De-dollarization is not an abstract, insignificant concept. It is most pervasive in commodity markets, particularly energy, where a growing number of transactions are being priced in non-dollar denominated contracts. This is an offshoot of Western sanctions on Russian energy due to the Ukrainian conflict. To cope, Russia diverted energy exports eastward and southward and sold them either in the local currencies of buyers, or in countries Russia perceives as friendly. These include China, India and Turkey. Even Saudi Arabia has been considering adding yuan-denominated futures contracts, albeit at a slower pace.
The trend has also been gaining ground in cross-border yuan settlements beyond oil. Some Indian businesses have been paying for Russian coal imports in yuan, even without Chinese intermediaries. Bangladesh too recently decided to pay Russia for its 1.4 GW nuclear power plant in yuan.
Conversely, deposit dollarization is still widespread in emerging market countries, particularly in Latin America, with an aggregate dollarization rate of 19.1%. In contrast, Asia has the lowest at 9.7%. As for China, its dollarization rate has been persistently falling since 2017, when U.S. – China relations markedly began to be increasingly characterized by the trade war and growing geopolitical tensions.
The trend is poisonous to the U.S. economy, which relies on the petrodollar to attract liquidity for government securities and Wall Street. A steep, irreversible decline in the use of the dollar would magnify the weight of the perennial fiscal and trade deficits, the accumulated debt, and the probability of hyperinflation. The danger here, never before seen, is that China’s unrivaled status as factory of the world is increasingly acceptable simply because its currency can be redeemed for all sorts of consumer goods. In addition, other countries hope to export to its vast consumer market.
Viewed in that context, it’s easy to see why the U.S., for all practical purposes, acquired complete control of Venezuela’s oil deposits, and reserved the right of first refusal of Canada’s tar sands. Africa and the rest of Latin America are not a problem.
Iran is. Not only because of the size of its indigenous oil reserves, but because, as we have seen, it is determined to reject American dominance in the extreme. As it now stands, it can threaten American bases in the Persian Gulf, close the Strait of Hormuz, and, if needed and approved by its theocratic rulers, swallow the poison pill and actually destroy all oil and gas infrastructure and water desalination plants in the Middle East, including Israel. Needless to say, a blow of that magnitude to the economy and the very viability of the countries in the region, and indeed the world, simply cannot be underestimated.
Iran is also ground zero of the underlying rivalry between the U.S. and China, and, as fierce supporter of the Palestinian cause, a dangerous threat to Israel’s policy regarding Judea and Samaria, otherwise known as the occupied Palestinian Territories. If Iran succeeds in evicting the U.S., it may accelerate the demise of the dollar as reserve currency of the world, with ominous potential ramifications for both the U.S. and Israel. If the U.S. prevails, it will give it the ability to dictate the price of oil, indefinitely preserve the petrodollar, and determine who gets how much oil and who does not. In other words, it would put China in the same situation Japan found itself in in 1941, when the U.S. embargoed its oil supply. The de facto conquest of Iran would also inherently bury the Palestinians’ hope of statehood.
As things now stand, they’re on a collision course, and no one seems to have concocted a compromise to prevent a terminal war. This need not be. Despite their best efforts to decouple, China and the U.S. are each other’s best customers and stand to gain more than they may realize, if only they come up with a neutral plan to support each other’s needs.
For example, they could negotiate and agree on a timetable to transition from fossil fuels to green hydrogen, and to make it, on a per capita basis, the universal determinant of the relative value of all currencies. For practical purposes, that would redistribute future wealth more equitably among and within all nations and perhaps even usher in long-term peace.
Incidentally, to say the least, it would be good for the environment.