I recall when Russia wanted to purchase oil from the UAE, but due to sanctions Russia can’t conduct the transaction in dollars (often or not is used as the intermediary). Instead the Dirham was used as a replacement currency to acquire it, however it involved exchanging each other’s currency. I mean, why can’t just countries use each other’s own currency to purchase oil to steer away from the petro-dollar?
In that case, counties will just exchange each other’s money directly (like for instance if Germany wants oil from Oman, then the transaction is done via Rial to Euro and vice versa) would that mean it’ll be a multipolar economy since each nation uses their own currency to pay for the imports rather than using US Dollars so much? That was the move BRICS used on them trying to not rely on USD a lot.
There are two elements to this - the system and dollars. The systems are CHIPS (used for clearing, which is in US Dollars) and SWIFT used for interbank communication. Russia was severely cut off from both. Countries can trade in any currency they want, but the international system is standardised around the dollar and CHIPs and SWIFT make it fast and efficient.
Lets say Russia wanted to buy $50m of oil from UAE. It would involve a Russian bank and a UAE bank handling the money and both would have CHIPS accounts. A Russian bank would place an order via SWIFT for $50m to the UAE bank via its CHIPS account. The money would be transferred to the UAE banks account and out to the UAE. This seems pointless for 1 transaction, but actually there are many 1000s of different transactions happening every day in different directions, and the way clearing happens instead of moving $50m from one bank to another, it will look at all the other transactions both banks are making with everyone else across the day and just move the correct overall amount out.
So $50m does move from one bank to the other, but it’s part of all the other transactions going on making it simpler for both banks. For example maybe at the same time the UAE bank is transferring $30m to another bank in another country; so at the end of the day it’ll get $20m from CHIPs.
When Russia was cut off, there weren’t really other good routes to make that trade. Also people don’t want Roubles. So normally Russia and Russian banks buy and hold Dollars, and use that when they need to trade. Russia was locked out of this, so it now had to buy $50m of oil but using Roubles which the UAE bank didn’t want or need. This means either Russia had to find other ways to get the $50m or it paid way more in Roubles than the $ amount to buy enough Dirhem so that the UAE would accept the money.
However, as you rightly point out - why would countries be so reliant on the $ and the US like this? Up until now, people trusted the Dollar and the US to keep the system open and functioning. But first the Ukraine war sanctions and now certainly the Iran war have shown to the world that the Dollar and current systems are entirely under US control. Even though the EU was against Russia in the Ukraine war, they have also been moving to put in new systems so they’re not over reliant on the US systems after seeing what happened with the CHIPS/SWIFT sanctions. Those sanctions were really seen as the “nuclear” option when it happened, and people never thought anyone would actually do that.
Now the Trump is again emphasising how reliant the world was on US stability, and US stability is seemingly gone. Tarrifs, threats to invade Greenland, disparaging allies, and Iran - all have shown that the US is unreliable and unstable. So now the EU and many other countries (including China) are accelerating the process to move away from being so reliant on the US Dollar and the USA. It will have huge consequences for the USA and the world, and even if the Iran war ends tomorrow and a decent president is elected in 2028, the damage is done. No one trusts the US political system any more - it has been shown to be unstable and capricious, and entirely dependent on the whims of the US president. The supposed “checks and balances” are non-existent: the courts and congress have done nothing to stop this mess. So everyone is reducing their “exposure” to the risk of being too reliant on the USA and it’s financial systems.
It really doesn’t matter any more if the Democrats win congress and the white house. It will just be seen as a period of calm before the next Trump comes along. We’ve already had that once with Biden coming in after Trumps first term, and Trumps second is even worse. And it’s not about Trump specifically - he’ll be gone in a few years, but the world has been shown that any nutter in the white house can do what they want, plus the Republicans are clearly bat-shit crazy. And whats to say the Democrats don’t also put someone bat shit crazy into the white house in the future? All trust in the US is gone and it can’t be rebuilt.
The UAE isn’t interested in selling oil for Rubles.
They want hard currency. And that’s the same with all oil-exporting countries.
It makes no sense to sell a non-replenishing resource in exchange for currency that may or may not be worthless in the future.To that effect all internationnal goods are purchased in a negotiated currency . Used to deal with Chinese manufacturers and had a discount or penalty depending on the currency used.
This begs the question: why use the US Dollar?
Because Nixon and Kissinger made a deal with the Saudis to conduct all their oil transactions in dollars in exchange for military protection.
The dollar was probably the most desirable currency for international transactions before that though. The USA was the largest economy by far, and USD was convertible to gold at a fixed rate.
Other than the GBP and the Yen, it’s one of the most financialized currencies that is often used as “the intermediary” for conversions into other currencies and for international transactions. You’ll always have someone who will be willing to take your USD off you in exchange for product or another currency.
There are probably other alternatives (like the Euro and GBP) that could be used by these nations, but I’d imagine the USD has the least restrictions and the widest reach compared to each.
(This is also why the Yuan can’t replace the dollar, China places a lot of measures to restrict outflow of their currency to prevent capital flight)
I’m curious why China isn’t tempted to get the Yuan to become the reserve currency of choice. Why would that cause capital flight?
It’s infamously hard to invest in non-state-controlled assets in China - that’s one of the reasons why their domestic real estate industry became used as a financial asset more than housing; it was somewhat independent from government control.
In contrast, the USD largely has no regulations on how much capital enters or leaves the country, and private assets in places such as the New York Stock Exchange aren’t going to be seized by federal authorities on a whim.
The mega wealthy of China already have to jump through many hoops to move their fortunes outside of the nation to places where they can properly invest without CCP oversight, so if one day their currency did become financialized similar to the USD and was allow to flow without restrictions, the outflow would be immense and likely very damaging to their domestic economy.
Everyone uses it for oil deals because it’s the hardest currency.
It’s the hardest currency because everyone uses it for oil deals.
(Countries that don’t, get regime changed by the US military)Countries that don’t, get regime changed by the US military)
e.g.
Iraq nets handsome profit by dumping dollar for euro
16. Feb. 2003 A bizarre political statement by Saddam Hussein has earned Iraq a windfall of hundreds of million of euros. In October 2000 Iraq …
https://www.theguardian.com/business/2003/feb/16/iraq.theeuro
The problem is the other side:
The seller has a huge interest to not deal with too much fiat exchange. There’s always fees and market risks associated.
The USD historically was very stable compared to the rest. That in combination with the huge purchasing and military power the US represented while being reliable as a trading partner pushed the US dollar into focus.
The USA then spent a lot of time, energy, money and lifes (mostly others) in ensuring this dominance.
Think of it like a language: a Spanish and a German work together in English - not because it’s impossible for them to learn each others language but because the overhead is too big.
Specifically to your example: no one wants to sell anything to Russia in rubles.
Imagine this scenario:
Hey, I’ll pay you 100 YC (your currency).
Oh since we agreed on the price a few days ago it’s only worth 80YC.
Oh now it’s 120 YC but no one else will take the currency I’m paying you in except me.
Oh now it’s worth 10 YC but we signed the contract, hurray!!
Because the USA didn’t meet the expectations to stabilize the international economy following the Bretton Woods agreement and hadn’t sufficient gold reserves to back the US dollar value.
Nixon and Kissinger came with a solution to back the US dollar value with oil from Arabic countries in exchange for military protection. Nixon Shock
BRICS is then a threat to the US economic dominance, Iran and Venezuela sold their oil in other currencies, no wonder Trump was after them under false pretense.
