War Behind Closed Doors
Dollarization is when a country begins to recognize the U.S. dollar as a medium of exchange or legal tender alongside or in place of its domestic currency. It normally occurs when the local currency has become unstable and begun to lose its usefulness as a medium of exchange for market transactions.
Full dollarization lowers inflation rates and enhances policy credibility, encouraging foreign investment. It also promotes, but does not guarantee, fiscal discipline, a competitive financial system and economic integration with international markets.
De facto dollarization represents the situation of a foreign currency being used alongside the domestic currency as means of exchange for transaction purposes, (i.e., as currency substitution) or as means of saving in hard currency (i.e., as asset substitution).
De-dollarization is a process of substituting U.S. dollar as the currency used for (i) trading oil and/ or other commodities (i.e. petrodollar), (ii) buying U.S. dollars for the forex reserves, (iii) bilateral trade agreements, and (iv) dollar-denominated assets.
Starting from Russia-India transactions, trade with Iran; the EAEU (Eurasian Economic Union); BRICS (Brazil-Russia-India-China-South Africa), and SCO (Shanghai Cooperation Organisation) members in national or digital currencies can also become a reality in near future.
The world's largest countries with the biggest economies are moving away from payments in the U.S. dollar and increasingly using local currencies for trade. Among these countries are Russia; China; India; Saudi Arabia, and Iran.
If China (or any other nation having a trade surplus with the U.S.) stops buying U.S. Treasuries or even starts dumping its U.S. forex reserves, their trade surplus would become a trade deficit, something which, no export-oriented economy would want as they would be worse off as a result.
Existing studies have not systematically examined BRICS as a rising power and de-dollarization coalition, despite the group developing multiple initiatives to reduce currency risk and bypass U.S. sanctions.
Rather, the shift out of dollars has been in two directions: a quarter into the Chinese Renminbi (RMB)/Yuan (CNY), and three quarters into the currencies of smaller countries that have played a more limited role as reserve currencies.
As of the late-2000s, China has sought to internationalize its official currency, the RMB. It is making strides in fostering cross-border use of the CNY and building a renminbi-based interbank payments system that can serve as an alternative to SWIFT and Western clearinghouses.
The Cross-Border Interbank Payment System (CIPS), the international system used in China to clear and settle /CNY payments that are Onshore in China, launched by the Chinese central bank on 8 October. 2015, for dealing with international clearing houses uses "SWIFT" (Society for Worldwide Interbank Financial Telecommunications), legally (S.W.I.F.T. SC, a Belgian cooperative society), the industry standard for syntax in financial messages.
Messages formatted to SWIFT standards can be read and processed by many well-known financial processing systems, whether or not the message travelled over the SWIFT network.
China's de-dollarization initiatives are not only implemented by the central government in Beijing. The significance of Moscow's de-dollarization drive is that it is the most radical of such measures taken by a sovereign nation.
The war in Ukraine has dramatically transformed global power dynamics, as Western sanctions on Russia triggered the rise of alternatives. Augmented dollarization (i.e. the dollar's hegemony) throughout the world is beginning to show some serious side-effects.
Researchers argue that replacing the dollar isn't going to be easy or quick and neither is its war. However, they found evidence that CNY reserves were steadily increasing in countries that had tighter trade relations with China. This growing influence could make the CNY an alternative to the U.S. dollar in a “multipolar” world.
Food for thought!