Dedollarisation

Dedollarisation refers to countries reducing reliance on the U.S. dollar as a reserve currency, medium of exchange or as a unit of account.
The U.S. dollar began to displace the pound sterling as international reserve currency from the 1920s since it emerged from the First World War relatively unscathed and since the United States was a significant recipient of wartime gold inflows. After the U.S. emerged as an even stronger superpower during the Second World War, the Bretton Woods Agreement of 1944 established the post-war international monetary system, with the U.S. dollar ascending to become the world's primary reserve currency for international trade, and the only post-war currency linked to gold at $35 per troy ounce.
Since the establishment of the Bretton Woods system, the US dollar has been used as the medium for international trade. The United States Department of the Treasury exercises considerable oversight over the SWIFT financial transfers network, and consequently has a huge sway on the global financial transactions systems, with the ability to impose sanctions on foreign entities and individuals.
Devaluation of the dollar
Under the Bretton Woods system established after World War II, the value of gold was fixed to $35 per ounce, and the value of the U.S. dollar was thus anchored to the value of gold. Rising government spending in the 1960s, however, led to doubts about the ability of the United States to maintain this convertibility, gold stocks dwindled as banks and international investors began to convert dollars to gold, and as a result, the value of the dollar began to decline. Facing an emerging currency crisis and the imminent danger that the United States would no longer be able to redeem dollars for gold, gold convertibility was finally terminated in 1971 by President Nixon, resulting in the "Nixon shock".
The value of the U.S. dollar was therefore no longer anchored to gold, and it fell upon the Federal Reserve to maintain the value of the U.S. currency. The Federal Reserve, however, continued to increase the money supply, resulting in stagflation and a rapidly declining value of the U.S. dollar in the 1970s. This was largely due to the prevailing economic view at the time that inflation and real economic growth were linked (the Phillips curve), so inflation was regarded as relatively benign. Between 1965 and 1981, the U.S. dollar lost two thirds of its value.
Sectoral developments
Trading oil or other commodities
Argentina
Starting from early 2023, Argentina plans to join Brazil in paying for Chinese imports using the yuan instead of U.S. dollars. The country's goal is to safeguard its diminishing reserves of U.S. dollars. Argentina has been facing a significant decline in agricultural exports due to a severe drought, resulting in reduced inflow of dollars. In April 2023, Argentina intends to purchase approximately US$1 billion worth of Chinese imports using the yuan. Following that, the country aims to pay around $790 million worth of monthly imports in the Chinese yuan.
After China and Argentina declared in April that their swap line had been opened, Argentina was able to utilise the equivalent of 1.04 billion yuan to pay for Chinese imports in May. The line was then increased to $18 billion over the following three years in June, during Massa's visit to China.
Brazil
In late March 2023, China and Brazil finalized an agreement to conduct trade using their respective currencies.
Bolivia
In April 2023, Bolivian President Luis Arce revealed that the government is actively considering the adoption of China's yuan as an alternative to the U.S. dollar for conducting international trade. The decision stems from Bolivia's ongoing challenge of insufficient liquidity in domestic markets, with shortages of U.S. dollars escalating since early 2023, due to the declining net international reserves.
China
Since 2011, China is gradually shifting from trade in US dollar and in favour of Chinese yuan, and in March 2018, China started buying oil in gold-backed yuan.
In March 2022, multiple reports claimed that Saudi Arabia was in talks with China about trading Saudi oil and gas to China in Chinese yuan instead of dollars.
In December 2022 at China - GCC Summit, President Xi Jinping called for Oil trade payments to be settled at yuan. Foreign Minister Wang Yi stated that Chinese-Arab relations experienced a "historic improvement."
Europe
Immediately at the start of the War in Ukraine, mostly Western countries imposed heavy sanctions on Russian commodities and banking sector. As a response, on 31 March 2022 Russian president Vladimir Putin signed a decree mandating unfriendly countries from April 1 to pay the natural gas imports in rubles. European leaders have initially rejected paying for deliveries in rubles, marking that such a move would undermine sanctions already imposed on Moscow. In April 2022, four European gas companies made trade payment settlements in rubles. Gas imports from Russia to Europe maintained a stable level for some months but experienced a significant decline following the destruction of Nord Stream pipelines. In 2023, the imports have plummeted by 20% compared to the preceding year.
Ghana
On 24 November 2022, Vice President Mahamudu Bawumia stated that they are working to buy Oil in Gold and he added "The barter of gold for oil represents a major structural change."
Iran
As a result of US sanctions, Iran has tried hard to reduce its reliance on the dollar. The country has been seeking alternative ways or methods in order to conduct international trade utilizing diverse currencies such as the Euro. Islamic Republic of Iran is also striving to apply blockchain technology and digital currencies in order to bypass the international financial system and likewise to reduce the effect of sanctions.
Malaysia
Due to the fluctuations in the dollar in recent years, there are countries like Malaysia that are seeking an appropriate alternative to the dollar in global trade transactions in order to strengthen their economy. On the other hand, according to Malaysia, the de-dollarization and lower demand of the country in order to apply the dollar in commercial transactions will be able to provide the ground for the stabilization of the ringgit (its local currency). The president of this country mentioned that with the economic power given to Asian countries among China/Japan, there isn’t any reason for Malaysia to remain dependent on the dollar, and on the other hand, the central banks of these two countries (i.e. China and Malaysia) have begun their discussions in regard to the implementation of trade in each other's currencies.
Russia
In August 2022, Turkey and Russia agreed to use rubles in trade of the natural gas.
In September 2022, Gazprom CEO Alexey Miller said that they have signed an agreement to make trade payments in rubles and yuan instead of US dollars.
In November 2022, Russian Deputy Prime Minister Alexander Novak confirmed that all gas supplied to China via Siberia are settled in rubles and yuan.
On March 23, 2022, Putin signed an order forbidding "non-friendly" countries (including EU countries, United States and Japan) from buying Russian gas in any other currency besides the Russian ruble in the wake of sanctions given in aftermath of 2022 Russian invasion of Ukraine. As of 2022, Russia is the world's biggest gas exporter, making 17% of world gas export.
Saudi Arabia
In January 2023, Finance Minister of Saudi Arabia Mohammed Al-Jadaan stated that it is open to trade in other currencies besides the US dollar, and this expression is considered to be the first time in 48 years.
Venezuela
In August 2018, Venezuela declared that it would price its oil in euros, yuan, rubles, and other currencies.
Forex reserves
According to the IMF's Currency Composition of Official Foreign Exchange Reserves (COFER) survey the share of reserves held in U.S. dollars by central banks fell from 71 percent in 1999 to 59 percent in 2021.
China
Effective from 6 June 2023, China has said to its state-owned banks to substantially reduce the interest rates on dollar deposits.
Egypt
In May 2022, Egyptian Minister of Finance Mohamed Maait announced the intention to issue bonds in yuan to raise capital as an mechanism to diversify the sources of finance.
Myanmar
In September 2022, Chairman of State Administration Council Min Aung Hlaing stated that they are planning to reduce US dollar reliance and to include trade in other foreign currencies. Apart from this there had been discussion to use Mir Payments system for payments.
Kazakhstan
In December 2015, the Kazakhstan government and national bank announced plans to reduce dollar dependency and strengthen the national currency. The joint statement of Kazakhstan government and national bank stated that their intent is to strengthen their national currency rather than focus on eliminating US dollars. In August 2016, after inflation surged to a 6-year high, the Kazakhstan central bank governor stated that it is a necessity to kickstart dedollarisation.
Russia
In June 2021, Russia stated it will eliminate the dollar from its National Wealth Fund to reduce vulnerability to Western sanctions just two weeks before Russia's president Vladimir Putin held his first summit meeting with U.S. leader Joe Biden.
Russia had been planning to buy more yuan in the foreign exchange market in 2023 for trade settlements. The Russian Finance Ministry and Central Bank of Russia stated that it would sell around 54.5 billion rubles in foreign currency from January 2023.
(iii) Bilateral trade agreements
India-Russia
Before 1991, Soviet Union and India traded in rupee-ruble exchange during Cold War. Mutual trading between India and Russia is done mostly in rubles and rupees instead of dollars and euros.
Australia/Russia/Japan/Brazil/Iran
It made agreements with Australia, Russia, Japan, Brazil, and Iran to trade in national currencies. It has been reported that in the first quarter of 2020 the share of the dollar in the bilateral trade between China and Russia fell below 50 percent for the first time. In 2011, Japan made an agreement with China to trade in national currencies. Sino-Japanese trade had a value of US$300 billion.
Brazil-China
In March 2013, during the BRICS summit, Brazil made an agreement with China to trade in Brazilian real and Chinese yuan.
Australia-China
In 2013, Australia made an agreement with China to trade in national currencies.
INSTEX
In 2015, China launched CIPS, a payment system which offers clearing and settlement services for its participants in cross-border Renminbi payments and trade as an alternative to SWIFT. Since the end of 2019, the EU countries established INSTEX, a European special-purpose vehicle (SPV) to facilitate non-USD and non-SWIFT transactions with Iran to avoid breaking U.S. sanctions. On 11 February 2019, Russian deputy foreign minister Sergei Ryabkov stated that Russia would be interested in participating in INSTEX.
Iran-EU
In March 2020, the first Iran-EU INSTEX transaction was concluded. It covered an import of medical equipment to combat the COVID-19 outbreak in Iran. European countries said in March 2023 they had decided to end a scheme put in place in 2019 to allow trade with Iran and protect companies doing business with it from US sanctions, but it was only a single one transaction traded.
Others
In March 2022, India and Russia entered for a RupeeRuble Trade Arrangement. In July 2022, Russia and Iran made modifications in their Bilateral trade to reduce the dependency of US dollar. The new monetary system could mean the debts can be settled in their own countries and could reduce the demand for US dollars by 3 billion a year. In December 2022, Sri Lanka and Mauritius started using the rupee for international trade. Tajikistan, Cuba, Luxembourg and Sudan have also shown interest to use this mechanism.
In January 2023, Russia and Iran were planning to trade with gold backed cryptocurrencies as an alternative to US dollar. Also, the same month, Argentina and Brazil proposed a common currency for trade which is termed as Sur. Sur combines the currency of Argentina's peso and Brazil's real. The same month, Brazil and China entered into a preliminary agreement to trade in national currencies instead of US dollar.
In May 2023, South Korea and Indonesia signed a memorandum of understanding to promote bilateral trade in national currencies, moving away from the US dollar as an intermediary.
In early May 2023, the central banks of South Korea and Indonesia entered into a Memorandum of Understanding (MoU) aimed at fostering collaboration in advancing the utilization of their respective currencies for bilateral transactions. This includes promoting the use of their currencies for activities like current account transactions and direct investment between the two countries.
(iv) Dollar-denominated assets
As academic Tim Beal summarizes, many commentators view the United States' overly broad imposition of financial sanctions as a factor increasing dedollarisation because of responses like the Russian-developed System for Transfers of Financial Messages (SPFS), the China-supported Cross-Border Interbank Payment System (CIPS), and the European Instrument in Support of Trade Exchanges (INSTEX) that followed the United States' withdrawal of from the Joint Comprehensive Plan of Action (JCPOA) with Iran.
Russia
Russian Federation accelerated the process of dedollarisation in 2014 as a result of worsening relations with the West. In 2017, SPFS, a Russian replacement of the SWIFT financial transfer system, was developed by the Central Bank of Russia. The system had been in development since 2014, after the United States government threatened to disconnect Russia from the SWIFT system. Lukoil, a state-owned company, had announced that it will find a replacement for the dollar.
On March 17, 2022, Anatoly Aksakov, Chairman of the State Duma Committee on the Financial Market, announced that the Central Bank of Russia and the People's Bank of China are working on connecting the Russian and Chinese financial messaging systems. He also pointed to the beginning of the development of information transfer schemes using blockchains, including the digital ruble and the digital yuan. On March 31, 2022, the Economic Times published information that India has offered Russia a new transaction system with the transfer of trade to the ruble and SPFS, which will work through the Reserve Bank of India and Russia's Vnesheconombank. According to the same data, the system will be put into operation within a week.
On March 30, 2023, Deputy Chairman of the State Duma Alexander Babakov on the sidelines of the Russian Indian Business Forum in New Delhi stated that the BRICS countries can create a new currency that will be backed not by gold but by real resources, including land and rare earth metals.
Zimbabwe
After a year of the RTGS Dollar having been the only legal tender, Zimbabwe adopted dollarization due to hyperinflation. In June 2019, it also reduced the usage of a multicurrency system and preferred to switch to the US dollar. In an interview with former Finance Minister Tendai Biti, he pointed out that dedollarisation has failed dismally.
In 2022, Zimbabwe introduced a new form of currency made by gold, the Mosi-oa-Tunya, to reduce inflation since the local currency had considerably weakened. The governor of the Reserve Bank John Mangudya said that the gold coins will contain one troy ounce of 22-carat gold, and that trade could be carried out both locally and internationally.
Reaction
Evidence from economics researcher Jonathan Hartley published in June 2023 shows that the US dollar share of central bank reserves, global debt securities, and foreign exchange trading are unchanged since the 2022 Russian invasion of Ukraine and sanctions of Russian reserve assets. In the case of central bank reserves, the US dollar share of central bank reserves is 10% higher as of July 2023 than it was in the early 1990s.
On May 24, 2023, IMF Managing director Kristalina Georgieva stated that " We don't expect a rapid shift in reserves because the reason the dollar is a reserve currency is because of the strength of the US economy and the depth of its capital markets."
On June 6, 2023, JP Morgan stated that "De-dollarization is evident in FX reserves where USD share has declined to a record as share in exports declined, but it is still emerging in commodities."
On July 11, 2023, S&P Chief Economist Paul Gruenwald stated that "The U.S. (dollar) will continue to be a leading world currency, (but) it will no longer be the dominant world currency."
See also
World currency
Currency substitution
References
International trade
Bilateral trading relationships