Question:
There have been noticeable attempts by some countries, particularly Russia, China, and the European Union, to replace the dollar with another currency in international transactions. Agreements have even been made to trade in the local currencies of some countries, such as Russia's agreement with India on 31/10/2018 to sell S-400 missiles in Russian currency, and with Turkey a month ago to use the currencies of both countries to pay for a similar missile deal, as well as during Erdogan's meeting at the summit of Turkic-speaking countries. China announced it would pay for its Iranian oil imports in "Petroyuan," and the Chinese Central Bank signed a bilateral agreement for local currency swaps with its counterpart in Japan for 200 billion yuan (29 billion dollars) in exchange for 3.4 trillion Japanese yen (31 billion dollars). Has the "countdown" begun to end the dollar's hegemony over the global economy?
Answer:
To clarify the answer, the reality of the position held by the dollar in the global economy must be explained:
First: The dollar's status began to emerge through the "Bretton Woods" agreement in 1944, where America imposed the dollar and its hegemony during the meeting, being the victor in the World War and unharmed. Thus, a financial system was established under which the ten major industrial countries agreed to set a specific price for their local currencies based on the US dollar. America, in return, agreed to link the US dollar to the gold standard ("35 dollars per ounce"). Subsequently, dollars provided by foreign central banks were exchangeable at a fixed rate for gold-linked dollars. At that time, America's gold reserves were estimated at two-thirds of the world's total, with the rest of the world holding the remaining third. However, the continued weakness of the US balance of payments due to external spending led to a decline in US gold reserves; between 1961 and 1970, they fell to nearly five billion dollars. To preserve America’s gold stock, US President Nixon decided in 1971 to stop the conversion of the dollar into gold, declaring the end of the system linking the dollar to gold.
After that, the Nixon administration dealt with this new financial change through a series of agreements with Saudi Arabia from 1972 to 1974, creating what is known as the Petrodollar. This gave foreign countries another convincing reason to accumulate and use the dollar because of the need for oil, which is priced in dollars according to agreements with Saudi Arabia, being the largest oil producer in the world. Saudi Arabia also agreed to recycle billions of US dollars from oil revenues through American weapons manufacturers, infrastructure, and the purchase of US Treasury bonds. By 1977, at least 20% of all overseas Treasury bonds were in Saudi hands. If gold, which is also priced in dollars, is added to oil, countries became keen to hold the dollar. The percentage of cash reserves in dollars in global central banks was about 71% until 2000, although it fell to 62% after that year. Similarly, 40% of global debt is issued in dollars.
Second: Today, the US dollar dominates global transactions. This situation creates a massive artificial market for the US dollar, which distinguishes it from every self-contained local currency. The dollar has come to act as a medium in countless transactions reaching more than 5.4 trillion dollars a day, unrelated to American products or services. Remarkably, the dollar represents 84.9% of daily foreign exchange transactions, even though America's own commercial transactions are less than half of this percentage, because countries other than America deal in dollars in their commercial affairs! The dollar's economic strength has enabled America to punish target states economically and financially. Not only that, but it also discourages other countries from trading with the target country. America is able to achieve this harsh measure through the SWIFT system (Society for Worldwide Interbank Financial Telecommunication), which is a dollar payment settlement system. Since the dollar is the global reserve currency, the SWIFT system facilitates the international dollar system, and countries worldwide settle transactions through it, ensuring all bilateral transactions are based on the dollar. For example, Russia and China cannot exchange goods and services in their local currencies unless the transactions are settled in dollars via the SWIFT system, and America can use the system to impose severe economic sanctions. Based on this system, America, between 2014 and 2015, blocked several Russian banks from SWIFT when relations between the two countries deteriorated. In November 2018, the United States reimposed strict sanctions against Iran using SWIFT, and several European companies refused to fulfill their deals with Iran out of fear of America.
All of this is because, as mentioned earlier, the dollar is the global reserve currency: ("The dollar's share in the reserves of 146 central banks globally by the end of last year reached 64% of the total currency reserves of those banks. The Euro came second with a 20% share, while the contribution of the Japanese Yen and the Pound Sterling did not exceed 5%. This is without mentioning the Chinese Yuan, whose reserves in those banks did not exceed 108 billion US dollars, constituting a percentage of less than 1%..." 19/08/2018 www.alquds.co.uk).
Third: Facing this reality, countries of weight and importance in the world have moved from two starting points to limit the dollar's influence. The European starting point was first in 1999, when the Euro appeared and was officially traded in 2002 to compete with the dollar. This was based on the strength of European economies and their confidence in their ability to compete. As for the second group of countries, like Russia and China, their efforts to limit the dollar's hegemony were delayed because of their inability to compete at that time (when the Euro was launched), until the 2008 financial crisis occurred. Fearing the erosion of their dollar stocks and loss of value, they joined the established European countries in limiting the dollar's dominance. With China turning into a world-class economy, those international efforts have had a tangible impact on the dollar's hegemony.
Thus, the 2008 economic crisis was an alarm bell for countries to rethink the issue of the dollar due to the crisis's impact on it. However, what accelerated this was Trump's provocations and sanctions. The new policy adopted by the Trump administration has accelerated the trend of other major countries to limit the global hegemony of the US dollar. President Trump's policy was characterized by the blatant slogan "America First." Although all previous American administrations certainly worked for America's interest, the Trump administration approached a disregard for the interests of other countries. Trump demanded that Europe pay retroactively for American military protection, sparked strong threats of a trade war with China, and demanded that Japan and South Korea pay for protection against North Korean missiles. When President Trump imposed sanctions on Iran, he included anyone using dollars to buy Iranian oil. Since China is now the world's largest importer of oil, Trump's action motivated China to take measures to stop using the dollar, especially since it is in a trade war with the United States. Therefore, in March 2018, the Shanghai Futures Exchange launched its first futures contracts open to foreign investors. This contract, for oil futures, was denominated in Yuan to compete with Brent and WTI contracts denominated in dollars, which serve as the current benchmarks.
Consequently, the explosion of the financial crisis in America in 2008, its reflection on the economies of many countries, the damage they suffered, followed by Trump's protectionist actions, the trade war, and the financial and economic policies he takes... all of this accelerated the emergence of trends against the dollar's hegemony.
Fourth: Therefore, these actions have provoked some countries, especially strong independent ones, and sometimes even countries orbiting in the US sphere. However, the effective and influential impact comes from the movements of independent states, because the impact of states orbiting in America's sphere is momentary for a specific purpose and then stops, as they cannot effectively oppose America as long as they remain in its orbit. We will review the actions of these countries:
Actions by Independent States:
a- Russia: In 2009, Russian President Medvedev proposed a new "global currency" at the G8 meeting in London as an alternative reserve currency to replace the dollar. Recently, China, Russia, India, Turkey, and other oil-producing countries agreed "to conduct all their mutual trade and investment transactions in their own currencies." Despite all this, the price of gold and crude oil remains in dollars. Russia's repeated announcements about replacing the dollar with other national currencies and taking payments for Russian oil in currencies other than the dollar are all due to US sanctions on Russia after its invasion and occupation of Crimea and eastern Ukraine in 2015. It is also a consequence of the investigation into Russia's interference in the 2016 US elections.
Then the United States steadily increased its sanctions against Russia since 2015, and Congress gradually expanded them, using the "Countering America's Adversaries Through Sanctions Act," passed in August 2017, which placed even harsher sanctions on Russia. These were very strong measures against Russia, which led to cutting off major Russian banks from the dollar, resulting in an 18% drop in the Ruble against the dollar. All this while Russia uses the dollar for 58% of its debt, meaning it borrows nearly half of its loans in dollars. Therefore, Russia found itself in a predicament that pushed it to try to reduce its use of the dollar and free itself financially, economically, and monetarily from it. Putin stated in a speech before the Duma: ("We must strengthen our economic sovereignty. Oil trade on the exchange is conducted in dollars, and we are certainly thinking about how to get rid of this burden..." continuing: "We have acted naively during the past decades, hoping that there would be a commitment to the declared principles in the field of global trade and the global economy. Now we see that the rules of the World Trade Organization are being subjected to many violations, and that restrictions are being imposed based on political considerations, which they call sanctions..." Donia Al-Watan 09/05/2018). Consequently, Russia began to gradually reduce its holdings of US Treasury bonds, which peaked in 2008 at 223 billion dollars, until they reached approximately 100 billion at the end of last year. Under the weight of US sanctions, Russia disposed of most of its bonds during April and May 2018, and now owns only 14.5 billion dollars in those bonds.
However, it cannot replace the dollar with the Ruble because the weak confidence in the Ruble does not help it rally countries of weight with it. This is because many countries in the world do not want to buy the Ruble as it fluctuates widely in currency markets, and primarily, the world does not trust the Russian Ruble as a reserve currency. Thus, the most Russia can do is pressure some countries to pay for their Russian energy purchases in Rubles, but the Russian currency cannot replace the dollar. Dmitry Peskov, Putin's spokesman, said in an interview with the Financial Times: ("An increasing number of countries, not only in the East but also in Europe, are starting to think about how to reduce dependence on the US dollar." "They suddenly realize it is: a) possible, b) must be done, c) you can save yourself if you do it early." "De-dollarization is possible to some extent, but it is not about whether you want to leave the dollar zone, but what is the alternative after that: the Euro? The Yuan? Or Bitcoin?" and Koryshchenko, former deputy chairman of the Russian Central Bank, said: "Each of these options has its own costs, we have to balance the costs of staying with the dollar and the costs of finding a new position."... Financial Times, 3 October 2018). All of this indicates that Russian officials themselves are not confident that the Ruble is suitable as a global currency instead of the dollar!
b- China: China could make its currency, the Yuan, a strong global competitor, but its global political horizon is narrow, which in turn affects its narrow global economic horizon in terms of competition and conflict with America. Therefore, it has not been able to impose its currency globally in commercial transactions and financial markets despite the large size of its economy. Instead, it relied on the dollar and accumulated huge amounts ranging in recent years between 3 and 4 trillion dollars! Although it made attempts to move away from American financial institutions by forming the BRICS economic group with Russia, India, Brazil, and later South Africa—with the total economic size of the BRICS group exceeding about 15 trillion dollars, which is equivalent to 20% of the size of the global economy of 74 trillion dollars—and also establishing a development bank to finance projects and lending for the group in July 2015 in Shanghai with a capital of 50 billion dollars, reaching finally 100 billion dollars as an alternative to the World Bank, it still did not abandon the dollar!
When President Trump imposed sanctions on Iran and included anyone using dollars to buy Iranian oil, and because China is now the world's largest importer of oil, this action by Trump motivated China to take measures to stop using the dollar, especially since it is in a trade war with the United States. Therefore, in March 2018, the Shanghai Futures Exchange launched its first futures contracts open to foreign investors, and this contract, for oil futures, was denominated in Yuan to compete with Brent and WTI contracts denominated in dollars, which serve as the current benchmarks. All these are significant actions that could unsettle the dollar.
What limits China's serious work to displace the dollar or effectively unsettle it is its deep integration with the American economy and dollar. The volume of US-China trade is extremely large, reaching 500 billion dollars annually, and it currently holds 1,170 billion dollars in US Treasury bonds (Chinese financial website Saixin 20/09/2018), down from 1,300 billion dollars in 2013, making it the largest holder of these bonds in the world. China's dollar reserves range between 3 and 4 trillion dollars. Additionally, China exported 2.1 trillion dollars' worth of goods to the world in 2016 and imported 1.6 trillion dollars' worth, according to World Trade Organization data, making it a commercial giant, the second largest in the world after the United States.
Thus, the intensity of its trade in dollars in addition to Treasury bonds makes it hesitate (stepping one foot forward and one foot back) in working seriously to unsettle the dollar. China realizes that it would be the biggest global loser from the dollar's instability, which pushes it to limit the dollar's role slowly and with great caution to preserve its stock of dollars and bonds. Even if China's entire trade with Russia shifted away from the dollar, it would not solve the problem because the volume of that trade, which amounts to 120 billion dollars annually in both directions (ArabicChina 23/09/2018), remains limited compared to global trade, which exceeds 20 trillion dollars annually. Thus, China is less bold than Russia and more cautious in its pursuit to limit the dollar's hegemony.
It seems that China has realized the harm of dealing in dollars, whether in terms of the density of its dollar reserves or in terms of US Treasury bonds, etc. It became the world's largest buyer of gold, and its gold reserves rose from 600 tons in 2008 to 1,842 tons in 2018. This explains the significant drop in its dollar reserves, which peaked in 2014 at nearly 4 trillion dollars (Trading Economics website), noting that China bought more than 700 tons of gold in 2015 alone. As for US Treasury bonds, China turned to selling after the 2008 financial crisis, and the value of its holdings of those bonds fell during the two years following that crisis. However, America's threat to obstruct Chinese trade, which emerged at the time regarding the safety of toys exported from China to America, returned it to further acquisition, and that continued until it peaked in 2013. But China returned to selling under the weight of trade threats from the Trump administration, so it began to reduce its holdings of those bonds in a non-confrontational manner. Then it began to seek a way, cautiously, to reduce the dollar's role in its trade, signing agreements with Russia, Japan, and others to trade in local currencies. It also established the Shanghai Oil Exchange for oil trade denominated in Yuan covered by gold, an exchange that captured 10% of global oil trade during its first six months of establishment. Furthermore, it participated in Special Drawing Rights (SDR). (The Yuan joined the US Dollar, Euro, Japanese Yen, and Pound Sterling in the SDR currency basket. The Fund added the Chinese Yuan to the currency basket that makes up the SDR as of 1 October 2016. 30/09/2016 https://www.imf.org).
Despite all this, the density of China's stock of dollars and bonds, etc., makes its work to displace the dollar lack effective influence. Therefore, the Yuan represents only 1.7% of international payments, compared to 40% for the US dollar.
c- The European Union:
In 1999, the Euro appeared and began to be used for banking, replacing local currencies for certain countries in the European Union starting from 2002. It began attempting to compete with the dollar, as it is backed by strong global economic countries like Germany and France, followed by other industrial and wealthy countries. Thus, the Euro became a strong global currency, backed by a collective force that could have global political influence and compete with America, and it has the potential to build a strong independent army, which it seeks to do. The Euro entered as a reserve in international central banks at a rate ranging between 20-23%. However, one of the main factors preventing the Euro from controlling the global economy is the weakness of Europe's political, military, and economic influence compared to America. The European Union itself is still in a state of defending its existence, as there are significant threats to this existence; the exit of Britain from it was considered a shock to confidence in it, as well as the rise of racist separatist movements in its countries demanding secession from the Union, which weakened confidence in the Union. This is in addition to the lack of unity in its political decision-making; all these factors reflect on the Euro and confidence in it.
Countries Orbiting in America's Sphere in Agreement with Russia, China, and Europe:
- Turkey, Iran, India, and Japan:
The Governor of the Central Bank of Iran, Abdolnaser Hemmati, announced that in a meeting with representatives of Russia and Turkey ("The issue of trade using local currencies instead of the dollar was discussed..." Tehran Times 09/09/2018).
Turkey, Russia, and Iran agreed to use their local currencies in trade exchanges among themselves instead of the US dollar, according to the Turkish Anadolu Agency. The state-run agency quoted Iranian Central Bank Governor Abdolnaser Hemmati in Tehran as saying ("Trade transactions will take place using specific exchange rates... 09/09/2018 https://ahvalnews.com/ar).
In October 2018, China and Japan agreed on a currency swap deal worth 30 billion dollars, which is Japan's largest deal.
Yuri Borisov, the Russian Deputy Prime Minister, announced on 31/10/2018 that ("The contract to supply the S-400 missile system to India will be carried out using the Russian currency 'Ruble'..." MENA 31/10/2018).
These countries that China and Russia are trying to bring into the policy of dealing in local currencies are still orbiting in America's sphere or are its agents; that is, they are politically linked to America and quickly fall in line with it, not taking a firm stance in abandoning the dollar or giving up making it their cash reserve. The decision for economic independence must be paralleled by political independence, like independent China and Russia. Even if they accepted discussing local currency trade with Russia and China, America forced them into this due to an emergency circumstance, the removal of which would return things to as they were.
Since President Trump imposed sanctions on Turkish steel and since the United States attacked the Turkish currency, Erdogan has been criticizing the dollar for local consumption. Turkey's total debt, exceeding 400 billion dollars, is collected in dollars, which means every time its currency depreciates against the dollar, debt repayment requires more and more liras; thus, prices rise and people are exhausted, so Erdogan delivers a fiery speech as is his custom! As for Erdogan's statement at the sixth summit of the Turkic Council in the Rukh Ordo Cultural Center in Kyrgyzstan on September 3rd, where he said: "We propose trade in our own currency instead of the US dollar," this statement has no reality and is far from becoming a reality, because Turkey primarily trades with the European Union! Nonetheless, Turkey trades in dollars, borrows in dollars, and keeps most of its foreign currency reserves in dollars. Likewise, imported oil, natural gas, and imported raw materials are all done in dollars. We saw Turkey, when America lifted sanctions on it after it released the American pastor, return to business as usual, losing the same enthusiasm it had before the sanctions were lifted for prioritizing local currency trade. As for the Turkic-speaking countries in Central Asia, they are followers of Russian policy, and Turkish trade with them, even if exchanged in local currencies, does not reach figures that influence global trade due to the marginal economy of Central Asian countries.
As for Iran, it is prohibited by America from dealing in dollars by virtue of harsh financial sanctions imposed on it for many years after being removed from the American banking system. However, after the sanctions were lifted in 2015, it was selling its oil in dollars and signed large contracts with international companies, including European companies like Airbus and the French Total, exclusively in dollars, as if nothing had happened! Sanctions and their lifting affect Iran's behavior temporarily, as America is the one that enters or exits Iran from the international dollar transaction system SWIFT. When America increases hostile statements against Iran and closes its door to the dollar, the Iranian response is to declare trading in other than the dollar.
As for India, it has imported Russian weapons for a long time and America did not object to that. India has favor with America because it wants it to be a significant power to counter the increasing Chinese influence in Asia, and India realizes this. Therefore, India is not expected to seek to change the dollar to the Ruble or Yuan as a global currency.
As for Japan, its link to America needs no explanation; its dealing with Russia by no means indicates that it is against the dollar or that it accepts the Ruble as an alternative to the dollar.
In Conclusion:
The countries that can be considered to have an effective impact in displacing the dollar from its position are Russia, China, and the European Union. However, each has factors that weaken its movement, as we have explained. But if they were to rid themselves of those factors, they could shift the dollar from its place. If they do not strive and work hard in this matter, what is called the "weak dollar" will surprise them, and they will find their wealth of dollar reserves gone with the wind. America suffers from a large debt; the American magazine Washington Examiner reported on 01/10/2018 ("US government debt rose more than 1.2 trillion dollars during the fiscal year that ended 30 September 2018 according to a government website that tracks debt. The US national debt had reached (20.25) trillion dollars at the end of fiscal year 2017, and at the end of fiscal year 2018, it reached (21.52) trillion...").
The accumulation of American debt over decades has brought the country to a financial predicament. When that accumulation accelerated after the 2008 crisis, jumping from 8 trillion dollars to 21 trillion today, the American financial predicament became acute, which Bolton called a threat to national security, requiring quick solutions—in the near and medium term, not the long term. Facing this reality, the remaining field for America to manage its financing is to pump more liquidity (printing dollars). Pumping liquidity in quantities sufficient to finance the state, let alone pay its debts, will lead to a collapse of the dollar, or what the US Treasury Secretary called a "weak dollar." This means the world's countries that deal in dollars in their trade, their currency reserves, and the US Treasury bonds they own, will lose a portion of their wealth equal to the extent the dollar is weakened—a powerful blow to those countries!
In any case, the current reality does not enable these countries to adopt a global currency instead of the dollar. However, it can be said that the attempts by Russia and China to deal in local currencies and their signing of local currency contracts with other countries have an effect on breaking the dollar's hegemony if they continue strongly and without slackening, and the European movement alongside China has a greater impact. The tendency to buy gold will strengthen this, but it does not solve the problem as long as gold remains a commodity in central banks sold to obtain dollars when countries need them, or as a reserve to support the state's paper currency to obtain hard currency. The problem will not be solved unless gold and silver are the currency themselves. If paper currency is issued, it must be backed by gold or silver, not just a commodity in banks to buy what is called hard currency. That is, the central bank in each country issues the currency in gold and silver, and there is no objection to issuing a banknote with its value in gold and silver, enabling its holder at any time to go to the bank and take its equivalent in gold or silver. That is, it is treated as a representative currency for gold and silver, exchangeable for its written value in gold and silver; thus, hegemony would belong to gold and silver. Consequently, no state can plunder the wealth of others or exploit their efforts and run its war machine and launch its aggressive wars with worthless paper money. As we see currently, no state can do this; it is only the Khilafah State that can implement it because it is a Sharia ruling that Allah has commanded. His Messenger (saw) implemented it in his state, and the Rightly Guided Caliphs and the Caliphs after them followed his path until the Khilafah State was destroyed in 1342 AH, corresponding to 1924 CE. Subsequently, falsehood prevailed... the Capitalist ideology prevailed in the world, whose proponents care only for plunder, consuming people’s wealth unjustly, and accumulating and counting money by the billions. It is a tyrannical human rule, and we see the resulting destructive financial and economic crises, along with the manipulation of people's destinies, the plundering of their wealth, and the loss of their money in papers that in themselves are worth nothing! This false ideology must be overthrown, and work must be done for the sovereignty of the Islamic ideology—the ideology of truth and justice embodied in its state that Allah promised His believing, working, and righteous servants:
وَعْدَ اللَّهِ لَا يُخْلِفُ اللَّهُ وَعْدَهُ وَلَكِنَّ أَكْثَرَ النَّاسِ لَا يَعْلَمُونَ
"It is the promise of Allah. Allah does not fail in His promise, but most of the people do not know." (Surah Ar-Rum [30]: 6)
The world will remain in financial and economic misery as long as it does not judge by the Sharia of Allah. Allah the Almighty spoke the truth:
وَمَنْ أَعْرَضَ عَنْ ذِكْرِي فَإِنَّ لَهُ مَعِيشَةً ضَنْكاً
"And whoever turns away from My remembrance - indeed, he will have a tight life." (Surah Taha [20]: 124)
18th Rabi’ al-Awwal 1440 AH
26/11/2018 CE