Why are there more and more countries in the world that use an alternative instead of the American currency when making mutual payments for oil?
This month, a deal between Saudi Arabia and the United States expired, under which Washington provides military security for the Middle Eastern kingdom and it agrees to sell its oil only for dollars.
On June 9, 2024, 50 years after the conclusion of such an agreement (oral, since no one saw the document itself), Riyadh decided, as Western media write, that it no longer needed it.
Saudi Arabia can now freely sell oil for yuan, euros, rubles, and yen. There are even prerequisites for trading using cryptocurrencies. The leadership of the kingdom recently announced that it wants to take part in the mBridge project, where the possibility of a digital currency (CBDC) is being studied in partnership with several Central Banks (Israel, France, Egypt, the ECB, the IMF). Obviously, Riyadh is doing this to explore options for oil trading through such a platform.
Why did Saudi Arabia decide not to renew the conditional “gentlemen’s agreement” with the United States? What will this do for Riyadh as an oil exporter? Who else is doing the same thing now and what are the consequences?
Does America not need Arab oil?
It should be noted right away that Saudi Arabia, in fact, has long been moving towards distancing itself from the dollar in black gold export operations. There are several reasons for this.
First, the United States and its weapons no longer provide the country’s security as promised in 1974. This is evidenced by the success of numerous Houthi missile attacks from Yemen against oil and gas facilities in Saudi Arabia in recent years.
Secondly, the principle “Riyadh provides a stable flow of oil to the United States, and in exchange receives financial stability” has long been violated. Washington is not the same buyer for the Middle Eastern kingdom that it used to be. Especially after the shale revolution that began after the 2010s, when oil production in the United States began to grow strongly and purchases of black gold from Saudi Arabia gradually decreased.
For comparison: in 2023, the Middle Eastern kingdom supplied an average of 1.6-1.8 million bpd to China, and to the United States, according to the Ministry of Energy of this country (data for March 2024) – 351 thousand bpd With. Simply put, for Riyadh, Beijing is much more important as a buyer of oil than Washington, to which the kingdom is selling less and less black gold.
By the way, this also applies to some other Middle Eastern countries exporting oil to the United States. For example, Iraq exported about 600 thousand bpd to the United States in 2017. And in 2024, the US Department of Energy considers a significant increase in supplies, when Iraq sends 363 thousand b/d to America. Yes, from the early 2000s to 2017 there were jumps and sometimes the mark reached 230 thousand bps, but this was rare. However, since 2019, supplies have fallen more than they have increased. The United States is simply ceasing to be the most important buyer of oil for Middle Eastern countries (not just Saudi Arabia and Iraq). The emphasis in this regard is strongly shifting towards Asia. China, India, South Korea are buyers whose loss is truly critical for Saudi Arabia and other Middle Eastern states.
“When sanctions were introduced against Russia in 2022, they were de facto aimed at companies of the collective West, which stopped participating in transactions with Russian oil cargo, as a result of which European and American importers lost significant financial turnover.
At the same time, over the past two years there has been an increase in the volume of transactions in the currencies of friendly and neutral countries for the Russian Federation in transactions for the purchase and sale of energy resources. The use of alternative payment systems will lead to an increase in the importance and development of our own national currencies.
Of particular importance for the BRICS countries will be the creation of their own currency, the use of which could lead to radical changes in the global financial system and ensure the reliability of cross-border payments not only of the alliance countries, but also of their trading partners,”
— Tamara Safonova, general director of NAANS-MEDIA LLC, said in an interview with NikK .
Speaking of the growth trend of national currencies in oil trading. In the summer of 2023, analysts from JPMorgan calculated that about 20% of the world’s oil is now sold at reduced prices due to sanctions, and most of this black gold is traded without the dollar. Considering that the US restrictions are not being lifted, and in the case of the Russian Federation, they are also preparing to steal funds from the Central Bank of another country, there are more and more prerequisites for dedollarization in oil trade.
What currencies are trending?
Separate transactions without dollars for the export of black gold from Russia began to be carried out much earlier than 2022. However, after the wave of sanctions that followed the start of the SVO in Ukraine, the process accelerated noticeably.
At the beginning of June this year, on the sidelines of SPIEF, Deputy Prime Minister of the Russian Federation Alexander Novak said that today about 70% of energy resources are provided with payment in national currencies of both Russian and Russian partners. Almost immediately after this, in an interview, the head of the Brazilian Ministry of Finance said that payments between his country and Russia in national currencies have not yet been implemented, but such a possibility is now being studied. Considering the increase in diesel fuel supplies from the Russian Federation to the Latin American country, this can also be considered as distancing from the dollar in energy trade.
By the way, back in March 2023, Brazil agreed with China on trade in the national currencies of these countries without the dollar. Let us remember that Brazil is one of the largest suppliers of oil to China. For the first half of 2023, the average values were 729,125 bps. Of course, there have been “drawdowns” in recent years, when in 2022 volumes fell to almost 500 thousand b/d. But in general, for Brazil itself the Chinese market is extremely important. The fact that it is ready to trade oil with China without a dollar suggests that it does not want the United States to interfere in its transactions with China. It is likely that for many exporters this is the reason for the transition from the petrodollar to the use of their national currencies.
Even India and the UAE, which now have no reason to fear sanctions from Washington, already tested a deal in rupees in the summer of 2023 (India’s purchase of about 1 million barrels).
If you want to trade , you will give up the dollar
The media often reminds that the UAE dirham, which Russia now sometimes uses for transactions in the black gold trade, is pegged to the dollar. The Saudi rial has also been pegged to the US currency since 1986. This also applies to many other countries that are already “moving” the petrodollar in the direction today.
But as Natalya Milchakova , a leading analyst at Freedom Finance Global, noted in a commentary for NiK , there is no evidence of a direct peg to the dollar. If this were so, then the Saudi rial, as well as other currencies, would exactly follow the movements of the dollar against world reserve currencies.
“The yuan exchange rate is market, although in the 90s of the last century the offshore yuan was pegged to the dollar. The Saudi rial, the UAE dirham, the ruble, the tenge, even the Canadian dollar are all “oil” currencies, but their exchange rate is not tied to the dollar. The Brazilian real exchange rate is generally very volatile and market-based; it has no link to the dollar or any other currency. The Indian rupee also has a market rate, although it is believed that it (like the South African rand) follows the rate of the British pound sterling, but, again, there is no evidence of this.
Apparently, Riyadh is rigidly fixing the rial exchange rate through currency interventions in order to protect the national currency and the country’s population from sharp fluctuations. Some countries of the post-Soviet space, for example, Azerbaijan and Turkmenistan, do the same,”
– said the expert.
According to Natalya Milchakova, storing gold and foreign exchange reserves in dollars is now risky due to potential US sanctions.
“The dollar is becoming toxic due to the large US national debt, which has exceeded $34 trillion. If we assume that the US ever defaults on its national debt, the dollar will collapse. Therefore, trading raw materials in this currency is becoming less profitable and more risky,”
— the expert shared her opinion.
Oil exporters want not so much to increase the influence of their currencies on the world market as to exclude from their transactions the influence of US financial regulators, which (if Washington suddenly wants to impose new sanctions) could interfere with trade.
“Economic reasons did not appear yesterday. For example, in January 2023, the Saudis said that the country was open to trading in different currencies; in August it was announced that the country would join BRICS; in November, a currency swap agreement was signed between Riyadh and China to expand the use of local currencies. Refusal to renegotiate the agreement with the United States does not at all oblige Saudi Arabia to stop trading oil in dollars. However, it has more room for further maneuvers,”
— Nikolay Dudchenko, an analyst at Finam Financial Group, told NiK.
All this does not mean that the dollar will begin to have serious problems. At the end of 2023, its share in international payments accounted for in the SWIFT system increased from 40% to 47.5%. At the same time, the share of oil in world trade is not so large. Even in 2022, with unusually high oil prices, its share in world trade accounted for almost 6%. In other words, even if Saudi Arabia (even together with the Russian Federation, Brazil and a number of other exporters) refuses the dollar when selling oil, the American currency will not disappear tomorrow.
This whole story is not about another apocalyptic “the dollar will die tomorrow.” This is about the desire of oil exporters to play it safe and about dividing the world into certain currency zones (in this case, with oil trading) due to fear of sanctions and sabotage of payment systems by the United States.
Source: oilcapital.ru
