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By
Janna Al-Kadri January 1, 2023
"It has been almost a year since the war in Ukraine began. Since then, talk of de-dollarization has picked up speed. Even prominent mainstream economists Galbraith (2022) and Eichengreen (2022) have joined the bandwagon, but they do not see an avalanche that could unseat the dollar yet, and rightly so, but as argued here, they do so for the wrong reasons."
Across the board, the mainstream peddles the point that the US financial market has depth that no other market has, and therefore, the dollar is irreplaceable. That is true for the moment. Where else can financial wealth be placed safely, traded and cashed in quickly other than the US market. I emphasized safely because such a market was not safe for confiscated Russian assets and it is proving to be unsafe for any would-be customer whose politics do not align with US imperial designs. Thus, the issue of depth and safety have subjective twists to them. More so, the occurrence of Russian asset seizure by Europe and the US begs the question: the financial market is deep for whom?
Money, it ought to be remembered, is a social convention. It serves a function as a medium of exchange/reserve, as well as a savings medium. Money is also an idea (a form) with an aura whose very allure is to reproduce the social conditions for the creation of more money, through credit of course. Like all conventions, money also holds by some form of consensus. Any currency has to be recognized as value and it attains a status as a symbolic power by the knowledge people hold about it as both means of transaction and a social form. Of all the monies in circulation around the world, the dollar is unusual in the sense that it derives its legitimacy from the knowledge that the dollar is secure from many people of different nationalities around the globe.
The dollar and dollar instruments, like treasuries and bonds, are assumed risk-free. Pension funds for instance, which ensure against old age poverty, scramble to lodge in dollar assets that are set to grow and not lose but gain much value over time. People acknowledge that the dollar is a universal medium of exchange and savings, and such acknowledgment is the source of the power of the dollar. However, such common knowledge, which is the substance of dollar power, must also be constantly produced and reproduced. For that, there are theories that fit the bill.
For instance, instead of theorizing that money depends on real production capabilities, fiat money is said to depend on a capitalism of futurity and a tradability of debt. Although the US accounts for less than 20 percent of world output (production’s worth’, faith in the depth of its financial market and its credibility in the future as a state account for it covering the credit necessary for much of global transactions and savings.
Still, theories are pretty much ideological tools that show or hide some desired aspects of reality in order to serve the interests of different social groups. So, while it is true that the US nominally holds less than 20 percent of global output, much of global output depends on the US’ control of strategic resources and global chokepoints. These are delivered by the demonstrative power of its many military bases and capacity to destruct its foes.
As one can readily see, if the capacity to destruct and to infuse instability abroad are counted as production, then it is obvious that the US accounts for much more in production than the merely 20 percent it registers in its national accounts as GDP. Such a megalithic process is the true substance of the knowledge that upholds the dollar as the world reserve currency. It is this knowledge, reproduced on a global scale by the capacity to destruct, which is the real reason for the deep knowledge that props up the deep US financial market, as opposed to some hallucinatory moneyed economy whose debts are tradable, and it is the erosion of that capacity that is heralded by the rise of the multipolar world when Russia began its de-Nazification of Ukraine campaign. Changing that power structure behind the depth of US finance changes the acknowledgment that the US dollar is the sole undisputed universal currency on account of the universal power of the US. How so?
The resilience of Russia's economy
When the Central Bank of Russia announced it pegged its national currency to gold, just a month after the conflict erupted, many saw the move as a blow to the dollar status quo - especially for the EU bloc, which heavily relied on Russia for supplies of cheap LNG. For them, it was out of the question to pay for oil in rubles. "We will not be blackmailed by Russia" to pay for gas in rubles, said Germany’s Finance Minister, Robert Habeck. In March 2022, US lawmakers introduced a bill to sanction Russian gold and then the EU followed suit. By June 2022, the Group of 7 agreed to implement a full-scale ban on the Russian gold market, completely sanctioning Moscow from exporting gold. By placing an embargo on Russia’s gold exports, freezing Russian assets and blocking Russian banks from using SWIFT, the West believed it could pressure Moscow. These sanctions against Russia threw Russia out of the dollar loop and were de-dollarizing Russia. The West was partially de-dollarizing the world by imposing more sanctions.
Even though the sanctions did weaken the ruble at first, it did not take too long for the currency to rebound since many of the commodities Russia produces such as gas, wheat and fertilizers are priced in the ruble. In the span of ten months, the Ruble went from a volatile position in March to a stable currency by September. The ruble still stands stronger than pre-war levels, and as Russia keeps carrying out trade activities with third countries via new monetary channels, the situation of the ruble only serves to forecast that the crisis in Europe will exacerbate further and further. If anything, the fact that Russia still manages despite the sanctions proves that there is more to production estimated in dollar GDP to measure the real worth of an economy and its currency. It has become apparent that the commodity control-based standard of the dollar equally applies to the Ruble, which accounts for significant shares of wheat and oil.
Furthermore, Russia’s new MIR payment system, which parallels SWIFT and MasterCard, said that by the end of September it issued more than 161 cards worldwide. By November, Russia decided to take a step further and called on all state members of the BRICS+ alliance to consider the possibility of establishing a single gold trade system. And just very recently, reports revealed that Russia was beginning to test international payments in digital currencies with companies. Unlike Iraq and Libya, and Venezuela, Russia is bigger and has proven resilient, especially with support from China.
Getting 'at' China
Besides the vast amounts of money spent on financing Kiev, Ukrainian President Volodymyr Zelensky himself admitted that the war in Ukraine was a war ‘for’ the US. When he delivered an address at a joint session at the US Congress in December, he warned that if Russia were to win the war, the world order established by the US post-WWII would inevitably crumble – with it, the hegemony of the dollar. With China’s economy surpassing the US in real terms and commanding much of global production and trade, the possibility of an alternative financial system is around the corner – unless of course the balance of forces tilts in favor of the US as it defeats Russia in Ukraine and extends its hegemony to the Eurasian corridor.
So what does the US really want with Russia? It wants Russia fragmented and China choked. China, Russia’s de facto ally, has been de-dollarizing its economy over the past decade. But that doesn’t necessarily imply both countries form ‘a bloc’ per se. Both Russia and China remain distinct governments with distinct policies and distinct ideologies. What really unites them in this trade/currency warfare is the fact that they both oppose a unipolar world over a multipolar world. They both want to develop at their own pace, their own way, without the interference of neoliberal or imperialist elements. In that sense, the conflict in Ukraine has a lot to do with China.
Even the most recent Pentagon defense strategy admits that Russia is not as threatening as China is, which it dubs as "the greatest security challenge for the US." When that report was issued in October 2022, US Defense Secretary Lloyd Austin said that China “is the only competitor out there with both the intent to reshape the international order, and increasingly, the power to do so, while Russia on the other hand "can’t systematically challenge the US over the long term. But Russian aggression does pose an immediate and sharp threat to our interests and values." Unlike the West, it took only seven decades for China to establish itself as a global superpower that has carried out the biggest poverty alleviation project in history. It established such a record without enslaving or geocoding the planet and the environment.
Another important feature of the Chinese economy is the fact that it easily absorbs technologies from abroad and it's good at meeting the standards of foreign markets. It’s a leading pioneer in a panoply of sectors which include space exploration, financial developments, medical advances, green technologies, urban construction, and military innovations. China’s economy is also relatively insulated from external shocks and capital flight by its non-convertible currency. It draws down on its massive currency reserves denominated in dollars - mainly US government debt - and invested in US treasury bonds, to protect against any short-term capital flow and to preserve the competitiveness of its own currency at times of crises.
What really bothers the West is the fact that China was not only able to propel its entire population to higher standards of living, but it also assisted others in doing so. Through its Belt and Road Initiative (BRI), China promoted infrastructural ventures in some of the world’s poorest economies in a way that complemented their productive assets in facilitating productivity, growth, and economic mobility. The Asian country has defied neoliberalism both as an ideology and as an economic policy by upholding its own brand of socialism based on “Chinese characteristics”.
As part of its commitment to the internationalism of Mao Zedong, China through the demonstration effect, exported that model based on an anti-imperialist and nationalist mode of development to countries of the Global South. Being the world’s largest trading country, the world’s largest exporter, and one of the world’s largest holders of US debt, China never forced anyone to borrow from it in order to financially enslave them and/or to finance its war effort. Adding all this to China’s defiance of abiding to western sanctions against Russia, and you will have Sino-Western relations hitting an all-time low - particularly in light of accusations that China helped Russia circumvent the effects of sanctions.
Given the developmental trajectory of China’s growth, which is detached from militarism and built on a working-class-led resistance, it is rather an arithmetic certainty that China will never morph into a war-mongering nation. It simply does not depend on war to grow. Moreover, having itself been the target of imperialism for centuries is enough to suggest that China in no way intends to pursue such an agenda - but rather strives to resist it, as it always did. Its very existence as a powerful socialist nation is antithetical to the ideological, financial, and military dominance of the post-WW2 Western order.
This only adds to the reasons why the US has been recently waging a series of provocations against China, both economically and politically. On the economic front, the US constrained China from exporting semiconductors to western markets and suspended the transfer of chip technologies to China. It also plans to cut Huawei’s access to US banks over allegations that the company is engaged in “economic espionage” against the US. On the political front, there was the whole Taiwan fiasco which was short-lived after Tsai Ing-wen was humiliatingly defeated in Taiwan’s last election.
China retaliates
At some point, it is only natural for China to retaliate. To strike back at the financial hegemon by decreasing the global demand for US dollars is one such measure of retaliation. China’s de-dollarization strategy can basically be summed up as follows: creating trade payment systems based on the national currencies of trading partners, dumping US treasuries, and breaking the petrodollar system while buying massive amounts of gold.
It may be recalled that China stores a considerable portion of its surplus in US Bonds. The standard idea of weaponizing bonds is often reiterated in what pundits dub the ‘nuclear option’, a theory that supposes China could sell off all of its treasuries in an attempt to destabilize the American economy. But then again that seems like a mythical alternative, which is likely to harm everyone including China. The potential flooding of the global exchange market with billions of dollars of American debt may cause the price of US treasury bonds to decrease and reciprocally interest rates to increase. The interest rates on US treasury bonds are the benchmark for borrowing throughout the global economy. So, in case they are abruptly raised, this may precipitate another global slowdown.
China, as well as others, seek a reasonable solution to the US debt problem and a transfer to a more representative multi-polar currency and world-saving medium. At some point in the past, China held $3 trillion in US debt. In October 2022, it recorded treasury holdings to a 12-year low below the $1 trillion mark. It has been slowly ridding itself of being indebted to the US in the US’s own currency.
Over fears that China will endure a fate similar to that of Russia, that it will lose all its assets and dollars in case tensions increase, China has resorted to converting its bonds into real assets and proceeded by investing them in the third world as a counter-hegemonical strategy. China's Belt and Road Initiative is the gateway to transform US-denominated money capital into real capital. Whereas US imperialism is about the incapacitation and disempowerment of the developing world, the Chinese funded BRI, which turns Chinese saved US dollars into third world plans and equipment, turns US bonds into weapons against the US.
Breaking the petrodollar system
While reducing transactions in dollars diminishes global demand for the dollar, China and others with trade surpluses need to save in US treasuries for lack of alternatives. Analytically, an alternative to the US savings instruments from a multi-currency saving bond is not difficult to envisage. In fact that is what John Maynard Keynes proposed at Bretton-wood in 1944, but the proposal was declined by the US. The alternative multi-national savings instrument would come as a natural outcome of shifting balance of forces globally, especially as the principal strategic commodity, oil, becomes denominated in currencies other than dollars.
Xi's recent visit to Saudi Arabia is one step towards provisioning an alternative oil payment system. The visit amounted to a diplomatic offensive and was hailed as a landmark event on the strengthening of Sino-Arab ties as on December 20, 2022, the Chinese head of state attended the first ever China-Arab state summit and delivered a key speech "underscoring the importance of carrying forward the spirit of China-Arab friendship featuring solidarity and mutual assistance, equality and mutual benefit, inclusiveness and mutual learning, and jointly building a China-Arab community with a shared future in the new era."
The move is clearly aimed at disrupting the petrodollar system, which has for the past 50 years upheld the US dollar as the sole currency to purchase oil. As is already known, the dollar-priced oil system is what redeemed the departure of the US from the gold standard in 1971. Being a source of energy upon which life depends, and a strategic commodity that accounts for about 20% of the global trade volume, having dollars is a prerequisite for an economy's survival, and pricing the oil in dollars keeps the dollar high in demand. The more the US prints dollars to meet expanding trade demand, the more it could live off the rents of dollar seigniorage, or the ability to buy real assets from abroad with the credit it issues. No other empire in history enjoyed such privilege.
The modern imperial tributary system is that the US lends money in its own currency, and in return, it usurps the wealth produced by other nations. So when China says it wants to purchase oil using the Yuan and initiate separate deals, this means it is planning to lessen the global demand for the dollar, therefore lessen the capacity of the US to issue global credit, and hence, lessen its imperial rents.
Gold is ok, but only partially
China has been hoarding much gold. It now has the highest gold reserves. For the first time since 2019, the central bank of China announced it increased its gold reserves with the purchase of 32 tons of gold in November, bringing the total up to 1980 tons amounting to $111.65 billion. Needless to say, the gold standard cannot supplant a fiat money system already based on commodities and production capabilities. However, having gold in addition to developing its own development bank and international lending institutions and payment system, China further securitizes its finance.
Thus, gold demand in China is high because traders and investors consider the commodity as a buffer against extreme fluctuations and an effective store of value. The Chinese government monitors carefully the amount of gold that is brought in and out of the country. Being the biggest gold producer, China safeguards much of its gold production for itself. In addition, China intentionally uses price arbitrage to get traders to purchase more gold from abroad. Most of that gold was purchased from the West, particularly the UK and the US, where gold is traded at a cheaper price. However, gold primacy alone is insufficient to create the acknowledgment of depth similar to that enjoyed by the US market.
Once more, that confidence in the dollar market is reproduced daily by the power of the US over strategic commodity channels around the world. The US is heir to the European colonial system and its control emerges from the transference between its physical and ideological powers. Therefore, gold alone is possibly only a gateway to dislodging a dollar system based on strategic commodity control.
The alternative to the US financial market is in the making
China has inked separate agreements, especially with Russia, with the aim of purchasing energy with a non-dollar currency. Though the de-dollarization of trade channels may achieve some results, one cannot deny the fact that the world still needs an alternative universal savings medium. On paper, designing a bond whose guarantors are the major powers is not a difficult task; however, such a task, if it were to materialize, undercuts the financial rents of US and US-associated elites.
A real de-dollarization requires a shift in the geopolitical context and an erosion of the consensus around the dollar. The war in Ukraine and the collapse of Europe augur the loss of the US and its dollar primacy. Unlike twentieth-century wars that caused the retreats of Europe to the benefit of the US, the current regression of Europe vis-à-vis Russia and China, also weakens the US. The case may be that the European working class, being more so a clone of capital than its antithesis, continues to self-harm at the behest of its bourgeoisie. It is then that the alternatives to the dollar and, more importantly, its bonds begin to take shape.
With 65 trillion dollars in off-balance sheet debts, and a CDO and Repo market rife with moral hazard, the chances of a major collapse are all too ominous. The transition will be gruesome given the fragile financial architecture. A smooth US debt workout is a must since the US is a huge net debtor in its own currency, which happens to be the world’s savings medium. Yet, the world must part with a system that pawns the future of man and nature by the power of the gun for the interests of so few. China and Russia have taken the bold decision to de-dollarize, to de-financialize wars and pollution and such must be the alternative for humanity.