Contesting the Hegemony of the Dollar
Context:
- In polycentric global geoeconomics, there are clear tendencies that lend credence to the notion that the multipolar international order is rapidly taking shape. Trade plays a crucial role in the Global South:
The trading of currencies:
- using national currencies for business To avoid utilising the dollar in oil and gas transactions, measures are being made.
- The promotion of such agreements by regional organisations, the establishment of specific accounts for the internationalisation of national currencies, and the development of systems for financial communication.
- Is this kind of multipolarity ever-present? Is it possible to challenge the dollar’s hegemony?
Diversifying the economy:
- Non-Western countries claim they function in a multipolar system and are developing systems for alternative currency transactions in order to reduce risks and their reliance on the dollar. Since trade wars against it started in 2018, China has been travelling along this path. The Russia-Ukraine war has intensified this tendency because Russia trades oil and other commodities in rubles and national currencies, similar to the rupee-rouble trading of earlier years.
- The steady but erratic rise of the “emerging economies” is the basis for economic variety. For instance, China, India, Russia, South Africa, Indonesia, Brazil, Iran, and Turkey all have GDPs that are greater than the total GDP of the G7.
- Asian intra-regional consumption is the main driver of the high levels of commerce between Asian countries. India does more business with Asia than the West. China’s trade with Asian countries has increased more than twice as much in recent years, exceeding its trade with the West.
- The UAE, Iran, Turkey, Indonesia, Sri Lanka, Myanmar, Thailand, Malaysia, and Sri Lanka all conduct business with regional partners using local currencies. Between ASEAN countries, China, Japan, and South Korea, bilateral currency trades are worth $380 billion and rising. The South African rand is also used by a few other African countries. The countries of Latin America are working to increase regional trade.
Internationalization of rupees:
- Emerging economies have started conducting business in their own national currencies because of the high dollar exchange rates. The local currency swap lines held by Asian central banks total more than $400 billion and are used for cross-border trading.
- Since 2019, India has been paying Russia off-the-record for certain imports of petroleum, minerals, and defence technology. It has arranged local currency trading with the United Arab Emirates, Japan, Turkey, Korea, and South Asian countries.
- In an effort to internationalise the rupee, the Reserve Bank of India (RBI) proposed a rupee settlement mechanism for cross-border trading in July 2022 by allowing special vostro accounts in particular Indian banks. The RBI has granted permission for the opening of nine special vostro accounts in two Indian banks for the purpose of settling rupee payments for trade between India and Russia (UCO Bank and IndusInd Bank). The two largest banks in Russia, Sberbank and VTB Bank, are the first foreign lenders to receive RBI approval for rupee settlement of global trade transactions.
- A Nostro account is one that a bank maintains in another bank. Funds from customers’ accounts at other financial institutions can be deposited into the bank’s account. This technique is typically used if a bank doesn’t have any international branches.
- A Vostro account is another name for a Nostro account. It’s a checking account that lets users deposit money on behalf of other banks. Nostro and Vostro have accounts that are held in a different currency.
- Vostro accounts enable domestic banks to provide access to international financial services to their customers who need them. Performing foreign exchange transactions, simplifying deposits and withdrawals, and facilitating wire transfers are just a few of the services offered for Vostro accounts. They also involve promoting global trade.
Innovative substitutes:
- By disbursing up to 50% of its loans in the national currencies of the BRICS since 2015, the New Development Bank (NDB) has enabled trade and investment in those currencies.
- Other regional organisations, such as the Eurasian Economic Union (EEU), the Shanghai Cooperation Organization (SCO), and the RCEP member countries, are setting up systems to conduct trade, investments, and settlements in national currencies.
- A common payment infrastructure is being constructed, and national networks for the transmission of financial information are being linked. The petrodollar is seriously threatened by efforts to trade oil and gas outside of the dollar zone. The dollar hegemony that the US has had since the 1970s may be threatened by this measure.
- The process has not yet fully taken off, despite the fact that a substantial number of oil producers, refiners, and consumers, including Russia, India, China, Venezuela, and Iran, have begun trading hydrocarbons in national currencies. India can purchase Russian crude using its vostro accounts and save up to $4 billion in foreign money each month, according to former RBI governor D. Subbarao.
Moving ahead:
- There isn’t any progress toward dedollarization, despite rumours to the contrary. This is problematic since national currencies aren’t entirely convertible. Thus, despite the rise of alternate trading systems and multiple money circulation systems, the dollar still reigns supreme. If the currency is further destabilised, these countries, which have trillions of dollars in reserves, will be exposed.
- US dollars account for 60% of the world’s currency, followed by euros (20%), yen (5.7%), and yuan (3%). Making an alternate system work requires a longer-term, consistent effort.
- The exchange of several national currencies is growing. Trade and the purchase of food and oil in national currencies have given nations outside the West options. In the current international order, country states in the Global South are adamant about choosing their own partners.
- In this setting, geopolitics and geoeconomics are mixing, and new supply chains and linkages for alternative currencies are enabling dual/multiple circulation systems. This is the structural basis of the multipolar system.
Conclusion:
- There will be multipolarity for some time to come. India will be required to function within this financial system. But in order to safeguard ourselves, we also need to adopt brand-new, alternate structures.
