Saudi Arabia's recent decision to join the BRICS bloc has raised concerns about the global dominance of the U.S. dollar in trade, as stated by ING. While this challenge may only become significant in the long term, it is still a crucial development to consider.
The BRICS group, comprising Brazil, Russia, India, China, and South Africa, has announced the expansion of its emerging market alliance. Starting next year, Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates will join this influential coalition.
This expansion aims to establish a counterweight to the G7 group, which primarily focuses on advanced Western economies. Russian President Vladimir Putin, in particular, hopes to leverage the collective power of BRICS to undermine the perceived dominance of the U.S. dollar in global finance.
With Saudi Arabia, the world's second-largest oil producer after the U.S., joining forces with fellow energy exporters Iran and the UAE, discussions surrounding the use of non-dollar currencies in trade are expected to intensify. Experts at Dutch bank ING, led by Chris Turner, Global Head of Markets, anticipate an increased focus on this issue.
According to ING's analysis, the inclusion of Middle Eastern states would result in the expanded bloc accounting for nearly 42% of global crude oil output. Saudi Arabia, being the largest exporter among them, assumes particular significance.
Considering the BRICS bloc's aspirations to de-dollarize, there is heightened speculation that this recent development could lead Saudi Arabia to shift towards non-dollar-denominated currencies for oil trade. ING emphasizes the potential implications of such a move.
In conclusion, Saudi Arabia's entry into BRICS marks a noteworthy milestone that may challenge the prominent role of the U.S. dollar in international trade. While this shift is projected to take time to materialize fully, it undoubtedly warrants careful observation and analysis.
The Future of Currency: Saudi Arabia, the Yuan, and the Rupee
According to ING, there has been increasing speculation about Saudi Arabia accepting the yuan from China and the rupee from India. While this move may make sense to some, the process of de-dollarization is expected to be lengthy.
One reason for this is that the Saudi riyal is currently pegged to the U.S. dollar. This makes Riyadh hesitant to move away from the greenback for trade purposes. Additionally, while energy comprises a significant portion of global trade, it only makes up 15% of it. Therefore, even if Saudi Arabia were to price their oil exports to China and India in non-dollar currencies, it would not necessarily result in the end of the dollar's reign as the international currency of choice.
Another factor to consider is the "liability role of an international currency," as described by ING. For a significant shift to occur, international issuers and investors would need to be willing to issue and hold international debt in non-dollar currencies. However, the adoption of non-dollar bonds, such as the CNY Panda bonds, has been slow. This suggests that a move towards a multi-polar world, where the dollar, euro, and renminbi dominate the Americas, Europe, and Asia respectively, will likely take a decade or longer.
In conclusion, while the idea of Saudi Arabia accepting the yuan and rupee may be intriguing, the process of de-dollarization is not expected to happen quickly. The shift towards a more diverse currency landscape will require significant time and progress in various areas of international finance.
