De-Dollarization: Equation with Many Unknowns

The dollar is dead, long live the dollar. Since the end of World War II, the dollar has played a fundamental role both as a means of regulating world trade and as a currency reserve instrument. Official statistics leave no doubt about the central role of the US currency in the global economic and financial system: some 59% of the world’s foreign exchange reserves is denominated in dollars, 64% of the world’s bond debt is denominated in dollars, 58% of international payments, excluding eurozone countries, are made in dollars, and about half of world trade is conducted in dollars.

The rapid spread and acceptance of the dollar as the “world currency” was made possible by the Bretton Woods Agreements, which tied the value of the dollar to the value of gold and created the symbiosis of the dollar and oil, hence the term “petrodollar” in the rules of global transactions in the most traded commodity. However, against the backdrop of geopolitical conflicts that have erupted over the past two years, the word “de-dollarization,” i.e. the process of distancing countries from the dollar in order to reduce the US currency-related risks, both political and economic, has become increasingly common.

Never has the topic of de-dollarization resonated as much as it did in 2024. In June, rumors began to circulate about a possible and drastic reduction in the use of the dollar in settling international trade deals, as talks emerged that the Saudi Arabian government had no intention of renewing agreements with the USA to maintain the dollar oil price, effectively leading to the imminent collapse of the petrodollar system. A further blow to dollar hegemony was to be dealt during the BRICS summit in late October in the Russian city of Kazan, as many analysts were convinced that the member countries would present a common currency capable of replacing the US currency as a settlement tool in trade.

While it may seem easy to achieve de-dollarization on a theoretical level, the rhetoric that the dollar’s “status quo” is in question seems to have no basis in reality. The abandonment of the dollar cannot be implemented massively and right away, as possible financial and monetary shocks would affect the value of dollar-denominated assets and foreign exchange reserves of all countries in the world. The process of de-dollarization of monetary reserves has started some time ago and, as gradually as their share denominated in dollars, is steadily declining. In fact, dollar-denominated global reserves have declined by about 10 percentage points since the early 2000s, going from 70% to 60% of the total. However, projections for the near future do not foresee high rates of substitution or even acceleration, as a further decline of 15% to 20% is estimated over the next 25 years.

At the same time, we are also witnessing a sell-off in US government bonds and a relative increase in gold reserves, which the world’s central banks have begun to accumulate at an even higher rate than on average in the past. The US Federal Reserve’s monetary policy of high interest rates has pushed and is pushing countries to sell US Treasury securities to mitigate the weakening of their currencies against the dollar, so much so that today foreign central banks hold “only” $3.4 trillion in US Treasury bonds, about 14% of the total. The strong appreciation of gold, driven by renewed interest in the precious metal itself, has only slowed the new gold rush by central banks to the extent where in the third quarter of 2024 alone, net purchases reached 909 tons.

However, taking into account the dollar’s role in international settlements, de-dollarization does not seem to have started at all. Analyzing data on transactions through the SWIFT system, excluding transactions within the eurozone, the use of the dollar has even increased: from 45% in 2019 to 58% of the total in September 2024, taking market share away from the euro itself.

At the global level, this trend seems to be even more pronounced. Despite a significant increase in the use of the yuan (RMB), its share still remains below 10% of the total, while the use of the dollar seems to dominate the use of the euro, whose share has gone from 34.5% to 13% of total payments made.

The de-dollarization process is fueled by both geopolitical and economic developments. While, on the one hand, sanctions against Russia, the freezing of Russian central bank assets held abroad, and the misappropriation of the proceeds from these same frozen assets have undermined many countries’ confidence and attitudes towards the dollar, used as an instrument of retaliation and financial blackmail, on the other hand, the high inflation rate and the constant growth of public debt in the United States accelerated the loss of purchasing power of the dollar itself. Just as an example: one dollar in 1950 equals $13.10 in 2024, which effectively brings the cumulative inflation rate of the US currency to 1209%.

The debate on de-dollarization seems to focus mainly on the process of replacing the US currency in international commercial transactions, because restricting the circulation of the dollar is believed to automatically limit its possible distribution and acceptance. For this reason, the process of de-dollarization has often been and is linked to the adoption of a “substitute” currency, first the yuan, then the BRICS currency, and now the CBDC (central bank digital currencies), which can replace the dollar and deprive it of its “world currency” status. Many have speculated that, given China’s industrial potential, the volume of yuan-denominated transactions could rise sharply. However, while there has been an initial attempt to increase the global spread of the yuan, so much so that it has become the fourth currency used in trade, China does not really seem interested in losing control of its currency at a time when it can be freely traded in global financial markets. Thus, attention has shifted to the BRICS countries, and as early as 2022, many analysts began to speculate and predict the introduction of a common BRICS currency, called R5, after the initials of the currencies of the five BRICS founding countries: ruble, renminbi (pinyin, yuan), rupiah, real, rand. The assumptions were that R5 should be tied to the commodities and raw materials basket, which would guarantee its underlying value, as was the case with gold and the dollar. However, the main problem with the single currency is and remains the need for countries, which have adopted the currency, to cede or at least delegate some of their financial, monetary, and even fiscal sovereignty to a third party that controls and manages the currency independently. In this context, it is impossible not to suggest an analogy with the euro, which before its emergence was also seen as an alternative currency that could replace the dollar in international trade, but over time seems to have simply surrendered to the US currency.

Ultimately, de-dollarization is supposed to be achieved once national digital currencies are launched, but projects to implement them are still largely in their infancy, and only in some cases pilot projects are already underway to test the applicability and use of these new forms and payment instruments.

To date, the real tool to promote de-dollarization on the international trade front is their regulation through the use of other national currencies. Russia’s exclusion from SWIFT has pushed the country to encourage the use of the ruble to the extent where, according to Central Bank data published in August 2024, 43% of exports, which totaled $90 billion in the second half of 2024, and 24.5% of imports, equivalent to about $38 billion over the same period, were calculated in rubles. However, circumventing the use of the dollar for commercial transactions is not possible without developing the new payment and information transfer systems necessary to circumvent or at least limit US banks’ involvement in payment settlement. In the final declaration of the BRICS countries at the Kazan summit, they strived to further develop settlements in national currencies in accordance with the BRICS Cross-Border Payments Initiative (BCBPI), also known as BRICPay, which is a system of decentralized and independent payment messages.

Today, there are already real alternatives to SWIFT. Since 2014, Russia started developing the Financial Messaging System (FMS), to which 557 banks and companies were connected by the end of 2023, 159 of them were not Russian residents. China has also developed its own system, the Cross-Border Interbank Payment System (CIPS), which processed about 6.5 billion transactions totaling $17.09 trillion in 2023, an increase of 50.29% and 27.27%, respectively, from 2022.

To date, only the political and economic choices of the United States can truly promote de-dollarization and push other countries to more or less quickly repay accumulated dollars. At least in the short term, without political or economic upheaval and without structural changes in the global financial system, it is hard to imagine that the role of the dollar could really be questioned, much less that its use could be invalidated. However, in the long run, the US currency may indeed be replaced by the CBDC, otherwise its role will diminish given the greater use of other currencies, but the very high liquidity of the dollar still makes it an important element for international trade and finance. In fact, 88% of currency transactions on world markets are made with the dollar.