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A significant and a gradual shift from economics to geopolitics occurring cross the globe, is driven by national interests. The rising geopolitical tensions with the West, an increase in gold reserves by the advanced and emerging economies, and a move towards diversifying currencies beyond the US Dollar underscore the urgent need for an alternate global financial system. Emerging economies are seeking to protect their assets from external vulnerabilities that could jeopardize their economic sovereignty, signalling a trend towards economic fragmentation and multi polarization.
Countries less aligned with the US geopolitically have become the largest purchasers of gold in recent years, and challenges dollar dominance. These developments could boost the international prominence of other currencies.
Factors driving Geopolitical Shifts –
America’s High Debt–
With US debt hovering at 122% of GDP, persistent high interest rates and lower growth present medium-term fiscal deficits, poses risk to its financial stability. The US government's perceived lack of credibility in supporting ailing banks could further increase sovereign borrowing costs. Prolonged high interest rates can lead to steep bank losses, slowing the economy. Consequently, global investors may offload existing US debt and avoid new US debt.
Addressing this vast debt crisis would require decades of slashing spending on healthcare, social services, public safety, education, while increasing taxes would negatively impact US economic growth. This uncertainty diminishes US global dominance, potentially causing global turmoil.
Geopolitical Fragmentation –
The invasion of Ukraine by Russia led to US sanctions and asset freezes intended to stop the war, yet the Russian economy rebounded with better GDP growth, highlighting the ineffectiveness of these sanctions. Similarly, US sanctions over Iran's nuclear program, and tensions with China over unfair trade practices, invasion over Taiwan, and tighter investment curbs have deepened. Worsening insurgent violence in South Africa has diverted US attention, resulting in minimal engagement. Additionally, Saudi Arabia has ended its 50- year Petro Dollar deal with the US in June 2024, seeking broader alliances and a strategic global position.
Outcomes of Geopolitical Shifts –
End of the Petro Dollar Deal –
The Petro Dollar deal originated in 1973 after the Yom Kippur War, where Saudi Arabia agreed to trade oil in US Dollars in exchange for US military assistance. This established a strategic relationship between the US and Arab nations, with the US Dollar becoming the most stable and widely recognized currency for global trade.
The shift in the geopolitical landscape ended this 50-year deal, with Saudi Arabia now open to multiple currencies to diversify risk. This move is also motivated by the transition from coal to renewable energy, reducing long-term oil demand. To maximize oil export revenues, Saudi Arabia aims to create a financial buffer for future investments in renewable energy. Despite this, the Saudi Riyadh remains pegged to the dollar, with oil prices still based on the dollar.
BRICS Alliance –
The countries like Brazil, Russia, India, China, and South Africa have formed the BRICS alliance to protect their assets, diversify across the multiple currencies and cement their alliance to push back the western economic pressure. New members including Saudi Arabia, UAE, Iran, Egypt, and Ethiopia have joined this alliance recently.
Key developments –
- BRICS-pay: Inter-Bank payment system uses block chain and prospects of Central Bank Digital currencies.
- Russia-Iran Payment System: Linked national systems for financial transactions, aiming to double trade from $4bn to $8bn.
- China-Russia Trade: Surpassed the goal of US$200bn in 2023, 95% of the trade without US dollar.
- China-UAE LNG Trade: China bought LNG from UAE in yuan.
- African Foreign Exchange System: African continent created its new online foreign exchange system to enable cross border payments in local currencies, launched in 2022.
- MBridge Project: Saudi Central Bank joins China’s block chain enabled mBridge project for better cross border payments.
Countries have reduced their dollar reserves to protect their assets from western vulnerabilities. They are dropping out of dollar and going in favour of accumulating gold as reserves. Even the advanced nations have risen their share of gold and expect it to rise at the expense of dollar.
Conclusion –
The world wants to have an alternate global financial system aiming to conduct transactions independently, circumvent economic sanctions and maintain strategic autonomy. Using local currencies mitigates exchange rate risk, creating a more stable framework, doubling trade volume and strengthen ties within the bloc. This shift allows countries greater control over monetary policies, aligning them with domestic priorities. Conventional institutions and frameworks must adapt to this diverse and complex new landscape, fostering balanced power distribution and economic resilience.
These pieces are being published as they have been received – they have not been edited/fact-checked by ThePrint.