De-dollarisation: Saudi Arabia’s Petrodollar exit and CBDC embrace
Saudi Arabia has allowed its fifty-year ‘Petrodollar’ deal with the United States to expire. The deal, which was originally signed on 8th June 1974 expired unceremoniously on Sunday 9th June 2024. It was broadly considered to be a lynchpin of US global economic pre-eminence.
The Petrodollar agreement, which was formalised following the 1973 oil crisis, established that Saudi Arabia would price and invoice its oil exports exclusively in US dollars while committing its trade surplus oil revenues towards the purchase of US debt in the form of treasuries. The latter known as ‘petrodollar recycling.’ As a quid pro quo, two joint commissions were established, the first based on economic cooperation and the second based on Saudi Arabia's military posture as well as its defensive needs.
Since the US dollar was established as the global ‘unit of account’ in 1944 and firmly entrenched in global finance since 1958, commodities such as oil, gold, and grain were already priced and invoiced in US dollars. However, with the demise of the Bretton Woods system following the Nixon Shock in August 1971, the world could no longer rely on the US dollar as a stable ‘store of value’ underpinned by gold. The ‘metallism’ era of the gold standard had ended with a new ‘chartalism’ era of fiat money and floating exchange rates in its wake.
Thus, the ‘petrodollar agreement’ acted as a guarantee that US dollars remain unchallenged as both principal reserve currency as well as global unit of account beyond the gold standard. At the time, officials had expressed optimism that the deal would incentivise Saudi Arabia to increase its oil production. Furthermore, it established a blueprint for fostering cooperation between the US and other oil producing countries. Additionally, the agreement has had the effect of keeping global demand for US dollars high which in turn has supported the dollar’s value, making imports cheap for US consumers. The influx of petrodollar recycled foreign capital has furthermore supported low interest rates and a robust US bond market. Above all else, the agreement has assured that energy could only be purchased with US dollars.
By deciding to let the ‘Petrodollar agreement’ lapse without renewal, Saudi Arabia is now free to price and invoice its oil exports in multiple currencies, inclusive of the Chinese RMB, the Euro and even cryptocurrencies such as Bitcoin or Ether. In all likelihood however, as a recently minted member of the BRICS consortium, Saudi Arabia like its BRICS partners, are likely seeking to settle a greater proportion of trade invoicing transactions in local currencies rather than in US dollars. This reflects a trend in global de-dollarisation activity, particularly among the BRICS countries and what has become known as the ‘Global South.’ Thus, the expiration of the ‘Petrodollar agreement’ represents a significant shift in the power dynamics of the global geopolitical landscape. It casts a spotlight on the growing influence of emerging market economies and the changing energy landscape for advanced economies.
Saudi Arabia’s CBDC Embrace
Saudi Arabia recently announced its involvement in Project mBridge, a project which has endeavoured to develop a multi-central bank digital currency (mCBDC) platform to be shared among participating central banks and several commercial banking institutions. The mCBDC platform is underpinned by distributed ledger technology (DLT) to enable near instant cross-border payments, settled in multiple currencies.
Project mBridge thus far has accumulated more than twenty-six observing members of which the South African Reserve Bank, (a BRICS member central bank) is the most recent to join. Other prevalent members include the Bank of Israel, Bank of Namibia, Bank of France, Central Bank of Bahrain, Central Bank of Egypt, Central Bank of Jordan, the European Central Bank, the International Monetary Fund, the Reserve Bank of Australia, and the World Bank.
The platform now boasts a project steering committee which has created a governance and legal framework which is closely tailored to accommodate the platform’s unique decentralised nature and its characteristics.
mBridge is the result of extensive negotiation and collaboration which commenced in 2021 between the BIS Innovation Hub, the Digital Currency Institute, the People’s Bank of China, The Hong Kong Monetary Authority, the Central Bank of the UAE, and the Bank of Thailand. A pilot with real-value transactions was conducted in 2022 and since then exploration as to whether a Minimum Viable Product (MVP) could be achieved has dominated the initiative. Private sector firms are expected to be invited to propose new solutions and experiment with the platform in order to showcase its potential in the not too distant future.
A major thesis of my book, Bad Money, is illustrating the link between FinTech innovation and hegemonic decline by way of enabling de-dollarisation. This topic is explored in far greater detail therein.
In conclusion, by ending exclusive demand for dollars in the global energy market, the currency could weaken substantially as a consequence of a decline in global demand for the dollar. This in turn by extension would be expected to permeate the bond market and the financial markets leading to high inflation, higher interest rates and tighter capital controls. Eventually, this may result in a geopolitical shift towards the ‘Global South’ or worse, a worldwide hegemonic conflict. For now however, the global financial order is entering a new era whereby the US dollar’s dominance is no longer assured.