De-dollarization is a gradual process where countries reduce their reliance on the US dollar as the primary reserve currency and means of exchange in international trade.
Today, the US dollar is recognized as the global reserve currency, constituting about 60% (7 trillion out of 12 trillion USD) of global currency reserves. It is the most widely used currency in international trade and finance, with most goods and commodities priced in dollars. The liquidity of the dollar and the depth of US financial markets continue to make it the preferred currency for central banks, investors, and companies worldwide. However, this dominance faces challenges. Economic changes, geopolitical tensions, and technological advancements have initiated gradual trends collectively known as de-dollarization, as countries seek to diversify their reserves and reduce dependence on the dollar. The international monetary system’s evolving dynamics may lead to a more multipolar world of currencies. In Iran, however, as with many imported concepts, de-dollarization has been distorted from its original essence. It has become a pretext for unscientific methods and irrational mechanisms propagated by pseudo-experts, leading only to further damage, rent-seeking, corruption, and inflation.
Table of Contents
Introduction
De-dollarization refers to the gradual process through which countries and global markets reduce their reliance on the US dollar as the primary reserve currency and means of exchange in international trade. This trend has accelerated in recent years due to various economic, geopolitical, and technological factors. The dollar’s dominance has been the cornerstone of the global financial system since the mid-20th century. However, recent changes indicate a growing desire among countries to diversify their currency reserves and reduce vulnerabilities to fluctuations in the dollar’s value, political considerations, and US monetary policy decisions.
Moreover, a major limitation exists: every US dollar (in official form, such as US Treasury bonds) circulating globally must ultimately be registered with a US-based bank, a process that can be slow and cumbersome. In reality, no official global transaction involving dollars occurs without US oversight. Thus, the inherent complexities and delays in fund transfers remain a significant concern for governments and markets.
Consequently, countries pursuing de-dollarization aim to enhance their economic sovereignty, reduce the impact of US sanctions, and bolster financial stability. Strategies include increasing the use of local currencies in bilateral trade agreements, establishing currency swap lines, developing alternative payment systems, and accumulating reserves in other currencies and assets like gold. The implications of de-dollarization for the global economy are profound, potentially leading to greater currency market volatility, shifts in economic power toward emerging markets, and a gradual transition toward a more multipolar currency world.
In Iran, unfortunately, proponents of this process often lack a solid understanding of economics or deliberately misrepresent concepts. These individuals advocate measures such as fixing exchange rates at unrealistic levels, maintaining multi-tiered exchange rate systems, or shifting the basis of calculations from the dollar to other currencies under unrealistic conditions for de-dollarization. These measures are undoubtedly prone to corruption and inflation (as they have primarily been tested for other administrative purposes).
This article delves into the motivations behind de-dollarization, its broader economic consequences, and the steps needed to achieve this significant shift in the international monetary landscape, alongside Iran’s situation in this regard.
Historical Context of Dollar Dominance
Rise of the Dollar: The Bretton Woods Agreement
The US dollar’s dominance as the world’s primary reserve currency began earnestly with the Bretton Woods Agreement of 1944. During World War II, the Allies recognized the need for a new international monetary system to promote economic stability and prevent competitive devaluations. The Great Depression had also been exacerbated by declining production and government interventions. Representatives from 44 countries gathered in Bretton Woods, New Hampshire, to design a framework fostering cooperation and economic growth. The key outcomes of the Bretton Woods Conference were:
1. Establishment of Fixed Exchange Rates:
This agreement pegged major world currencies to the US dollar, which was, in turn, linked to gold at a fixed rate of $35 per ounce (the gold standard). This system provided a stable exchange rate environment, facilitating international trade and investment.
2. Creation of International Financial Institutions:
The conference led to the establishment of the International Monetary Fund (IMF) and the World Bank. These institutions were designed to oversee the international monetary system and provide financial assistance to countries grappling with various crises, including balance-of-payments issues.
Post-War Economic Dominance
Several factors cemented the US dollar’s dominant position in the global economy after World War II:
- Economic Strength: The US emerged from the war with a robust and growing economy, while many other industrialized nations were rebuilding from devastation. The US accounted for a significant share of global GDP and industrial production.
- Political Stability: The US political system was seen as stable and resilient compared to the uncertainties in Europe and Asia, making the dollar an attractive store of value and medium of exchange.
- Financial Markets: The US developed deep and liquid financial markets, offering numerous investment opportunities. The New York Stock Exchange and bond markets attracted international investors seeking safe and profitable places to park their capital.
Collapse of Bretton Woods
By the late 1960s, the Bretton Woods system faced significant challenges:
- Economic Imbalances: Persistent trade deficits, particularly for the US, and divergent economic policies among member countries created substantial imbalances, straining the fixed exchange rate system.
- Inflation and Gold Reserves: As US inflation rose, the dollar became overvalued relative to gold. Foreign governments began converting their dollar holdings into gold, depleting US gold reserves.
- Speculative Attacks: Currency speculation intensified, further destabilizing the fixed exchange rate system.
In 1971, US President Richard Nixon announced the suspension of dollar convertibility to gold, effectively ending the Bretton Woods system. This marked the transition to a floating exchange rate system, where currency values are determined by market forces rather than fixed frameworks. Subsequently, both industrialized and developing nations abandoned the gold standard or similar practices.
The Dollar in the Era of Floating Exchange Rates
Despite the end of the Bretton Woods system, the U.S. dollar maintained its dominant role in international finance due to several factors:
- The Dollar System: In the 1970s, the United States negotiated agreements with major oil-producing and exporting countries to price oil transactions in dollars, achieving its desired outcome. This ensured ongoing demand for the dollar, as countries needed it to purchase oil.
- Financial Innovation and Liberalization: The U.S. financial system continued to innovate, offering a wide range of financial tools and services that attracted both small and large international investors. The liberalization of capital markets further increased the appeal of the dollar.
- Geopolitical Influence: The U.S. remained a global superpower with significant political and military influence. This geopolitical position reinforced trust in the stability and security of holding and transacting in dollars.
Motivations for De-Dollarization
The motivations for de-dollarization are multifaceted. Each factor contributes to the growing movement toward a more diversified and resilient international financial system that is less reliant on the U.S. dollar. The key drivers include:
Economic Sovereignty
One primary motivation is the desire for greater economic sovereignty. Countries heavily dependent on the U.S. dollar are significantly affected by the monetary policy decisions of the Federal Reserve, the U.S. central bank. Adjustments in interest rates by the Federal Reserve impact global financial markets, with severe effects on countries holding substantial dollar-denominated assets or debts. This dependency can lead to significant economic instability, especially in nations where U.S. policies do not align with their economic or governance conditions. Reducing reliance on the dollar allows countries to exert more control over their monetary policies, achieve economic gains, and shield themselves from external shocks.
Political Tensions
Geopolitical and political factors also play a crucial role in the push for de-dollarization. Countries such as Russia, China, and Iran face heavy economic sanctions from the United States. These sanctions can severely restrict their access to international markets and financial systems, deeply impacting their economies. To mitigate such risks and reduce the leverage that the U.S. holds over their economies, these countries actively seek alternatives to the dollar. By doing so, they aim to increase economic resilience and reduce vulnerability to political and geopolitical pressures.
Diversifying Reserve Portfolios
Much like individuals and institutions design diversified investment portfolios, central banks around the world seek to diversify their reserves of currencies and precious metals, a trend that has accelerated in recent years. Traditionally, the U.S. dollar has constituted a significant portion of these reserves due to its stability and liquidity. However, holding a large share of reserves in a single currency exposes countries to various currency risks. In contrast, diversifying reserves with other currencies, such as the euro, yen, or Chinese yuan, can mitigate these risks and potentially offer better returns. This strategy aligns with the broader goal of reducing dollar dependency and enhancing financial stability.
Technological Advancements
Technological advancements, particularly in digital currencies and blockchain technology, provide new tools for de-dollarization. Cryptocurrencies and Central Bank Digital Currencies (CBDCs) offer alternative mechanisms for conducting international trade and financial transactions without relying on the dollar. For instance, the decentralized nature of most cryptocurrency-related technologies and consensus mechanisms like proof of work and proof of stake enable powerful, independent financial processes outside the dollar-based system. For example, China’s development of the digital yuan facilitates cross-border transactions in its currency, bypassing traditional financial infrastructure dominated by the dollar. These innovations promise to transform the global financial landscape and make it easier for countries to move away from the dollar.
Trade and Investment Opportunities
The growth of emerging markets and the shifting balance of global economic power also drive de-dollarization. As countries like China and India become more significant players in the global economy, there is a natural movement toward using their currencies in international trade and investment. This shift is not merely about reducing reliance on the dollar but reflects the changing dynamics of global economic power. Using local currencies in trade and investment agreements fosters more balanced economic relationships and strengthens regional economic integration.
Reducing Transaction Costs
Using the U.S. dollar in international transactions often entails additional costs, including exchange rate conversion fees and the need to maintain dollar liquidity. By shifting to direct currency exchanges between trade partners, countries can lower these transaction costs, making trade more efficient and cost-effective. This is particularly beneficial for developing nations looking to maximize their economic gains from international trade.
De-Dollarization Strategies
Countries have employed various approaches to achieve de-dollarization, including bilateral trade agreements in local currencies, currency swap arrangements, alternative payment systems, gold reserves accumulation, promoting national currencies in global markets, developing central bank digital currencies, and strengthening regional and international groups. These strategies include:
Bilateral Trade Agreements in Local Currencies
One of the most direct and effective strategies for de-dollarization is the use of bilateral trade agreements that rely on local currencies instead of the U.S. dollar. Countries are increasingly negotiating trade deals that allow them to settle transactions in their own currencies. For example, China and Russia have entered into agreements to trade using the Chinese yuan and the Russian ruble. This reduces the need for dollars in bilateral trade and helps stabilize exchange rates between trading partners’ currencies. Such agreements also mitigate exposure to dollar fluctuations and U.S. economic policies.
Currency Swap Agreements
Currency swap agreements are another powerful tool in the de-dollarization toolkit. These arrangements allow countries to exchange currencies directly, bypassing the dollar. Central banks from various nations agree to exchange currencies up to a specified limit, facilitating trade and investment using their local currencies. BRICS nations (Brazil, Russia, India, China, and South Africa) have been particularly active in establishing such arrangements. For instance, China has signed numerous currency swap agreements with countries across Asia, Africa, and Latin America, promoting the international use of the yuan.
Developing Alternative Payment Systems
The establishment of alternative payment systems and financial messaging platforms is crucial for reducing reliance on the dollar-dominated SWIFT system. China’s Cross-Border Interbank Payment System (CIPS) exemplifies this approach, facilitating global payments and international trade in yuan. Similarly, Russia has developed its own System for Transfer of Financial Messages (SPFS) as a SWIFT alternative. These systems allow countries to conduct financial transactions without relying on the dollar, thereby enhancing financial sovereignty and resilience against potential sanctions.
Accumulation of Gold Reserves
Increasing gold reserves is a traditional strategy to mitigate risks associated with dollar dependency. Gold is regarded as a stable store of value and a universally accepted medium of exchange. Countries like Russia and China have significantly increased their gold reserves over the past decade. By accumulating gold, these nations diversify their reserves away from the dollar and reduce exposure to its fluctuations. Gold reserves can also serve as collateral in international trade and financial exchanges, providing an additional layer of financial security.
Promoting National Currencies in Global Markets
Some countries actively promote the international use of their national currencies. For example, China has pushed for greater global acceptance of the yuan through initiatives like the Belt and Road Initiative. This program encourages partner countries to use the yuan in trade and investment projects, thereby increasing its global circulation. Additionally, the inclusion of the yuan in the International Monetary Fund’s Special Drawing Rights (SDR) basket in 2016 marked a significant step toward its internationalization.
Central Bank Digital Currencies (CBDCs)
The development and implementation of Central Bank Digital Currencies (CBDCs) represent a forward-looking strategy for de-dollarization. CBDCs offer a digital alternative to physical cash and traditional electronic payment systems. For instance, China’s digital yuan aims to facilitate domestic and international transactions, promoting the use of the yuan in cross-border trade. CBDCs enhance transaction efficiency, security, and traceability, making them attractive for countries seeking to reduce dollar dependency.
Strengthening Regional Economic Blocs
Bolstering regional economic blocs and promoting intra-regional trade can also support de-dollarization. By encouraging trade within regions, countries can reduce their reliance on the dollar. Organizations such as ASEAN (Association of Southeast Asian Nations) and the African Union are striving for greater economic integration and the use of local currencies in trade. These efforts help build robust regional economies that are less dependent on the dollar for commerce and investment.
Legal and Policy Measures
Governments can implement legal and policy measures to encourage de-dollarization. For example, they may incentivize businesses to invoice in local currencies, reduce regulatory barriers for currency exchanges, and promote financial education on the benefits of using national currencies. Policies that support the development of local financial markets and infrastructure also play a significant role in this strategy.
Implications for the Global Economy
Dollarization has deep and widespread consequences for the global economy. This issue affects the economies of various countries and changes global trade patterns. The shift towards a more diversified and flexible international monetary system alters global financial dynamics and requires adaptation and cooperation between countries and financial institutions. Some of the consequences can be listed as follows:
Impact on the U.S. Economy
The de-dollarization trend has significant implications for the U.S. economy. Reduced global demand for the U.S. dollar may lead to higher interest rates and a weaker dollar. This shift could make borrowing more expensive for the U.S. government and consumers, potentially leading to higher inflation. Additionally, diminished dollar dominance may erode the “exorbitant privilege” that allows the U.S. to borrow cheaply and maintain large trade deficits without immediate economic repercussions. However, this transition is likely to be gradual, giving the U.S. time to adjust its economic policies accordingly.
Increased Currency Market Volatility
De-dollarization efforts could result in heightened volatility in currency markets. As countries diversify reserves and use alternative currencies for international trade, exchange rates may become more unstable. This volatility can create uncertainty for global businesses and investors, impacting trade flows and investment decisions. The adjustment period during which countries shift away from the dollar may see dramatic changes in exchange rates as markets adapt to new economic realities. Central banks and financial institutions will need to enhance their risk management strategies to address this increased volatility.
Shifts in Economic Power
De-dollarization may accelerate the shift of economic power toward emerging markets, particularly China. As the yuan gains prominence in international trade and finance, China’s influence on the global stage is likely to grow. This shift could lead to a more multipolar world where no single currency dominates, but several major currencies serve as global reserves. The rebalancing of economic power may prompt changes in global governance structures, with emerging economies gaining more representation in international financial institutions such as the IMF and World Bank.
Changes in Global Trade Patterns
As countries move away from the dollar, global trade patterns may shift. Bilateral trade agreements and currency swaps using local currencies could strengthen economic ties between nations and bolster regional trade blocs. This transformation may reduce the influence of traditional trading hubs like the U.S. and Europe, paving the way for the emergence of new economic centers. Increased use of local currencies in trade can also enhance economic resilience by reducing exposure to exchange rate volatility and dollar dependency.
Impact on Financial Markets and Investments
Financial markets will need to adapt to a world with multiple major currencies. Investment portfolios, especially those managed by institutional investors, are likely to become more diversified, encompassing a broader range of currencies and assets. This diversification may lead to a shift in capital flows, driving more investment toward emerging markets and economies that successfully internationalize their currencies. Moreover, the development of alternative financial infrastructures, such as China’s Cross-Border Interbank Payment System (CIPS) and Russia’s Financial Messaging System (SPFS), will introduce new dynamics to global financial markets.
Effects on International Monetary Policy
The shift toward a multipolar currency world will complicate the coordination of international monetary policy. With multiple major currencies in play, central banks will need to monitor and respond to a wider array of economic indicators and policy measures. This increased complexity could result in more frequent and significant policy adjustments, necessitating enhanced communication and collaboration among central banks. The traditional influence of the U.S. Federal Reserve on global monetary policies may diminish, giving way to a more prominent role for central banks in emerging economies.
Challenges of De-Dollarization
De-dollarization comes with numerous challenges. These include economic, diplomatic, and structural obstacles that underscore the gradual and complex nature of the process, requiring continuous effort and coordination among nations and financial institutions.
Economic and Diplomatic Nuances
Establishing and maintaining stable agreements for trade and finance amidst de-dollarization is a complex task. Factors such as similarities in competitive economic issues, significant non-complementary differences, or excessive overlaps in balance of payments structures can hinder cooperation. Additionally, aligning private-sector interests across nations can be challenging due to differing investment and capital flow trends, varying financial and trade regulations, and other factors. These challenges make forming sustainable agreements exceedingly difficult.
As the number and forms of de-dollarization initiatives increase, conflicts of interest among partner nations may escalate, leading to mounting pressures. Managing these dynamics requires active diplomacy, broadening influence, and enhancing economic strength.
Building Trust and Stability in Alternative Currencies
One of the primary challenges of de-dollarization is fostering trust and stability in alternative currencies. The U.S. dollar has long been perceived as a safe haven due to the stability of the U.S. economy, transparent financial markets, and the rule of law. For alternative currencies to replace the dollar, they must demonstrate similar levels of stability, transparency, and reliability. This presents significant obstacles for many emerging market currencies, often viewed as riskier due to economic volatility, political instability, or underdeveloped financial systems.
Developing Financial Markets to Ensure Liquidity
The U.S. dollar benefits from highly liquid and deep financial markets capable of accommodating large transaction volumes with minimal price or value disruptions. Replicating this level of market depth and liquidity for other currencies is challenging. Without sufficient liquidity, alternative currencies cannot support the same scale of international trade and investment flows. Developing such markets requires time, consistent investment, and substantial regulatory reforms to ensure alternative currencies can provide the necessary infrastructure for global transactions.
Establishing Alternative Payment Systems
Implementing alternative payment systems capable of competing with the dominance of SWIFT (the Society for Worldwide Interbank Financial Telecommunication) is a daunting task. Systems like China’s CIPS and Russia’s SPFS must not only achieve technical reliability and security but also gain widespread international acceptance. This requires extensive diplomatic and economic efforts to convince other nations and financial institutions to adopt these systems, which may face resistance due to existing dependencies and practices. Furthermore, creating standards as transparent and comprehensive as SWIFT’s accounting protocols is a significant and complex challenge.
Managing Currency Exchange Volatility
As countries diversify their foreign exchange reserves and conduct more transactions in alternative currencies, currency exchange volatility may increase. Managing such volatility is challenging, as it can lead to unpredictable costs for businesses and projects involved in international trade and investment. Central banks and governments must implement robust monetary and fiscal policies to stabilize their currencies, which may involve market interventions, interest rate adjustments, and other economic measures. These actions can be politically and economically sensitive and, if not carefully managed, could potentially lead to broader economic instability.
Ensuring Adequate Reserves and Backing
For a fiat currency to gain international trust, it must be backed by substantial reserves. The dominance of the U.S. dollar partly stems from the significant reserves held by the U.S. and other nations. Alternative currencies must build comparable reserve levels to establish credibility. This is particularly challenging for smaller economies or those facing economic difficulties. Accumulating reserves often requires a surplus in trade balances, which may not be achievable for countries heavily reliant on imports or those experiencing even minor economic tensions.
Overcoming Political Resistance
Geopolitical factors play a crucial role in the de-dollarization process. The U.S. wields significant influence in international economic and political arenas and is likely to resist efforts to undermine the dollar’s dominance. Countries pursuing de-dollarization are likely to face strong diplomatic and economic pressures from the U.S., including sanctions, trade restrictions, or other economic leverage. Navigating these geopolitical challenges requires precise strategies and cooperation among multiple countries with similar goals and the ability to withstand U.S. influence.
Acquiring Appropriate Technologies
The development and adoption of cryptocurrencies, such as central bank digital currencies (CBDCs), are seen as potential tools for de-dollarization. However, creating and maintaining robust and efficient cryptocurrency systems requires advanced technological capabilities. Ensuring cybersecurity, privacy, and interoperability with existing financial systems are fundamental challenges.
Furthermore, widespread adoption depends on public and business willingness to use these digital currencies, influenced by factors such as ease of use, high reliability, and security. The correlation between economic freedom levels and the adoption of new financial technologies highlights the significance of this issue.
Actions Taken by Nations to De-Dollarize
Several factors have accelerated the move toward de-dollarization, including the growing U.S. national debt, extensive military conflicts, the 2008 global financial crisis, and trade wars initiated by Donald Trump, particularly with China.
For instance, Russia has used the euro for settlements within BRICS countries for years. ASEAN members met in Indonesia in 2023 to discuss strategies to reduce reliance on the dollar, euro, yen, and pound in financial transactions and promote local currency use. India and Malaysia agreed to settle trade using the Indian rupee. These actions represent just a few of the steps taken by countries to reduce their dependency on the dollar.
Argentina
Since early 2023, Argentina aimed to join Brazil in using the yuan to pay for imports of Chinese goods instead of the U.S. dollar. The goal of this measure is to protect Argentina’s dwindling U.S. dollar reserves. The country has faced a significant decline in agricultural exports due to severe drought, resulting in reduced dollar inflows. As of April 2023, Argentina sought to purchase around $1 billion worth of Chinese imports using yuan. Subsequently, the country planned to conduct continuous monthly transactions of approximately $790 million worth of imports in yuan.
After China and Argentina announced the activation of their swap line in April, in May of the same year, Argentina used around 1.04 billion yuan to pay for imports from China. This credit line was also set to increase to $18 billion over the next three years. However, with the election of Javier Gerardo Milei, a right-wing president, and his economic policies, it remains to be seen whether Argentina will continue this path or follow Ecuador’s route of fully dollarizing its economy.
Brazil
In late March 2023, China and Brazil finalized an agreement to trade using their respective currencies. In December 2023, Russia and China expressed their intention to abandon the U.S. dollar in bilateral transactions. Notably, Brazil’s involvement highlights the importance of its role as a member of the G20 and BRICS groups alongside these two nations.
Bolivia
In April 2023, Luis Arce, the President of Bolivia, revealed that the government was actively exploring the use of China’s yuan as a substitute for the U.S. dollar in international trade. This decision stems from Bolivia’s ongoing challenge of insufficient liquidity in domestic markets and a shortage of U.S. dollars since early 2023 due to declining net international reserves.
China
Since 2011, China has gradually reduced its reliance on the U.S. dollar in trade, increasing the use of the yuan. In March 2018, China began purchasing oil in yuan backed by gold.
China–Saudi Arabia
In March 2022, multiple reports indicated that Saudi Arabia was negotiating with China to trade Saudi oil and gas in yuan instead of the dollar. As the two countries grew closer over the past year (even de-escalating tensions with countries like Iran), they signed cooperation agreements, resulting in increased yuan reserves in Saudi Arabia.
China–Russia
China has turned to using yuan for the purchase of oil, coal, and metals from Russia, amounting to approximately $88 billion.
China’s Relations with Arab Nations
In December 2022, at the China–Gulf Cooperation Council Summit, President Xi Jinping called for settling payments for oil trade in yuan. Chinese Foreign Minister Wang Yi stated that China’s relations with these nations had seen “historic improvement.” Notably, even years prior (between 2011 and 2013), the UAE allowed banks to open yuan-only accounts, taking significant steps ahead of other West Asian countries to establish non-dollar pathways.
European Countries
Immediately after the war in Ukraine began, most Western countries imposed heavy sanctions on Russian goods and its banking sector. In response, on March 31, 2022, Russian President Vladimir Putin signed a decree requiring “unfriendly” countries to pay for natural gas imports in rubles starting April 1. Initially, European leaders rejected this demand, arguing that it undermined previously imposed sanctions. However, by April 2022, four European gas companies had made payments in rubles.
India
India is exploring ways to strengthen its economy by reducing its reliance on the U.S. dollar. The country believes that lowering demand for the dollar in international trade could stabilize the rupee. Given the global trend of de-dollarization, India intends to expand trade using its currency. To achieve this, India plans to convert the rupee into a foreign currency and increase its share in global trade.
Malaysia
In light of recent dollar fluctuations, Malaysia seeks a suitable alternative to the dollar in global trade to strengthen its economy. Malaysia believes de-dollarization and reducing its dependence on the dollar in trade could stabilize the ringgit, its local currency. The Malaysian Prime Minister noted that with the economic power of Asian countries like China and Japan, there is no reason for Malaysia to remain dependent on the dollar. Additionally, the central banks of China and Malaysia have begun discussions on conducting trade using their respective currencies.
Russia
In August 2022, Turkey and Russia agreed to use rubles in their natural gas trade. In September of that year, Alexey Miller, the CEO of Gazprom, announced an agreement to use rubles and yuan instead of U.S. dollars in trade payments. By November, Russian Deputy Prime Minister Alexander Novak confirmed that all gas supplied to China via Siberia would be paid for in rubles and yuan. Additionally, in March 2022, Putin signed an order prohibiting “unfriendly” countries, including EU members, the U.S., and Japan, from purchasing Russian gas in currencies other than the ruble, citing sanctions imposed after the invasion of Ukraine.
As of 2022, Russia remains the world’s largest gas exporter, accounting for 17% of global gas exports. Putin noted that while approximately 3% of Russia’s transactions were conducted in yuan previously, this figure has now risen slightly above 34%, with the ruble constituting 34%.
Saudi Arabia
In January 2023, Saudi Finance Minister Mohammed Al-Jadaan stated that the country was prepared to trade in currencies other than the U.S. dollar for the first time in 48 years.
Turkey
President Recep Tayyip Erdoğan presented a new strategy to reduce reliance on the U.S. dollar in global trade. His goal is to establish trade without using the dollar with Turkey’s international trading partners. The President has shown interest in trading with China using local currencies and has discussed replacing the dollar with another national currency in transactions with Iran. This move is influenced by both political and economic factors, as Turkey seeks to support its domestic currency by distancing itself from the dollar.
Bilateral Agreements to Reduce Dollar Dependency
India–Russia:
Before 1991, the Soviet Union and India traded using a rupee-ruble system during the Cold War. Today, most bilateral trade between India and Russia is conducted in rubles and rupees instead of dollars and euros. In March 2022, India and Russia established a rupee-ruble trade agreement. India also purchases Russian oil in UAE dirhams and rubles.
India–UAE:
India and the UAE are negotiating the use of the rupee for trading non-oil goods, signaling a shift away from the dollar.
Australia, Russia, Japan, Brazil, Iran:
China has agreements with Australia, Russia, Japan, Brazil, and Iran to trade using national currencies. Notably, in the first quarter of 2022, the share of the dollar in China–Russia bilateral trade fell below 50% for the first time. In 2011, Japan and China agreed to trade using their own currencies, and trade between China and Japan reached $300 billion.
Brazil–China:
In March 2013, during the BRICS Summit, Brazil and China agreed to trade using the Brazilian real and Chinese yuan.
Australia–China:
In 2013, Australia and China reached an agreement to trade in their national currencies.
France–China:
In a notable development, a French company recently conducted a deal with the China National Offshore Oil Corporation, exporting liquefied natural gas (LNG) with payment made in Chinese yuan. This transaction highlights the growing trend of de-dollarization, extending to the European Union.
Russia–Iran:
In July 2022, Russia and Iran adjusted their bilateral trade agreements to reduce dependency on the U.S. dollar. The new monetary system could settle debts within their own countries and potentially reduce annual demand for the U.S. dollar by $3 billion. By January 2023, Russia and Iran were planning to trade using gold-backed cryptocurrencies as an alternative to the U.S. dollar.
Southeast Asia
Several Southeast Asian countries, including Singapore, Malaysia, Indonesia, Cambodia, and Thailand, are exploring de-dollarization to reduce reliance on the dollar. These countries have expressed concerns over dollar value fluctuations and the U.S. government’s use of dollar-based sanctions. Consequently, they are eager to reduce their vulnerability to the dollar and explore alternative currencies.
Dedollarization: A Frightening Myth in Iran
So far, we’ve discussed the concept and process of dedollarization and the actions taken by various countries, including mentions of Iran. It seems the importance of this issue is well understood in Iran, especially given our struggles with U.S. banking and oil sanctions and numerous economic challenges. With that in mind, let’s focus more on our own country.
There’s a story about someone condemned to death for armed activities many years ago. When this individual, a supporter of communism and Joseph Stalin, was asked for his final words, he allegedly said: “Tell Stalin not to come to Iran, because here they turn everything upside down, change its essence—even communism!” Whether this tale is true or not, the attributed sentiment rings true. For instance, while Iran speaks of privatization, entrepreneurship, and economic freedom, the privatization process unfolded so poorly that terms like “quasi-private companies” emerged, accompanied by highly complex corruption cases. Unfortunately, dedollarization in Iran seems to have taken a similarly distorted form.
As mentioned earlier and often heard in recent official news, the Iranian government has been striving to conduct trade with neighbors like Iraq and major partners such as China, Brazil, and Russia using local currencies or euros. Negotiations and agreements have been made in this regard.
Dedollarization appears necessary for a country like ours, which faces primary and secondary U.S. sanctions and lacks access to systems like SWIFT and U-Turn dollar transactions. However, despite these efforts, it seems well-intentioned goals have been accompanied by a significant lack of knowledge, ignorance, and vested interests, leading to distorted outcomes.
As emphasized in initial definitions, dedollarization is a gradual process. The U.S. dollar and the American economy remain dominant forces, and despite China’s growing proximity to the U.S., it’s unlikely that America’s monetary and financial hegemony will be fully challenged within the next 10 to 20 years.
To verify this claim, consider the numbers: the United States accounts for over 25% of the global GDP, while China, in second place, covers more than 17%. For China to catch up, its economic growth would need to exceed 8% annually for about two decades, while the U.S. remains stagnant. Thus, the dollar will remain the primary currency for global trade for a long time.
Pseudo-experts often quote “American university professors” predicting the collapse of the U.S. economy, the country’s disintegration, and the demise of the dollar’s dominance. Experts, however, recognize these claims as marginal and riddled with flaws in their supporting evidence. Their acceptance and dissemination only highlight the prevalence of cognitive biases. Consequently, these pseudo-experts confidently advocate for “removing the dollar” from all trade arrangements, even demanding this occur within a single governmental term in Iran.
However, dedollarization is not about “removing the dollar” but diversifying a country’s foreign exchange reserves. Even if the dollar’s status were to weaken entirely, managed reserves of dollar assets would still be necessary, as the U.S. economy’s stability is likely to remain reliable for a long time. It is improbable that the U.S. will fall out of the top two or three economic powers. Thus, like the yuan, yen, euro, and even Bitcoin, the dollar will remain a vital reserve currency in the future. Moreover, in Iran, calculations are still based on the dollar. A sudden reduction in dollar reserves or a shift in the calculation basis would undoubtedly result in price volatility and inflation due to cost-push pressures and currency shortages.
The process of “removing the dollar” would also necessitate the withdrawal of physical cash from markets and households. Accelerating this process would only incite distrust and fear, prompting hoarding and black-market activities. People would rush to purchase alternative currencies, valuable commodities, and gold—a phenomenon repeatedly observed in global and Iranian economic crises, such as during the Weimar Republic in Germany, Argentina, Turkey, and Iran during the currency turmoil of 2012, 2018, and 2019. As noted, to enable dedollarization, reserves of other currencies and precious metals must be significantly strengthened, making it an undoubtedly time-consuming process.
Another argument by advocates of removing the dollar is that Iran’s chronic double-digit inflation over the past 50 years stems from the “dollarization” of economic institutions. A more nuanced subset of this group claims that inflation has persisted since the mid-1990s due to the dollar. However, data from the Central Bank of Iran, the Parliamentary Research Center, the Statistics Center of Iran, and the Planning and Budget Organization—supported by nationwide studies—consistently attribute the primary cause of inflation not to the dollar or sanctions but to excessive money creation and the expansion of the monetary base.
In fact, all institutions and officials—indirectly, at least—acknowledge the established findings of economics. Yet, according to economic pseudo-experts, inflation originated in the 1970s when the Shah created inflation with oil revenue rent, persisted through the imposed war of the 1980s, and took on a new dimension in the 1990s. This era, marked by the administrations of Akbar Hashemi Rafsanjani and later Mohammad Khatami, witnessed the adoption of IMF and World Bank recommendations for economic reforms. These measures allegedly led to Iran’s heavy reliance on the dollar and the emergence of neoliberalism in the country.
Although it has never been clarified, what is the definition and mechanism of this type of economy according to its proponents, ranging from post-Mao Zedong China to Pinochet’s Chile to Iran, which has been operating based on innovations of “Abolhassan Banisadr’s divine economy” and Islamic banking, all of which are claimed to have been governed under neoliberalism? Is a political and economic school of thought a magical fluid that adapts to the shape and color of any container it finds itself in? Hence, industries were privatized, and the pricing of every product and commodity in the country, especially in the steel, oil, and petrochemical industries, is first determined by global prices, then discovered and sold through free-market mechanisms.
This alleged process emphasizes that the beneficiaries of these industries profit from the increase in the value of the dollar because they hold substantial dollar-denominated assets and credits. Therefore, they manipulate the market, create artificial shortages of dollars and goods, and under the pretext of sanctions, first inflate the dollar’s price and then their products’. They then influence the government and central bank to obtain foreign exchange settlement licenses, pocketing immense profits.
On the margins of these claims, they selectively and distortedly reference the economic theories of John Maynard Keynes (government intervention), David Ricardo (diminishing returns), Thorstein Veblen (production cycles and pricing policies), and others, mocking neoclassical economic theories. They also employ the views of theorists who defended the Soviet-style communist economy under the guise of welfare and justice states. With this strange amalgam, they identify liquidity and money growth as the drivers of economic progress, claiming that quality production and balanced supply demand depend on sufficient liquidity. They argue that the government should control all prices, base value calculations on domestic conditions, and impose greater oversight on companies. Ultimately, to eradicate these problems, they advocate severing dependency on the dollar.
Critics may argue that, like these dollar opposers, this narrative commits the strawman fallacy by focusing “only” on weaker parts of the argument. Such criticism might indeed hold merit. However, in practice, who appoints the boards and CEOs of supposedly major shareholder companies in the steel, automobile, and petrochemical sectors? Shareholders, ministers, institutions, or sometimes the head of state himself?
The notion that domestic economic conditions should form the basis of calculations and prices should be managed does not mean that pricing must be 100% government-controlled and that the market should be governed “only” by the government. At present, is it not true that goods from eggs to oil are sold under direct or indirect government intervention? Doesn’t the Price Monitoring Organization operate from street shops to factories, examining ministry or cabinet decisions for pricing, quality, and even supply volume? (This practice has destroyed the country’s inventory management and product supply systems to avoid labeling individuals as “hoarders”!)
Have these proponents considered that their arguments imply that the entire board of directors and appointed government supervisors must participate in corruption and that all three branches of government must be paralyzed, weak, and ineffective for the beneficiaries’ profit-driven schemes to succeed? Doesn’t such a solution neglect the profitability and efficiency of economic enterprises? Under these circumstances, how could companies like major steel or petrochemical firms determine the dollar price, which is so challenging to procure from neighboring countries, especially the UAE, with most transactions controlled by central bank agents?
On the other hand, there are additional questions for these extreme dollar opponents. For instance, where in the world do industries operate entirely on domestic resources and remain independent of international markets for raw materials, fuel, and updated technology, enabling them to calculate product costs free from dollar or other currency prices? Why should traders and producers be motivated to operate in an economy where neither prices nor their profit margins are under their control?
Finally, if the dollar (and the so-called mafia) holds such power, how can it be replaced? It is entirely plausible that for many years (perhaps decades), the dollar will remain the reference currency for most of Iran’s neighbors and trading partners. The inflation and economic scale ratios of Iran to the United States and similar ratios with third countries determine the value of the dollar, local currencies, and economic and trade elasticity. Consequently, it is neither feasible to eliminate or significantly reduce the dollar’s influence in the manner these advocates envision nor to achieve a state where pricing is based entirely on domestic conditions.
Nonetheless, these extreme dollar opponents play another astonishing card: exchange rate stabilization policies. Based on unspecified methods or theories (e.g., monetary theory, velocity relationships, purchasing power parity, etc.), they claim that Iran’s inflation and economic size ratios to the U.S. yield specific values, then calculate an exchange rate for the U.S. dollar. This rate often excludes considerations of sanctions and the challenges of bypassing obstacles.
This rate typically corresponds to or is slightly above or below the official exchange rate allocated to essential goods (currently 28,500 tomans per dollar). Some still imagine rates as low as 15,000-20,000 tomans per dollar! They then propose that this rate should become the benchmark, with market, exchange bureau, and bank rates aligning towards it for stabilization. They even cite examples of countries that have successfully stabilized the dollar’s value.
They also propose prerequisites, such as removing subsidies and reducing false demand for currency by avoiding imports of non-essential products and refraining from incurring debt through financing luxury and unnecessary items—even considering airplane purchases for the aging fleet (averaging over 28 years) unnecessary. Conversely, they suggest producing such items domestically, even in small, agile manufacturing units at a household scale. Inspired by Chinese village workshops post-Mao, they propose home-based production of car headlight shields and lenses, as if rising dollar prices are due to importing luxury car headlight lenses!
Additionally, joining organizations like BRICS and Shanghai Cooperation Organization, using their proposed currencies or cryptocurrencies, replacing reserve currencies with euros or yuan (with an emphasis on yuan, though the government recently reported its budgetary calculations in euros and announced euro-based figures in governmental directives), and creating financial protocols between Iran and countries like Iraq or India based on local currencies are among their recommendations. They claim that these measures aim to eliminate dollar dependency and strengthen the rial (!)—some proposals resembling common global practices.
However, significant misunderstandings exist even within these seemingly logical and conventional suggestions. Firstly, their de-dollarization goals stem not from trade, financial, or economic (political) motives but from ideological opposition to the United States. It’s essential to realize that establishing a credit line in dinars and rials between Iraq and Iran would require substantial dinar reserves on the Iranian side and rial reserves on the Iraqi side. This depends on credit provisioning, obligating banks, or even establishing a dedicated bank. Without sufficient U.S. sanctions exemptions, no Iraqi bank would risk economic penalties or participate in establishing such a bank.
Moreover, powerful nations condition most collaborations on Iran reducing tensions with the world. For instance, China has not yet become a strategic partner for Iran, with Iran’s markets being relatively insignificant to it. Trade balances between Iran and China compared to other countries illustrate this. In initiatives like the Belt and Road Initiative, bypassing Iran is simpler than resolving its issues. China’s diplomatic philosophy typically avoids direct intervention, so it certainly won’t escalate tensions with the U.S. to support Iran, as evidenced by Iranian traders’ experiences in China. So, how can sufficient yuan reserves be secured to replace the U.S. dollar without extensive negotiations with the U.S. and reduced tensions?
Similarly, exchange rate stability in the UAE or China is often misunderstood in Iran. For example, the UAE has no independent monetary and banking policies, having entirely dollarized its economy. The UAE Central Bank stabilizes the dirham-dollar exchange rate by meticulously following Federal Reserve policies, from interest rate changes to anti-money laundering laws. Politically, the UAE has built strong Washington lobbies. Thus, it faces no limitations in sourcing dollars, and its financial policies mirror those of the U.S. with a 24-hour delay—from inflation to capital formation (requiring only minor adjustments)! Consequently, a dirham-rial agreement would first require U.S. approval and secondarily result in indirect linkage to the U.S. dollar.
Currency dumping in China and most Southeast Asian and ASEAN markets, which enhances comparative advantages for importing technology from the U.S., depends on various factors. These include significant investments by powerful companies with American-led boards in the region, which prevent U.S. government pressure on these countries. For example, while China hasn’t fully and effectively accessed liquefied natural gas technology due to its trade war with the U.S. (and Iran hasn’t even raised this concern), Indonesia, with U.S. and Australian collaboration, has become a regional hub for the industry, profiting without natural gas reserves.
The UAE and Southeast Asia examples demonstrate that de-dollarization ironically relies on dollar stabilization. In reality, stabilizing the dollar requires one of two approaches: forging strong ties with the U.S. or relinquishing independent economic policies from the Federal Reserve!
There are many more points to consider, but let us pause here. De-dollarization in Iran seems well-intentioned; however, in practice, many proposed approaches are unsuitable or impractical.
Conclusion
In summary, de-dollarization is a gradual process increasingly necessary to stabilize political and economic governance and resist geopolitical and economic tensions. Creating a diverse reserve currency basket, increasing gold and precious metal reserves, and leveraging local currencies in trade are effective de-dollarization methods. However, stabilizing the dollar or removing it from governmental, financial, and trade calculations is not de-dollarization; it merely reduces the impact of dollar fluctuations on the economy. Unfortunately, this distinction is poorly understood in our economy, with some attempting a futile ideological battle against the dollar. This article reviewed issues surrounding global and Iranian de-dollarization, hoping to provide readers with practical information and avenues for reflection.
