A trader counts US dollar banknotes at a currency exchange office in Peshawar, Pakistan. | Photo credit: REUTERS
Jhe fact that the multipolar international system is rapidly developing is reinforced by the clear trends of the polycentric global geo-economy. There is significant trade within the countries of the South; currency exchange agreements; trade in national currencies bypassing the dollar; steps towards trading oil and gas in national currencies; the promotion of such agreements by regional organizations; the creation of special accounts for the internationalization of national currencies; and the establishment of financial communication systems. Is this multipolarity irreversible? Can the hegemony of the dollar be challenged?
Countries outside the West say they operate in a multipolar system and are developing alternative currency exchange mechanisms to reduce risk and their dependence on the dollar. The trade wars against China since 2018 have set China on this path. The Russo-Ukrainian war accelerated this development since Russia trades oil and raw materials in rubles and national currencies, following a pattern similar to the rupee-ruble trade of previous years.
The steady but uneven growth of “emerging economies” is the basis of economic diversification. For example, the combined GDP of China, India, Russia, South Africa, Indonesia, Brazil, Iran and Turkey exceeds that of the G7.
Inter-Asian consumption leads to high levels of trade between Asian countries. India’s trade with Asian countries is greater than with the West. China’s trade with Asian countries has more than doubled in recent years, beating its trade with the West. The United Arab Emirates, Iran, Turkey, Indonesia, Sri Lanka, Myanmar, Thailand, Malaysia and Indonesia trade in local currencies with regional partners. Bilateral currency exchange between ASEAN countries, China, Japan and South Korea is $380 billion and growing. Similarly, the South African rand is used by several African countries. Latin American countries are moving towards greater interregional trade.
With high dollar exchange rates, emerging economies initiated exchanges in national currencies bypassing the dollar. Asian central banks have over $400 billion in local currency swap lines and are trading with each other. Since 2019, India has been paying Russia for fuel, oil, minerals and specific defense imports in rupees on an informal basis. He has worked on local currency trading with the United Arab Emirates, Japan, Turkey, Korea and South Asian countries. In July 2022, the Reserve Bank of India (RBI) unveiled a rupee settlement system for international trade by allowing special vostro accounts in designated Indian banks, a step towards the internationalization of the rupee.
China developed the renminbi in 2015 and offers clearing and settlement services to participants in cross-border yuan payments and exchanges. The yuan is going international because the International Monetary Fund has granted it special drawing right status in the basket of currencies. Russian banks have started using the China-based cross-border interbank payment system for international payments, as they are excluded from the international SWIFT system.
The new BRICS Development Bank has encouraged trade and investment in national currencies by disbursing up to 50% of its loans in national currencies since 2015. Other regional groupings such as the Shanghai Cooperation Organization and the Eurasian Economic Union and Regional Comprehensive Economic Partnership partner countries are establishing processes for conducting trade, investment and settlement in national currencies. The process of creating a common payment infrastructure and connecting national financial information transmission systems is under way.
A serious challenge for the petrodollar comes from moves towards oil and gas trading outside the dollar zone. The move may reduce the dollar monopoly the United States has held since the 1970s. But while many oil producers, refiners and buyers such as Russia, India, China, Venezuela and Iran have started to trade hydrocarbons in national currencies, this process has not yet reached its full force. India’s vostro accounts allow payments in rupees for Russian crude and as former RBI Governor D. Subbarao has said, India can save up to $4 billion per month by currency outflows. China has been using the yuan-ruble route for Russian oil since 2020. China is in talks with Saudi Arabia and Gulf countries to swap oil for yuan.
What does that mean
What are these trends? First, despite speculation, there is no movement towards de-dollarization. The challenge for national currencies is that they are not fully convertible. Thus, despite the rise of alternative trading systems and multi-currency circulating systems, the dollar still dominates. Rocking the dollar boat further will expose those countries that have trillions of dollars as their reserve currency. Second, the dollar represents 60% of the world’s currency, the euro 20%, the yen 5.8% and the yuan 3%. Making an alternative system operational requires a longer and more sustainable effort. Third, the diversification of national currency in trade is increasing. Trading and buying food and oil in national currencies provides countries outside the collective West with options not previously available. In the contemporary international system, nation states in the Global South are determined to choose their own allies. In this environment, geopolitics and geoeconomics merge, and new supply chains and alternative currency chains enable dual/multiple circulation systems. It is the material basis of the multipolar system.
Anuradha Chenoy is Adjunct Professor, Jindal Global University, Haryana