Dollar hegemony at risk

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By ISAÍAS ALBERTIN DE MORAES*

Saudi Arabia's decision not to renew the petrodollar pact with the US represents a historic milestone, with vast and complex implications

1.

Recently, on June 9, 2024, Saudi Crown Prince Mohammed bin Salman announced that Saudi Arabia will not renew the petrodollar agreement with the United States. The agreement, negotiated in July 1974, established a long-term strategic alliance between the two countries.

Developed by Henry Kissinger, then President Richard Nixon's Secretary of State, and William Simon, undersecretary, in partnership with the Saudi Royal House, headed by King Faisal bin Abdulaziz Al Saud and Crown Prince Fahd bin Abdul Aziz al-Saud, it established two groups of work: economic cooperation and military needs of Saudi Arabia.

On the economic issue, the US ensured that Saudi Arabia, as president of the Organization of Petroleum Exporting Countries (OPEC), determined that all member countries set the price of oil in dollars. This meant that all commercial transactions in the area of ​​oil, gas and other fuels were carried out exclusively in US currency.

In the military sphere, Saudi Arabia and its Sunni Royal House would receive protection from the USA. Saudi Arabia feared the military superiority of Shiite Iran, which threatened its territorial integrity and the security of members of the Saudi Royal House. It is a protection model, roughly speaking, similar to Washington's treaties with some Asian countries such as Japan and South Korea. The USA maintains important military bases in Saudi Arabia.

Well, since June 9th, this arrangement has been at risk due to several factors and with the possibility of causing decisive impacts on the international political economy. Without exaggeration, this change will significantly transform the global economic panorama, geopolitics and the international system, with repercussions in Latin America.

The 1974 agreement is one of the main reasons that made the dollar the dominant currency in the world even after the end of the Bretton Woods System in 1971. In short, the Bretton Woods System, established in 1944, linked currencies to the US dollar which, by In turn, it was backed by the gold deposited by the signatory nations, as collateral for the currency, in Fort Knox.

The system lasted until August 15, 1971, when the USA, unilaterally, ended the convertibility of the dollar into gold, which made the dollar a fiat currency. This decision, referred to as “Nixon Shock”, created a situation in which the US dollar became a reserve currency, used by many countries.

Since 1974, with the agreement with Saudi Arabia, it can be said that the backing for the new dollars issued by the USA is the demand generated by the obligation to denominate contracts for the purchase and sale of oil, gas and other fuels in dollars. . The gold metal was replaced by “black gold”, oil. 50 years ago one of the anchors of the international economic-financial system and US hegemony was born, the “Era of petrodollars”.

2.

Petrodollars create an interesting capital cycle in the international system. Oil-producing countries, members of OPEC, sell their product to the USA and the rest of the world in dollars, then recycle their income into investments and assets also denominated in dollars through American and European commercial banks. As all states need oil, they all need to have dollars as a reserve currency, so when investing or lending to emerging or central economies, petrodollars explicitly support the domination-dependence of dollars in relation to other currencies.

Private financial entities and the States themselves treat the dollar as a safe haven for long-term investments and savings. This allows, for example, the USA to expand its monetary base (print dollars) without suffering from inflationary pressure in its domestic market to the same extent as other economies.

In 2023, data from the US Treasury showed that the gold reserves at Fort Knox (valued at market prices) were estimated at 270 billion dollars while the total amount of US currency in circulation and deposited in the banking system (checking and savings accounts) totaled 21 trillion dollars. In other words, for every dollar that can be backed by gold, there are 77 dollars without any type of backing, that is, fiat.

What maintains the system of the petrodollar era is the 1974 US-Saudi Arabia agreement, which may soon be broken. The reasons why the Saudi crown prince does not renew the arrangement are diverse, but the following stand out: (i) increase in China's economic influence, (ii) expansion of the BRICS bloc (Brazil, Russia, India, China and South Africa) , (iii) reduction in oil production by OPEC+; (iv) Russia-Ukraine/Nato War; (v) diplomatic tensions between the US and Saudi Arabia (murder of Jamal Khashoggi).

The possible fall of the petrodollar system is palpable and the US knows it. The candidate for the White House in this year's elections and former US president, Donald Trump, stated, in April 2024, that his economic advisors are drafting a plan for possible sanctions against countries that move away from the dollar as a commercial currency and spare. The project foresees the imposition of fines, export controls, charges for currency manipulation and tariffs.

In the words of Donald Trump: “I would not allow countries to stop using the dollar because when we lose that standard, it will be like losing a revolutionary war. This will be a blow to our country.”

The makers of economic policy and international relations in the Party of Donald Trump, the Republican, are aware that the end of the Dollar Era in the international economic-financial system is a checkmate to US hegemony. If Saudi Arabia and other OPEC members actually start trading oil in different currencies, the US would be restricted in its options to maintain its military strength, with an arms race with Russia, and its economic commitment, in a trade war with the China.

3.

The solutions for the Americans are: (i) further expand their monetary base (print money), which would lead to intense inflation, fiscal crisis and economic collapse. (ii) Search for new references of wealth to back the dollar differently from gold. There is no room to accumulate gold again, as in recent years Russia, India and China have significantly increased their gold reserves, thus taking the lead. Many Republican economists and politicians are conjecturing a dollar-bitcoin.

(iii) Politically and economically lead the world's main economies in the construction of a new Bretton Woods System, something that the BRICS, led by China, seem more willing to achieve. (iv) Force the dollarization of other economies, especially in its area of ​​direct influence: Latin America.

So far, everything indicates that, in the USA, the Democrats are lost between these strategies while the Republicans have already opted for the confrontation of economic blocs, preferring the tactic of clearly forcing partial or total adherence to the dollar from weaker economies. The method is to socially, politically and economically destabilize the target nations through hybrid warfare devices, including supporting the populist and neo-fascist right, and then, with the atrophy of the command mechanisms of the economic and political systems of these nations, recommending as a plan of salvation, perhaps, is the dollarization of their economies.

In Latin America, there are already three dollarized economies: Panama, El Salvador and Ecuador. It was no coincidence that Javier Milei, current President of Argentina and representative of this “new right” in Latin America, emphatically defended, during his campaign, the total independence of the Central Bank and the dollarization of the Argentine economy.

He was giving voice to the US project, especially that of the Republicans, which aims to maintain the dollar as a reserve currency or even force the total dollarization of the main economies of Latin America: Brazil, Mexico and Argentina. The population of these countries, in general, still does not understand what is at stake with the beginning of the end of the Petrodollar Era. The world and life as we know it will change completely.

It is ironic to say the least that the decision-making element for signaling a new Era in the international economy and geopolitics, signaling the construction of a new multipolar economic-financial system, involves the definition of a monarch, the Saudi Crown Prince Mohammed bin Salman. Saudi Arabia's decision not to renew the petrodollar pact with the USA represents a historic milestone, with vast and complex implications.

As the global economic and political balance of power adjusts to this new reality, the world faces an era of uncertainty and opportunity. Understanding and adapting to these new challenges will be crucial for all nations, especially those in Latin America, which could be the next pieces in this constantly evolving geopolitical and economic chessboard.

*Isaías Albertin de Moraes, economist, has a PhD in Social Sciences and visiting professor at the Center for Engineering, Modeling and Applied Social Sciences (CECS) at UFABC.


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