Saudi Arabia’s De-Dollarization Explained
The comments below are an edited and abridged synopsis of an article by SCHIFFGOLD
The longstanding US-Saudi petrodollar agreement is unraveling, with Riyadh inching towards diversified currency deals including the yuan. This article sheds light on the history and present challenge to the petrodollar, and what this means for the US dollar’s decline.
Reports are circulating about the US-Saudi petrodollar agreement “expiring,” suggesting that Saudi Arabia would now sell oil for various currencies, potentially even replacing the dollar with the Chinese yuan. These reports, initially originating from sources in India and crypto-focused publications, caused enough stir that economist Paul Donovan at UBS clarified that no major changes in Saudi-US currency relations had occurred.
It is important to note that while these reports contained inaccuracies, they reflect an ongoing trend. The Saudi move towards non-dollar currencies is not new, nor is there a formal treaty or contract between the US and Saudi Arabia with an expiration date. However, Saudi Arabia’s increased willingness to engage in non-dollar oil trades and its growing diplomatic ties with nations like China, Iran, and Russia indicate a shift away from US influence. This trend signals a potential decline in US global influence.
What Is a Petrodollar?
The petrodollar “deal,” established in 1974, is an informal arrangement where Saudi Arabia sells oil exclusively for US dollars and invests surplus dollars in US Treasuries. This arrangement bolstered the US dollar’s global standing, especially after the 1971 Nixon Shock. The deal ensures a steady market for US Treasuries amid growing federal deficit spending. For Saudi Arabia, the relationship provided implicit security guarantees from the US, ensuring military intervention if needed to maintain the Saudi state’s stability.
New Threats to the Petrodollar System
Geopolitical changes and evolving energy markets have prompted Saudi Arabia to publicly embrace non-dollar currencies. In January 2023, the Saudi finance minister stated the Kingdom’s openness to settling trade in various currencies, marking a shift from previous commitments to dollar transactions. Throughout 2023, Saudi policy further diversified, including a currency swap agreement with Beijing to expand the use of local currencies and increased trade with Russia.
Breaking Free of the US Axis
Individually, these developments may seem minor, but collectively they signify Saudi Arabia’s move away from US dominance. In March 2023, Saudi Arabia participated in a China-brokered deal to restore diplomatic ties with Iran, challenging Washington’s strategy of isolating Iran. By September 2023, the Stimson Center reported that Saudi moves away from the dollar were part of a broader diplomatic strategy to increase flexibility in dealing with global powers like China and Russia.
From Riyadh’s perspective, US actions have contributed to this shift. Criticism over human rights issues and the handling of the Jamal Khashoggi murder, as well as lingering questions about the Saudi regime’s links to the 9/11 attacks, have strained relations. Despite ongoing US arms sales to Saudi Arabia, these tensions persist.
Recent developments reinforce this trend. For instance, Saudi Arabia declined an invitation to the G-7 summit, citing the Crown Prince’s need to oversee the Hajj pilgrimage, yet sent a high-level delegation to the BRICS summit, highlighting a growing alignment with this anti-US bloc.
Conclusion
While the cooling relationship between Riyadh and Washington may not immediately overhaul the dollar economy or US dominance in the Middle East, it indicates a relative decline in US control over global currency markets and the geopolitical order.