital currency in the near future, and some signs of this are already visible. India may also consider having an increased share of euros and gold in its foreign exchange reserves, a method currently used by China and Russia.
More and more voices today point to the arrival of the Asian age (or century). With China now the world’s largest economic power, the US economy in slow motion, and the emergence of a growing polycentric structure in the global economy, the dollar’s dominance is doomed to upheaval. In order for global systems to keep pace with the changing economic order, structural changes such as the control of major economic organizations (such as the IMF and the World Bank) will become increasingly desirable.
With a growing number of countries now turning to digital currencies and considering a change in the composition of their foreign exchange reserves, a general trend is now visible although this would not mean the end of the dollar’s dominance in the immediate future. . As oil and gas trade in international markets also begins to shift from the dollar, the geopolitical balance of power is expected to change after decades of US domination.
Major geopolitical players like China, Russia and the EU have already started their journey to counter the dominance of the dollar and the US chains of influence over the political decisions that accompany it. According to Chinese media, rebuilding Afghanistan after the US withdrawal may also accelerate the global de-dollarization push, as countries like Saudi Arabia may seek to establish funds to help Afghanistan in other currencies. than the dollar. Thus, conflict zones highlight another avenue where the de-dollarization push will find a testing arena in times to come.
India has several options to start its de-dollarization process. From Russia-India transactions, trade with Iran, EAEU, BRICS and SCO members in national or digital currencies may also become a reality in the near future. Given India’s current reliance on the dollar, it must be determined whether the United States views India’s move towards de-dollarization as a direct challenge to US-Indian relations or accepts it as a change in global realities.
*Mehek Bhanu Marwaha is a Masters student in Diplomacy, Law and Business at OP Jindal Global University, India. His research interests focus on foreign policies and Indian and Chinese trade relations.