De-Dollarization: The Final Showdown?
„Right now there are changes the likes of which we haven’t seen for 100 years, and we are the ones driving these changes together.“
Xi Jinping, in his farewell to Vladimir Putin on March 22, 2023
- Taking on the mantle from Europe’s impact on dedollarization in previous years, the BRICS, led by China, are seeking to pull the rug from beneath a dollar that is gradually losing its footing.
- Beijing’s displacement of Washington as mediator in Saudi-Iran peace talks – combined with the scale of China’s “Belt and Road” Initiative – has resulted in an increasing recognition of the Yuan’s growing dominance.
- This dominance is evidenced by the eagerness of Saudi Arabia, Türkiye, and Egypt to join the BRICS party; however, it is not solely the BRICS that are eager to wean off their dependence on the greenback.
- Europe is now talking about “sovereignty” from the U.S dollar again – a narrative that stems predominantly from the mouth of President Macron, who’s rousing efforts have yet to tempt Putin away from his attachment to the yuan.
- Putin is a Yuan man for now, however with his Ministry of Finance expressing a keen interest in a gold backed BRICS currency, and with central banks breaking gold purchases records, it’s clear that the neutral reserve will play a critical role, as the transition to a “multipolar world” ensues.
De-Dollarization Hitting the Mainstream
After several years of our covering the global push to de-dollarization in the pages of the In Gold We Trust report[1], the public is finally catching on. Over the past couple of months, we haven’t just seen unprecedented steps to get away from the US dollar and US hegemony by the likes of China and Russia; we’ve also seen the topic covered in the pages of the Financial Times and even on Fox News and CNN. Talk about hitting the mainstream.
Just as before, we don’t want to fall into the trap that Twitter experts fall into when they proclaim the imminent demise of the US dollar. We know better. In recent years we talked about tectonic plates shifting; and we’re sticking with that picture. Tectonic plates move very slowly. But when they do, earthquakes happen.
In essence, the process of de-dollarization boils down to three things:
- A whole lot of complaining by politicians (and sometimes central bankers) who see themselves and their countries losing out within the current global monetary order.
- Many steps taken by these governments – some of them small, some big, some spectacular in nature – but always aimed at lowering their dependence on the US dollar, ultimately leading to less demand for US Treasuries on the margin.
- The relentless stockpiling of gold, the one true global and neutral money and another way to make yourself a bit more independent from the US dollar system.
In the past decades, the process of de-dollarization was first led by Europe, then by Russia. Today China is in the driver’s seat. The last couple of months have seen a truly epic number of spectacular developments all around the world. But almost without exception, we can see a connection to China; so don’t be surprised if Beijing and Xi Jinping feature heavily within the following pages. China is pushing the world towards a showdown – and region by region the world is taking notice. Asia, Africa, South America – but also the Middle East and Europe – and even the US itself.
The US Dollar Is Feeling the Heat
These are truly spectacular times. One after the other, countries are declaring their independence from the US dollar. And they are following up with actions that will shape the world we live in. Some are very active, like Russia, China and Brazil. Others at least talk the talk, like France. It’s obvious to us that the world order is being rearranged before our eyes.
Of course, we can’t immediately judge every single step and its repercussions. This would be an impossible task in the field of geoeconomics and geopolitics. Some of the seeds of de-dollarization coming to fruition today were planted years or even decades ago. It’s a complicated process with many moving parts. But it’s obvious that the process is in fact happening and that more and more countries see the possibility of a world order that is not solely dominated by the US dollar. Here is renowned analyst Zoltan Pozsar in a piece he wrote for the Financial Times:
“In finance, everything is about marginal flows. These matter the most for the largest marginal borrower — the US Treasury. If less trade is invoiced in US dollars and there is a dwindling recycling of dollar surpluses into traditional reserve assets such as Treasuries, the ‘exorbitant privilege’ that the dollar holds as the international reserve currency could be under assault.”
According to Pozsar, the process of de-dollarization can be traced back to the Global Financial Crisis of 2008. But it’s easy to look back a lot farther than that.[2]
- The US snubbing John Maynard Keynes’ proposal for a neutral reserve currency at Bretton Woods in 1944.
- Economist Robert Triffin warning the US Congress of the negative consequences of printing the world reserve currency in 1960.
- Europe starting to work on their own currency project back in the 1960s and 1970s, cumulating in the launch of the euro in 1999.
Of course, this list excludes the extensive countermeasures the US has taken at any point along the way. So far, the US dollar has always emerged as the winner. But times are changing, and the US is feeling the heat. We know this because Treasury Secretary Janet Yellen said as much:
“There is a risk when we use financial sanctions that are linked to the role of the dollar that over time it could undermine the hegemony of the dollar (…). Of course, it does create a desire on the part of China, of Russia, of Iran to find an alternative. But the dollar is used as a global currency for reasons that are not easy for other countries to find an alternative with the same properties.”
While Yellen is certainly right that it’s hard for countries to find an alternative, they certainly are trying hard. As economist Jared Bernstein, President Biden’s choice to lead the Council of Economic Advisers, said in April, there is “some evidence” that China wants to weaken the role of the US dollar as the global reserve currency.
But what are the alternatives to the US dollar? The first and obvious choice is gold. In 2022 global central banks bought 1,136 tons of the yellow metal. Yes, despite reports to the contrary, gold is not a pet rock. That’s the biggest gold-buying spree since the 1950s. As in the years before, the main buyers have been emerging economies.
Even within the world of paper money we do see a shift. Despite many claims that this could never happen, the renminbi has emerged as a reserve and trade currency in recent years. The sanctions the West has put on Russia and its reserves have played a big part in this process. But that’s not all. Renowned Western economists like Barry Eichengreen argue that China has found new ways to establish the renminbi (yuan) as a reserve currency – without lifting capital controls and opening its capital account.
“We show that, contrary to conventional wisdom, lack of capital account openness may not fully prevent the Renminbi from playing a stronger role as an international and reserve currency. This is not to deny that, to overtake the US dollar as a leading international and reserve currency, China will have to further liberalise its capital account. But with the help of import financing, debt payments, payment infrastructures, currency swap lines, and offshore markets, the Renminbi can still gain a more important role”.
According to Stephen Jen, former “currency guru” at Morgan Stanley and now CEO at Eurizon SLJ Capital, the US dollar is actually losing its role as the dominant reserve currency at an alarming speed. In 2022, the year the US and Europe sanctioned Russia for starting a war against Ukraine, the US dollar’s share as a global reserve currency fell at ten times the average pace of the past 20 years. Adjusting for exchange rate movements, the US dollar has lost about 11% of its market share since 2016 and double that amount since 2008. In his note Jen writes:
“The dollar suffered a stunning collapse in 2022 in its market share as a reserve currency, presumably due to its muscular use of sanctions (…) Exceptional actions taken by the US and its allies against Russia have startled large reserve-holding countries, most of which are from the Global South.”
According to Jen’s own calculations, the US dollar’s share of global currency reserves dropped to only 58% in 2022 – a far cry from its share of 73% in 2001 when it was the “indisputable hegemonic reserve”:
“The prevailing view of ‘nothing-to-see-here’ on the US dollar as a reserve currency seems too innocuous and complacent. (…) What needs to be appreciated by investors is that, while the Global South is unable to totally avoid using the dollar, much of it has already become unwilling to do so.”
That’s a view that is actually shared by IMF chief economist Gita Gopinath who does expect a further diversification of reserve assets as more countries use other currencies than the US dollar in international trade. Thus she argues:
“Countries tend to accumulate reserves in the currencies with which they trade with the rest of the world, and in which they borrow from the rest of the world, so you might see some slow-moving trends towards other currencies playing a bigger role.”
But there is more. The use of the US dollar as a financial weapon seems to finally be bearing consequences. Reminder: The US and its allies froze around USD 300bn in Russian currency reserves and all but banned Russia from using the SWIFT payment system. Similar measures have in the past been taken against other countries, including Afghanistan, Iran, and Venezuela. Here is Zongyuan Zoe Liu, a fellow for international political economy at the Council on Foreign Relations, talking about the consequences of these actions to Reuters: “The more we use it, the more other countries are going to diversify due to geopolitical reasons”.
Bank of America Analyst Michael Hartnett goes one step further and deduces that the US will have no choice but to print the difference in the face of falling demand for Treasuries: “US dollar debasement [is the] ultimate outcome as the dollar is weaponized in the new era of sanctions”.
The Five Phases of De-Dollarization
Now that we’ve established that de-dollarization is in fact happening and is also visibly speeding up thanks to the weaponization of the US dollar, it’s time to take a breather and look at the history of and structural reasons for de-dollarization.
We identify five phases of de-dollarization:
- 2000–2009: Growing discontent over the dominance of the US dollar in the financial system and the resulting one-sided benefits for the United States. In this phase, there are some countries that rebel, but are suppressed (Iraq, Libya).
- 2009–2013: The attempt to reshape the Western financial system in such a way that Asia, Africa, and South America gain more say and real power. In this phase, China and its allies try to exert pressure to reform institutions like the IMF, but the United States makes only minimal concessions.
- 2013–2022: Establishment of alternative payment systems and bilateral currency agreements that are intended to enable a departure from the US dollar as a payment and reserve currency. By now, there are various such systems, such as the Chinese SWIFT alternative CIPS. Central bank digital currencies (CBDC) also play an important role in this respect.
- 2022: The freezing of Russian currency reserves as the first official act of the United States in an emerging currency war between the old system of the West and the new system of the East.
- 2023: The showdown: Active resistance against the old system by the leading nations of the East, deployment of the built-up mechanisms to bypass the US dollar, and attempts to “turn” US allies (e.g., Saudi Arabia, France).
It is also helpful to look at the rise of China as a global (trade) power. This is especially helpful in understanding the position of countries and regions like Türkiye, Saudi Arabia, the whole of Africa, South America, and parts of Europe.
Source: Visual Capitalist
None of these countries or regions can ignore China’s calls for a change of the world currency order. Many actually welcome it and are by now openly revolting against US dollar hegemony and its institutions like the International Monetary Fund.
Here are some examples from the past 12 months illustrating the global nature of this revolt:
- In January, Argentina and Brazil started working on a “common South American currency” – an idea championed by Brazil’s new (and old) president, Lula da Silva. The Economist called the proposal “bizarre” – so we know it should be taken seriously.
- The same Lula shocked the world on his recent trip to China, where he stated that “every night” he asks himself why countries are forced to use the US dollar: “Why should every country have to be tied to the dollar for trade?… Who decided the dollar would be the (world’s) currency?” He also heavily criticized the IMF and its practices in South America: “No bank should be asphyxiating countries’ economies the way the IMF is doing now with Argentina, or the way they did with Brazil for a long time and every third-world country.”
- In March 2023 the finance ministers and central bank governors of the ASEAN group met in Indonesia. Top of the agenda were discussions to reduce dependence on the US dollar, euro, yen, and British pound in financial transactions and move to settlements in local currencies. Indonesia even urged its banks to stop issuing Western credit cards. Of the countries in Southeast Asia, only Singapore has enforced sanctions on Russia. Also, Malaysia recently revived the idea of an Asian Monetary Fund.
- In November 2022 Ghana announced plans to buy oil with gold instead of US dollars. The move is supposed to help shore up the country’s currency reserves and fight local inflation. Ghanaian Vice President Mahamudu Bawumia, said that the plan “will fundamentally change our balance of payments and significantly reduce the persistent depreciation of our currency”. Ghana also instructed local mines to sell at least 20% of their supply to the central bank. As of March the policy is in effect and fuel prices are dropping in Ghana, the BBC reports.
- Kenya is taking another route and has struck agreements with Saudi Arabia and the UAE to purchase oil for Kenyan shillings.
Please note, this is the tame stuff – the really big agreements and movements will be covered in the following chapters.
Russia and China Are Getting Ever Closer
The images went around the world: footage of the farewell between Russian President Vladimir Putin and Xi Jinping, the President of the People’s Republic of China, after the latter’s visit to Moscow in March 2023. Xi uttered these memorable words: “Right now there are changes the likes of which we haven’t seen for 100 years, and we are the ones driving these changes together,” to which Putin only replied, “I agree”. And then wished his counterpart a good trip. Perhaps this brief exchange, this shaky cell phone footage, marks the moment when the ongoing changes in the global geopolitical fabric truly struck the mainstream. A historic turning point.
The Moscow meeting was an occasion for the announcement of numerous cooperation agreements between China and Russia. These range from economic to military cooperation and mark a further, significant deepening of the relationship between the two countries. The message seems clear: Russia and China are standing together. At least for the time being. They do have a common goal: a new world order that knows more than one superpower.
The changes Xi is talking about have been a major theme of our report for years: We call it de-dollarization – the resistance of countries like China, Russia, the rest of the BRICS, parts of Europe and the Middle East to the dominant position of the US dollar in the world financial system. In 2023, we have moved from rather passive preparations to active reorientation of the East – led by China, which has long been working toward this moment.
Developments have gathered tremendous speed since Russia’s invasion of Ukraine. What we are now seeing is the final showdown. It has been brought about by the multiple crises the West is facing and the increasingly blunt reactions of Western leaders. War, inflation, banking crisis. Since Western central banks seized Russian currency reserves in 2022, many governments and leaders around the world have been in a similar position to average citizens in the West facing historic levels of inflation and government intervention: Everyone is now worried about their money.
Putin’s Worries, Putin’s Plans
It is no coincidence that the largest economic and military power of its time also issues the dominant currency. But since Richard Nixon’s unilateral closing of the gold window in 1971, the US dollar has been the first and only world reserve currency in history without the backing of a precious metal. This is a circumstance that has caused resentment in Europe and Asia for decades. A situation in which one nation could print the world’s reserve currency at will had simply never existed before.
As we write these lines, the citizens of the West are also feeling the long-term consequences of this arrangement – in the form of high inflation rates and a teetering banking system. Theoretically, a monetary system without a peg or any other form of reference to reality may be possible, at least that is what Modern Monetary Theory (MMT) says. But reality shows something quite different. At its core, the current political and economic crisis also has to do with the fact that the monetary system has been fully coopted by politics.
Russia’s President Vladimir Putin naturally puts all blame for the currently very tense situation on the West. In a remarkable speech in the summer of 2022, Putin denounced the West’s “money printing” and described the already rampant inflation as a homemade problem:
“Because they could not or would not devise any other recipes, the governments of the leading Western economies simply accelerated their money-printing machines. Such a simple way to make up for unprecedented budget deficits. I have already cited this figure: over the past two years, the money supply in the United States has grown by more than 38 percent. Previously, a similar rise took decades, but now it grew by 38 percent or 5.9 trillion dollars in two years. By comparison, only a few countries have a larger gross domestic product. The EU’s money supply has also increased dramatically over this period. It grew by about 20 percent, or 2.5 trillion euros.”
Unlike many Western economists and politicians, Putin sees the expansion of the money supply in the West as a serious problem. It’s something that touches even Russia – even if Moscow has long tried to break away from the US dollar. Putin also directly addresses the lockup of his country’s currency reserves by the West. This is the second major weakness of the current monetary system, in his eyes:
“According to the IMF, global currency reserves are at 7.1 trillion dollars and 2.5 trillion euros now. These reserves are devalued at an annual rate of about 8 percent. Moreover, they can be confiscated or stolen any time if the United States dislikes something in the policy of the states involved. I think this has become a very real threat for many countries that keep their gold and foreign exchange reserves in these currencies.”
The solution, in Putin’s eyes: a multipolar world order, a “new world order”:
“Changes in the global economy, finances and international relations are unfolding at an ever-growing pace and scale. There is an increasingly pronounced trend in favor of a multipolar growth model in lieu of globalization. Of course, building and shaping a new world order is no easy task. We will have to confront many challenges, risks, and factors that we can hardly predict or anticipate today.”
Russia Ditches the Euro for the Yuan
Shortly before the war in Ukraine started, Russia and China struck a huge deal on oil and gas supplies, the volume of which amounts to more than USD 100bn. The euro was agreed as the trading currency for the gas, which is also to come via a new pipeline. We suspect that this was a signal to Europe to participate in the “new world order” of the East.
The euro was always supposed to be a neutral alternative to the US dollar. But after not only the US but also the Eurozone – including the Bundesbank, where apparently a large part of the Russian reserves is stored – reacted by blocking Russian funds, Russia also turned away from the euro. In September 2022, Russia’s state-owned gas giant Gazprom switched from euros to yuan and rubles in its trade with China. Russia also now accepts yuan for oil and coal exports to China, while trade with Türkiye is now also conducted in rubles.
The Russian Ministry of Finance announced in February 2023 that it planned to throw the euro out of the National Prosperity Fund (NWF) – and hold only gold, Chinese yuan and rubles. According to Russian Deputy Finance Minister Vladimir Kolychev, the fund will contain up to 60% yuan and a maximum of 40% gold, with rubles possibly being added. The Russian central bank is also increasingly relying on the renminbi as a reserve currency, fulfilling a long-held goal of Beijing.
While Russia alone cannot make the yuan a globally accepted reserve currency, the support is certainly helpful. Russia and China had a combined trade volume of nearly USD 200bn in 2022. Before the war, nearly 85% of exports from Russia were denominated in Western currencies such as euros or US dollars. That share has since fallen to 16%, according to the Financial Times – and the renminbi’s share has increased fourfold, from less than one percent in 2021.
Settlement Currency for Russian Exports, in % of Total, 01/2022-12/2022
Source: FT, Russian Cental Bank, Incrementum AG
We currently do not know how high the share of the Chinese currency in Russia’s currency reserves really is. Even before the invasion of Ukraine, it had risen to 17% by January 2022 – but since then, the Russian central bank has not published any more data. As early as January, the yuan was also introduced as a currency on the Russian stock exchange. From January to November 2022, the trading volume of the yuan on the Moscow Exchange rose from just 0.2% of total FX transactions to 48%.
The yuan is also increasingly used in Russia’s international trade, and some of Russia’s largest companies have begun issuing yuan bonds to raise capital. Russian citizens are also buying yuan as more and more banks offer the possibility to open deposits in yuan. More than 50 Russian banks now offer renminbi-denominated deposits, often under names such as Silk Way and Crescent Moon. Customers are lured by higher interest rates.
Russia’s largest banks are also deepening their ties to the Chinese monetary and financial system. Sberbank has started lending money in yuan to replace US dollar and euro transactions. VTB is the first Russian bank to launch money transfers to China via yuan outside the SWIFT messaging network. VTB CEO Andrei Kostin said the launch of the yuan remittance system will greatly simplify the cooperation of Russian companies and individuals with Chinese partners and increase the popularity of the yuan in Russia: “The new reality is leading to a massive rejection of the use of the dollar and the euro in international payments.”
Russian President Vladimir Putin has recently explicitly endorsed the growing international use of the renminbi, stating during the meeting with Chinese President Xi Jinping that he supports “the use of the yuan in payments between Russia and the countries of Asia, Africa and Latin America.”
Russia’s Plans for Crypto
Russia appears to be working on several different concepts to incorporate gold and commodities more fully into a new monetary order. In doing so, they are not shying away from new types of crypto instruments such as stablecoins. Russia is currently working with several friendly countries to create clearing platforms for cross-border settlements in stablecoins. Both the Ministry of Finance and the central bank have already confirmed that cross-border trade will need to involve cryptocurrencies. Some of the ideas include the use of Bitcoin in international payments and the use of stablecoins tied to gold.
Here is what Russian Deputy Finance Minister Alexey Moiseyev had to say in September 2022:
“We are currently working with a number of countries to create bilateral platforms to not use dollars and euros. We are offering mutually acceptable tokenized instruments to be used on these platforms. Stablecoins can be tied to a universally accepted instrument, such as gold, whose value is clear and observable to all participants.”
Putin Wants a BRICS Currency
Another idea is the creation of a separate BRICS currency, which could establish itself as a global reserve currency. Such plans have been around since 2018, but they have only been actively taken up again by Moscow in particular since it turned away from the euro. Vladimir Putin wants a currency based on a basket of currencies, mirroring the concept of the IMF’s special drawing rights or the ECU, the precursor of the euro.
However, it is unclear what this currency will look like and whether the other BRICS countries are really interested in these plans. The BRICS are a very heterogeneous club that could grow in terms of members and importance, but they still have little experience with such huge undertakings.
The Gold Ruble 3.0
Of particular interest to this report is the Gold Ruble 3.0 plan put forward by influential politician and former Russian Finance Minister Sergey Glazyev in late 2022.
Here is what Glazyev had to say:
“Gold (along with silver) has been the core of the global financial system for millennia, an equivalent, an honest measure of the value of paper money and assets. Now the gold standard is considered ‘anachronistic’. It was canceled in its final form half a century ago (the United States announced the ‘temporary’ closure of the ‘golden window’ adopted in 1944 at Bretton Woods), re-pegging the dollar to oil. But the era of the petrodollar is coming to an end: now they are already talking about the petroyuan and other mechanisms to limit the abuse of the status of the world reserve currency issuer. Russia, together with its eastern and southern partners, has a unique chance to ‘jump off’ the sinking ship of the dollar-centric debt economy, ensuring its own development and mutual trade in the accumulated and extracted strategic resources.”
Glazyev speaks of a “Gold Ruble 3.0” because the creation of a hard ruble pegged to or backed by gold has already been tried twice. The first variant seems to be a thorn in Glazyev’s side. This involved the gold standard of the 19th century, which, according to Glazyev, came about because “Rothschild lobbied in Europe”; and it is said to have represented a kind of subjugation of Russia to Western capitalism.
The Gold Ruble 2.0 came after the Second World War. At that time, the Soviet Union signed the Bretton Woods treaties but never ratified them, and then tied the ruble directly to gold, as well as to “the entire wealth of the country”. Glazyev blames Nikita Khrushchev for the end of this gold ruble. He said that Khrushchev ended the gold standard in Russia in 1961, devalued the ruble sharply, and laid the groundwork for Russia to be reduced to a “raw material appendage” of the Western financial system.
Glazyev argues that the conditions now exist for a third gold ruble. Russia could thus secure its place in the financial world and also increase the importance of its domestic gold industry. He writes:
“The sanctions imposed against Russia have boomeranged the Western economy. The geopolitical instability provoked by them, rising prices for energy carriers and other resources, inflation and other negative factors put strong pressure on the global economy, in particular the global financial market. In 2023, all these circumstances will objectively affect the change in the stereotypes of investment policy in the world – from risky investments in complex financial instruments to investing in traditional assets, primarily gold. According to Saxo Bank analysts, in 2023, increased demand for this metal will lead to the fact that its price will rise from the current $1,800 per ounce to $3,000. As a result, there is a real opportunity in the very near future to significantly increase gold reserves – both by increasing the physical volumes of gold and by revaluing its value.”
Glazyev is of the opinion that an expansion of gold reserves and gold mining in Russia would provide the country with a “strong ruble”, a “strong budget”, and a “strong economy”. However, he makes no specific proposal to peg the ruble directly to gold. Russia has already bought massive amounts of gold for its reserves in recent years and is likely to continue doing so. In addition, there is large domestic gold production of about 350 tons per year.
A re-monetization of gold during the ongoing de-dollarization cannot be ruled out, either. The considerations are reminiscent of a simulation conducted by our advisory board member Jim Rickards at the Pentagon in 2009, as he describes it in his book Currency Wars.
In essence, Glazyev’s statements are little different from those of former World Bank chief Robert Zoellick in 2010, when he proposed that governments create a new international monetary order based on a basket of currencies that would include gold. Zoellick argued that including gold in the currency basket would boost confidence in the monetary system and serve as a hedge against inflation and provide a reference point for the global economy – something it has lacked since 1971. Zoellick also suggested that central banks should make their gold holdings public to increase confidence in the international monetary system. Zoellick’s proposal was seen as controversial and was ultimately not implemented in any form.
The BRICS Renaissance
The so-called BRICS are a difficult beast to understand. The name BRICS is derived from the first letters of the names of these countries: Brazil, Russia, India, China, South Africa. This group designation was first proposed in 2001 by economist Jim O’Neill, then with Goldman Sachs, who recognized the economic importance of these five countries for the coming decade. To this day, however, the rumor persists that South Africa was only added to make the acronym easier to pronounce.
The formation of the BRICS as a formal political group did not take place until 2006, when the countries decided to hold regular summit meetings. In total, the BRICS countries are now responsible for nearly 42% of the world’s population and about a quarter of the world’s economic output, with a large share in both categories accounted for by China, which alone contributes 70% of BRICS economic output. The first official BRICS summit was held in Russia in 2009. The 2023 summit will be held in South Africa at the end of August.
It could be the most exciting summit yet, as BRICS could grow. Saudi Arabia, Türkiye, and Egypt are planning to officially join BRICS. And according to Russia, Argentina and Iran have also begun the process of joining. Other countries that have already attended BRICS meetings as guests include Kazakhstan, Indonesia, Nigeria, Senegal, Thailand, and the United Arab Emirates. What is emerging here is a new way of organizing and governing the world – without the influence of the West.
Source: Silk Road Briefing
However, the inclusion of Saudi Arabia, Türkiye, and Egypt is particularly sensitive, as all three are traditional allies of the USA. Türkiye is an important military power within NATO. And Saudi Arabia, thanks to its cooperation with Washington, has formed the basis for the petrodollar system since the 1970s. But this system seems to be finally worn out, now that China has long used its own currency in energy trading – and has found good friends in Riyadh in the meantime. Of course, there are special blocs within the BRICS, such as Brazil and the candidate Argentina, which are working on their own economic union and even have plans for a common currency, which, however, will only function as a unit of account for joint trade.
India also has a special role, since it does not have a particularly good relationship with China, and as it is closely allied with the US. The BRICS must therefore also be seen as a club in which each nation is looking for its own special advantages. For example, India, which this year brought to a close a period of more than 200 years in which China was the world’s most populous country, has been able to massively expand cooperation and trade with Russia in recent years – and gets cheap raw materials, thanks to Western sanctions. Alternative currencies such as the United Arab Emirates dirham and the Russian ruble are used in this trade.
Top 5 Country Increases of Russian Oil Cargo Volume, in mn Tonnes, 2021-2022
Source: VesselsValue, Incrementum AG
The Building Blocks of the BRICS World Order
Alongside bilateral agreements between states, the BRICS are certainly the most important vehicle for the creation of an alternative world order – and quite specifically in the area of monetary architecture. Institutions have already been created that function as an alternative to the Bretton Woods institutions of the International Monetary Fund and the World Bank: The BRICS Contingent Reserve Arrangement (CRA) and the New Development Bank (NDB). Due to China’s dominance, both institutions can also be understood as building blocks of the new world order envisioned by Beijing.
The BRICS Reserves Fund is a financial mechanism established by the member countries of the BRICS group back in 2015. The fund was created to provide a collective pool of foreign reserves that member countries can draw on in times of economic crisis and volatility.
- The initial size of the fund was set at USD 100bn, with each member country contributing an equal share of USD 20bn. The fund is managed by a governing council consisting of representatives of the central banks of each member country. The council makes decisions on the allocation and disbursement of funds.
- An analysis on the future of the international monetary system published by the Credit Suisse Research Institute in January 2023 points to a Chinese special role within the fund:
“Its purpose is to provide protection if member countries face external liquidity pressures. Interestingly, members are allowed to draw up to twice their paid-in capital in a situation of stress, except for China, which can only draw half of its paid-in funds. In other words, China would act as a (partial) lender of last resort within the scheme. Even if the CRA is still limited in size relative to the lending power of the IMF, its establishment is an important step toward a more multipolar system.”
The New Development Bank, which was established in 2015 on India’s initiative, also has over USD 100bn in capital.
- Since its founding, other countries have joined: first Uruguay, and then, in March 2023, Egypt, the UAE and Bangladesh. Its aim is to provide financing for infrastructure and sustainable development projects in developing countries.
- The NDB is headquartered in a futuristic-looking skyscraper in Shanghai, China, and has regional offices in South Africa, Russia, Brazil and India. Since late March, the NDB has been headed by someone who is well-known on the world stage: former Brazilian President Dilma Vana Rousseff.
The Rise of China and Xi Jinping
As we can see, China dominates the BRICS due to its sheer size and economic power. In addition, Beijing has used the past 12 months to strengthen its influence around the world. President Xi Jinping’s visit to Moscow was just the tip of the iceberg – but an important tip. “Xi and Putin have the most consequential undeclared alliance in the world”, ran a Foreign Policy cover title. The magazine called the friendship between Moscow and Beijing “more important than Washington’s official alliances”. Big words.
Xi Jinping’s March 2023 visit to Moscow was his first overseas visit since his re-election. Despite historical tensions, the two countries have established good relations in personal, economic, military, and diplomatic terms under Xi and Putin. Economic ties between China and Russia have grown strongly since the Ukraine invasion, with China replacing the United States and Germany as Russia’s main trading partner and buyer of oil and gas.
Neither Xi nor Putin make any secret of their desire to end US domination and create what Xi has called “a new model of major-country relations”.
How Far Will Xi Go?
While a process like de-dollarization is very structural in nature, must be analysed over long periods of time, and is shaped by technocratic details, one must not forget the human component. Authoritarian rulers like Vladimir Putin and Xi Jinping have certain advantages in this game, thanks to their power. So it is somewhat surprising that we in the West hear a lot about Putin’s dark side but very rarely concern ourselves with the man who rules China.
As our friend Trey Reik writes in one of his recent newsletters:
“’We believe the greatest threats to global order emanate overwhelmingly from China’s economic, military and territorial ambitions’. President Xi Jinping has been vocal about his 2049 goal for China to ‘lead the world in terms of composite national strength and international influence’, and he has spent the past decade consolidating his power in much the same way President Putin became Russia’s supreme ruler.” [3]
Only last October, Xi was sworn in for a third term as general secretary of the Chinese Communist Party, contrary to previous tradition. To avoid the dangerous concentration of power in the hands of a few, Deng Xiaoping had set strict limits on the terms of office of Politburo members in 1982.
These rules have now been broken by Xi. According to Trey Reik, Xi has not only elevated himself to dictator for life – he is also preparing for war.
“President Xi shocked China experts by completely ignoring longstanding succession rules of age and experience and instead elevating six of his most ardent loyalists to join him on the Politburo. Ominously, none of the six has any job experience in economic, financial, or diplomatic affairs, and all have served in strongarm roles of anti-corruption, government reform and internal discipline. By elevating such extreme CCP loyalists to the Politburo, President Xi appears to be preparing his country for war and establishing a strict chain of command to enforce national compliance. In short, China experts now routinely refer to the new Politburo as Xi’s ‘war cabinet’.”
As a result, Xi was also confirmed as the country’s president for the third time, taking over the authoritarian legacy of Mao Zedong. Shortly thereafter, he initiated several major reforms that massively expanded the power of the party and the state over China’s economic and financial system. New party agencies were created to control the tech and financial industries, and oversight of Hong Kong and Macau was also streamlined.
And, something that no one in the West seems to register: Xi has not only installed several loyal henchmen within the Peoples Bank of China, he has also placed a new supervisory body alongside the central bank. In addition, there is a whole series of military rearmament measures – including the expansion of nuclear weapons numbers from 400 to more than 1500 by 2035.
Trey Reik comments on these developments:
“At the risk of sounding paranoid, we find China’s increasingly brazen aggressions highly troubling. Coupled with President Xi’s Putin-like power grab, China’s behavior represents a serious threat to global status quo, the unipolar stability of US economic and military power and even the dollar standard system itself. In such circumstances, gold’s safe haven utility will prove immensely valuable.”
Xi’s Appearance in Saudi Arabia
While the meeting between Xi and Putin attracted global attention, even in the mainstream media, the Chinese ruler’s visit to Saudi Arabia was probably even more important when it comes to restructuring the world’s monetary architecture. There was no lack of pompous images – and symbols pointing to a change of direction in the Middle East. This is how the New York Times reported it:
“Upon arrival on Wednesday, Mr. Xi was met by a grander reception than Mr. Biden received in July, when the American president visited the coastal city of Jeddah, partly in a bid to repair ties with the Saudi government. Footage of Mr. Xi’s reception on Wednesday showed jets flying overhead with smoke trails in the red and yellow colors of the Chinese flag. On Thursday, he was taken to the palatial royal court, where his car, a luxury Chinese sedan, was escorted by horse riders carrying Saudi and Chinese flags. Prince Mohammed greeted him with a warm handshake, contrasting with Mr. Biden’s greeting of a fist bump.”
More than 17% of global oil exports come from Saudi Arabia. Until recently, the country was also the US’s largest supplier and a crucial ally. Saudi Arabia leads the Organization of Petroleum Exporting Countries (OPEC). Since 1979, Saudi Arabia has also been an important partner of the US in the conflict with Iran.
A long-secret deal from the 1970s guaranteed the US the use of the US dollar as OPEC’s sole oil currency. This petrodollar agreement is considered the cornerstone of the post-Bretton Woods monetary order. But the petrodollar is wobbling. Much of the effort to de-dollarize consists of agreements between states to bypass the US dollar in trade for energy and goods. China has already entered into countless such bilateral agreements, but there has been no yuan-based oil trade with Saudi Arabia.
As a reminder, China has been signaling for many years that it is no longer happy with the US dollar as the world’s reserve currency. As early as 2009 – i.e., in direct response to the Western financial crisis – the then head of China’s central bank, Zhou Xiaochuan, called for a “reform of the international monetary system” and proposed replacing the US dollar with a “supranational reserve currency”, as John Maynard Keynes had already suggested in 1944.
Three years later, the Chinese central bank announced that it was no longer in China’s interest to expand its currency reserves. And by “currency reserves”, of course, it meant the US dollar reserves that are recycled into US government bonds – generating demand for US debt.
Foreign Official Buying and Selling of US Treasuries and Gold
Since Q4/2014, in bn USD, Q4/2014-Q4/2022
Source: FFTT LLC, US Treasury, World Gold Council, Incrementum AG
This announcement was made 10 years ago. And here we also find the connection to the yuan as energy currency and the meeting in Riyadh. Only a country that can buy raw materials and/or goods internationally with the money it prints itself can do without reserves. The US dollar is the reserve currency because every country must keep US dollars on hand to buy oil. But the US itself holds hardly any reserves – it just prints the US dollar, based on demand for US dollar debt abroad. That’s the exorbitant privilege – and everyone wants it now: Europe with the euro, China with the renminbi.
China has long been using the blocking of Russia’s US dollar reserves as a pretext to turn even further away from the US dollar. In January 2023, China only held US bonds worth USD 860bn – the lowest level in 14 years. This history probably explains why, after the meeting between Chinese President Xi Jinping and the King of Saudi Arabia, both countries made detailed statements – but did not address the use of the yuan as an oil currency. There was simply no need to make it explicit.
The Petroyuan Is Here
For noted analyst Zoltan Pozsar it was Xi’s speech in Saudi Arabia that marked the transition from a unipolar, US-dominated world to a multipolar world order:
“When the world is going from unipolar to multipolar, the actions of heads of state are far more important than the actions of central banks. That is because heads of state lead, their actions affect inflation, and central banks merely follow by hiking rates to ‘clean up’. Central banks will be behind the curve in this game, and if investors read only the speeches of central bankers but not statesmen, they will be even more behind the curve. The multipolar world order is being built not by G7 heads of state but by the ‘G7 of the East’ (the BRICS heads of state), which is a G5 really but because of BRICSpansion,’ I took the liberty to round up.”
Pozsar recalls that Xi’s visit was the first ever summit between China and the Arab world, comparing it to the meeting of Franklin Roosevelt and Saudi King Abdul Azis Ibn Saud aboard the USS Quincy in 1945 – when the foundation was laid for the friendship between Saudi Arabia and the US, which officially continues to this day.
But what exactly did Xi say now? Here are the highlights:
“In the next three to five years, China is ready to work with GCC countries in the following priority areas:
First, setting up a new paradigm of all-dimensional energy cooperation. China will continue to import large quantities of crude oil on a long-term basis from GCC countries, and purchase more LNG. We will strengthen our cooperation in the upstream sector, engineering services, as well as storage, transportation and refinery of oil and gas. The Shanghai Petroleum and Natural Gas Exchange platform will be fully utilized for RMB settlement in oil and gas trade. […]
The two sides could start currency swap cooperation, deepen digital currency cooperation and advance the m-CBDC Bridge project.”
Xi literally speaks of a “new paradigm”. He speaks of “all-dimensional energy cooperation” and promises that China will buy large quantities of oil and gas from the Gulf states over the long term. He also promises cooperation in the “upstream sector”, which is intended to fulfill the Gulf states’ desire not to degenerate into mere “gas stations” but rather to keep more value creation in the country. Specifically, this involves storage, transport, and refineries.
Then Xi calls a spade a spade, saying that the Chinese Energy Exchange in Shanghai will be used and that “RMB” (renminbi) will become the settlement currency. Key point.
To quote Zoltan Pozsar: “GCC oil flowing east + Renminbi invoicing = the dawn of the Petroyuan.”
It should be noted here that the deal China is offering the Gulf states is quite tempting. Because unlike the US, China does not insist on putting the yuan it issues into Chinese government bonds. Instead, in the past few years, Shanghai has set the stage for oil and gold trading in renminbi. So the Gulf states can either put the Chinese money into government bonds, buy goods and services from China – or simply convert it into gold.
Zoltan Pozsar: “Money is as money does, and convertibility to gold beats convertibility to dollars.”
Lastly, Xi promises closer cooperation on currency swaps and talks about the prospect of using the m-CBDC bridge project. This is also enormously important, because the Chinese president tells us exactly how this new world order will be put into practice. He says quite clearly how China and the oil nations want to bypass the US dollar in the future. And – just to remove any doubt – Saudi Finance Minister Mohammed Al-Jadaan appeared before the cameras in January 2023 and said that they were open to currencies other than the US dollar.
“We enjoy a very strategic relationship with China, and we enjoy that same strategic relationship with other nations including the US, and we want to develop that with Europe and other countries who are willing and able to work with us. There are no issues with discussing how we settle our trade arrangements, whether it is in the US dollar, whether it is the euro, whether it is the Saudi riyal.”
What is interesting, is that the m-CBDC bridge project mentioned by Xi comes from the Bank for International Settlements. Unlike the IMF, for example, the BIS is still dominated by Europe, which was also the birthplace of the euro – which once started out to challenge the US dollar. And now the BIS could play a decisive role in building a multipolar world.
Zoltan Pozsar is quite enthusiastic about the m-CBDC project:
“The m-CBDC Bridge project, or as the BIS likes to refer to it, Project mBridge, is a masterclass in plumbing: Undertaken by the PboC, the Bank of Thailand, the HKMA, and the Central Bank of the United Arab Emirates, the project enables real-time, peer-to-peer, cross-border, and foreign exchange transactions using CBDCs, and does so without involving the US dollar or the network of Western correspondent banks that the US dollar system runs on. Pretty interesting, no? In a very Uncle Sam-like fashion (see here), China wants more of the GCC’s oil, wants to pay for it with renminbi, and wants the GCC to accept e-renminbi on the m-CBDC Bridge platform, so don’t hesitate – join the mBridge fast train.”
This CBDC project also brings in a new player that we have hardly known on the playing field so far: the United Arab Emirates and its currency, the dirham. Since summer 2022, Russia has accepted dirhams as payment for its energy exports. And since February 2023, Indian importers have been paying their Russian energy suppliers in dirhams.
“Do take a step back and consider… that since the beginning of this year, 2022, Russia has been selling oil to China for renminbi, and to India for UAE dirhams; India and the UAE are working on settling oil and gas trades in dirhams by 2023; and China is asking the GCC to ‘fully’ utilize Shanghai’s exchanges to settle all oil and gas sales to China in renminbi by 2025. That’s dusk for the petrodollar… and dawn for the petroyuan.”
Quite a few important voices in the US and the Federal Reserve are extremely skeptical about needing a digital central bank currency in the US. They talk about democracy and civil liberties – but mainly it’s because the existing US dollar system works splendidly for the US. Zoltan Pozsar also strongly advises against introducing a US dollar CBDC and thereby endangering the US dollar’s current supremacy.
China FX Reserves, as % of GDP, 2008-2021
Source: FFTT LLC, World Bank, Incrementum AG
Peace Is Breaking Out in the Middle East
There have been many peace agreements and peace treaties in the Middle East – and they have often been disregarded. But this one is special. After decades of hostility, Saudi Arabia and Iran are once again talking to each other. And the mediation came from Beijing, of all places, not Washington.
The New York Times is astonished:
“The Americans, who have been the central actors in the Middle East for the past three-quarters of a century, almost always the ones in the room where it happened, now find themselves on the sidelines during a moment of significant change. The Chinese, who for years played only a secondary role in the region, have suddenly transformed themselves into the new power player. And the Israelis, who have been courting the Saudis against their mutual adversaries in Tehran, now wonder where it will leave them.”
Even American experts like Amy Hawthorne, deputy director for research at the Project on Middle East Democracy, admits: “This is a big deal, you have to call it that”. China, she says, has taken advantage of the fact that the US has “basically no ties” with Iran. Of course, the agreement does not mean that the deep rifts between Sunnis in Saudi Arabia and Shiites in Iran have suddenly disappeared. But it is a first step, not only for the two Gulf states but also for China – which is suddenly flexing diplomatic muscle as well.
How quickly the mood in the Middle East turns is also evident in the rapprochement between Syria and Saudi Arabia. This time, Moscow is the mediator.
To this end, Kiril Sokoloff and the team at 13D write:
“Together, these diplomatic maneuverings are reorganizing the geopolitical map of the Middle East, and with it, the global balance of power. Washington’s attempts to pressure Saudi and the UAE to isolate Iran and Syria have only served to highlight how far Beijing has been able to fill the diplomatic vacuum and to re-shape the regional power-balance in its favor.
Given the level, and likely continued growth, of trade between China and the
Middle East, particularly in energy, both sides have an incentive to look
beyond the confines of the dollar system. Riyadh is China’s largest oil supplier
and Beijing is Arab countries’ main bilateral trade partner, amounting to
$330 billion in 2021”. [4]
Macron Discovers Europe’s Interests
It’s not often that a European politician causes a stir on the world stage anymore, but France’s President Emmanuel Macron managed to do so in early April 2023. Surprisingly and without warning, Macron spoke of Europe as a “third superpower” after a meeting with Xi Jingping. He then warned against the “extraterritoriality of the US dollar” and insisted on his concept of the “strategic autonomy of Europe”. And in a speech after his return to Europe, Macron then spoke of Europe’s “sovereignty” and warned against becoming a “vassal” of the US. It was the first such outburst by a major Western head of state since the start of the war in Ukraine and the sanctions against Russia. Moreover, Macron had also stressed in the past that the path of dialogue with Moscow should remain open.
The French president thus joins a long line of statesmen who want to free Europe from the American embrace. His predecessor Charles De Gaulle complained about the dominance of the US dollar as early as 1965. In 2018, thenEU Commission President Jean-Claude Juncker even called the euro a big step toward a “new, more sovereign Europe” and complained that Europe still transacts its energy imports in US dollars. He spoke of the “hour of European sovereignty”.
However, Macron’s statements were not met with approval. The US-friendly camp in Germany, in particular, immediately chastised the Frenchman and spoke of a “pipe dream”. The fact that Macron returned from China not only with big plans but also with some lucrative deals for French industry should not go unmentioned. May it be a coincidence, but just a few days later, France was downgraded by Fitch. At the very least, it looks like Macron is keeping some options open for himself and Europe. And yes, getting the EU on their side would be the biggest coup imaginable for Russia and China. But there is still a long way to go before that happens.
Welcome to the Multipolar World
The practiced reader may have noticed that Europe plays only a small role in the chapter on de-dollarization this time, even though the euro once purported to offer a real alternative to the US dollar. The euro was chosen by China and Russia in early 2022 as the settlement currency for their huge gas deal. And the euro is the only currency that has managed to achieve significant reserve status next to the US dollar so far. But by blocking Russia’s foreign reserves, Europe has clearly aligned itself with the Western camp led by the US.
The destruction of the North Stream pipelines (by whomever) has destroyed an important physical connection between Russia and Europe and made the EU dependent on LNG imports (from the US, for example). And then this: France, of all countries, not Iran or Venezuela, was the first trading partner to pay for LNG from China in yuan – shortly before President Macron visited Xi Jinping in Beijing. The power of the symbolism here should not be underestimated. It seems that after becoming divided over the issue of Ukraine, Europe and the East have taken a step toward each other.
In other words, geopolitical tectonic plates are shifting. With Britain out of the EU, it would theoretically be possible for Europe to form a third block, a sort of neutral-ish zone between the US and China-Russia. But it’s not like Macron holds all the cards here; Washington does (for financial, geographic and military reasons). The US dollar is still the strongest and most important currency – but as we’ve outlined in this chapter, many countries (including at least France) are trying to gain independence. And others like Saudi Arabia and even Mexico have openly distanced themselves from the US – at least verbally.
At this point it is impossible to be sure which side Europe will really be on in this conflict between East and West in the long term. The next few years will show. It’s even possible that Europe will divide itself into two blocs, as happened during the Cold War. But that is a fate Paris and Berlin surely want to avoid. France also certainly does not want to fully switch to the other bloc, but rather, as Macron said, wishes to lead a “third superpower” Europe.
Considering the provided evidence, we do not think it is any stretch to term the current setup a geopolitical showdown. While Europe is trying to find its feet, China and Russia have laid their cards on the table and are openly talking about a new world order that has more than one center – i.e., is multipolar.
Nowhere are the threads coming together more than in Saudi Arabia. It is a long-time ally of the US, has its currency pegged to the US dollar, and yet flirts intensively with China and the BRICS. In addition, it would like to trade with Europe in euros – i.e., it is also striving for a multipolar system. All the new constructs – the bypassing of the US dollar in trade and the growing importance of gold as a reserve – are reducing global demand for US dollars. Even Janet Yellen seems to be feeling the heat now.
The question is whether and how the USA will respond to this challenge. The US dollar is still at the top of the currency charts. Washington still has many options. And if there is one thing we know from history, it is that we should never underestimate the Americans and their pragmatism. But in purely economic and geopolitical terms, the signs point to a continuation of the trend toward de-dollarization.
This does not mean that the US dollar will disappear tomorrow – or even that it will fall. Chaos on the currency stage might even help the US dollar exchange rate in the short term. But it does mean that the will of a large part of the planet is there to find a new system. The signals are clear.
Yes, world will change. “Changes like we haven’t seen in 100 years”, Xi Jinping called them. We strongly believe that the time of multipolarity has already arrived. Yes, the US dollar is top dog, but there are many other dogs in the park now. That’s also why Macron is getting restless: The Euro was built for this! Europe is still sitting on the world’s largest gold reserves, while the East is stacking gold like there is no tomorrow.
Well, maybe there isn’t. At least not for the debt-driven pure fiat system that we all grew up in. We’ve been in this business far too long to write any obituaries for the US or the US dollar. We know that the process of tectonic plates shifting will take a long time – even if the shifting is speeding up. But we are confident of a few predictions for the coming 12 months:
- The banking crisis and inflation will be important topics in the coming US presidential election.
- Europe will try to break free from US “custody” but will have a very hard time doing so – as always. A full pivot is not to be expected – at least not under current German leadership. A sharp inflation crisis might change this.
- China, Russia, Africa, South America, and Southeast Asia will aggressively push for the establishment of alternative currency rails that bypass the US dollar, and CBDCS will play a major role. This is also why Europe is keen on a digital euro.
- Central banks and governments will buy ever more gold – as will the general population. The same goes for Bitcoin, with less involvement on the side of the government.
- As things stand we don’t expect any coherent new, rules-based financial structure to emerge. Rather, we see the emergence of “one world, two systems” – or even “one world, three systems”, if Macron really gets his will.
The era of Bretton Woods and full petrodollar dominance is now truly over. The unipolar moment has passed.
Buckle up.
[1] See “A New International Order Emerges,” In Gold We Trust report 2022; “De-Dollarization 2021: Europe Buys Gold, China Opens a Digital Front,” In Gold We Trust report 2021; “De-Dollarization 2020 – The Endgame Has Begun,” In Gold We Trust report 2020; “De-Dollarization: Europe Joins the Party,” In Gold We Trust report 2019
[2] Please also see our extensive online-timeline of de-dollarization, ingoldwetrust.report/the-long-history-of-usdollardominance/?lang=en
[3] Reik, Trey: Themes, March 20, 2023
[4] Sokoloff, Kiril: “What I learned this week”, April 13, 2023
