Shaking a misplaced, unchallenged American belief: Who is driving de-dollarisation, and how

The expected decision of the Sri Lankan government for Indian tourists to pay in Indian rupee while in the country may only be a first step in a long journey, and not just for the currencies of the two countries. After India’s decision to pay for Russian oil in INR, followed by bilateral currency arrangements with a host of countries, and a simultaneous but independent attempt by China to popularise yuan as an international currency, America’s dollar may be on the decline. However, the world needs to watch for the political fallout of third nations’ attempt to de-dollarise global transactions as much as they keep looking at trade figures and the like. The devil is in the details. India’s efforts to trade in local currencies may have only a limited role as the rupee is a valid currency in Nepal and Bhutan, and Bangladesh and Maldives from among the South Asian neighbours too may follow the Sri Lankan example – especially in the light of the dollar-crisis that they too have been facing dollar-crisis since especially the Covid era. In fact, the India-Sri Lanka arrangement for trading in INR has more to do with the economic crisis in the island-nation and the consequent shortage of dollars. But the timing became perfectly correct. Likewise, it is another matter that Bangladesh has chosen to pay for Russian oil in yen, not Indian rupee. The reason need not be political. It may owe to Bangladesh’s balance-of-trade positions with India and China. But all this is a small pie or is a smaller fry in the larger context of what is happening to the dollar. One, there is India’s trade with the rest of the world, and other South Asian nations’ trade with the rest of the world. But there is trade between nations outside the region. They trade with the US, China and among themselves. Most of them now pay in dollars, to a lesser extent in euro and yuan. Sanctions sanctioned? Of course the Ukraine War and the uncanny Russian decision to sell oil outside of dollar-payment and at a cheaper price has put paid to the long-time dominance of the dollar as the world’s reserve currency. At the centre of it was/is misplaced and unchallenged American belief that the world or target nations had no choice but to comply and/or suffer when Washington imposed trade sanctions on them. Russia bet them on it, and of course, Moscow’s trading partners like India and China also ‘colluded’, if that phrase would satisfy Putin-haters in Washington. Of equal importance to the de-dollarisation process that the Russian oil trade set in was the ‘collusion’ the Saudi-centric OPEC, which refused to increase production for the US-led West to spite Russia. It was equally unprecedented. Yet, the US did not see the writing on the wall. Lately, US Treasury Secretary Janet Yellen has finally conceded 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.” According to experts, even without the Russia’s oil strategy, the dollar’s share of global reserves has decreased from about two-thirds in 2003 to 55 per cent in 2021 and 47 per cent in 2022. The dollar’s share of global reserves has declined by 11 per cent since 2016 on adjusted basis. Studies have shown that the dollar is losing its market-share as a reserve currency at a much faster rate than is commonly believed.” Though the comparison may sound brash and harsh, the question is if Russia’s strategy was the beginning of the end for the dollar-standard, or was the last nail on the coffin. It will take years, if at all, for historians to unravel if the Russian oil strategy had been built into their military strategy for ‘invading’ Ukraine, and if so, Moscow had anticipated the trigger-effort it would generate. Either way, the Russian economic counter to the US-led western sanctions is hitting the US where it hurts them the most, or without Washington realising it, and acknowledging it even more, for nearly a year. During the period, slowly but surely, the world is getting readjusted to a possible scenario, not without dollar, but without dollar as the international reserve currency – an European thanks-giving for rushing to their rescue in the two World Wars, through the instrumentality of the Bretton Woods arrangement. Alarm bells Today, along with the Indian rupee and more so Chinese yuan, the forgotten European currency, euro, is also back in the news. Europe lost the currency war to the dollar after launching one for the post-Cold War world, but there is now fresh hope for it in the global market-place. Of course, EU member-nations will have to decide if they have to now compete with the US and the dollar. Or, should they downplay their currency when faced with the Ukraine War, which charge the US is leading, but from behind, like them all. The immediate crisis facing the US dollar is not the making of Russia or Ukraine War, INR, yuan or euro. It is the handiwork of the US State. It has got accustomed to living beyond its means. If the US-controlled IMF and World Bank were to discipline some nations through conditionalities of the Sri Lankan and Pakistani kind, it should begin with America. If Washington has escaped IMF’s ‘wrath’ (?), it is only because the US has not knocked at IMF’s door. Now, Treasury Secretary Yellen has pressed the alarm. That the nation would be crossing the borrowing limit by June – that is the immediate next month – and Congress needs to authorise more borrowing that all-American profligacy cannot do without. The total debt is put at $31.38 trillion and is subject to the statutory debt limit, leaving just $25 million in unused borrowing capacity. For several years, the nation’s debt has been larger than its gross domestic product, which was $26.13 trillion in the fourth quarter of 2022. To address the crisis, President Joe Biden has called a high-level meeting on 9 May. The question remains if they are going to focus only on seeking congressional approval for increasing the debt-limit, or are also going to look inwards to cut down on ‘wasteful expenditure’. If the latter is the case, everything in American State spending could be considered wasteful by one or other section of government economists. It will be based not on socio-political pragmatism but on their economic ideology. Thus, may argue that spending billions and trillions on arming Ukraine (or any other nation) for fighting a proxy war where American interests are not directly or even indirectly hit. Of course, the discourse could then include if the US should spend to defend its pride, and if the nation could afford to have the kind of false pride that it is unable to defend without spending good money after bad – or bad money after good. The other side may then ask for scrapping all welfare measures, including ‘Obama Care’. If these voices reach a higher decibel, then it could hit the streets. That is when civil society protestors would then organise targeted groups that stood to lose, to organise rallies, all across the country. Washington and the Capitol may not be spared. No President or political party can afford a confrontation of a kind in an election year. Hence the chances are that they all will agree to increase the State’s debt-limit by a few more trillion dollars. But then, that would not address the current crisis for the dollar as the global reserve. For, even at the nominal 1.5-per cent commission in transactions across the world, American banks would stand to lose trillions of dollars, which too they were earning without burning – like the dollars that the Federal Reserve could print, which other nations would have to earn, after all. The writer is a Chennai-based policy analyst and political commentator. 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