As tensions between Russia and the West escalate in the wake of their invasion of Ukraine, China’s decision to strengthen ties with Russia while simultaneously moving away from the dollar could have massive implications for global politics. However, to fully understand this, we need to understand the context behind this oil deal and the historical importance of the dollar.
Context: The Russian Invasion
On the 24th of February 2022, the world was stunned by Russia’s full-scale invasion of Ukraine. Citing the oppression of the Ukrainian people as reason, Putin reignited a conflict that had just started to settle after the annexation of Crimea.
Immediately, there was a massive backlash, as many countries banded together to sanction Russia. Foreign Russian oligarch assets were seized, and Russian oil and gas were boycotted. This posed an issue for Russia because a significant portion of its economy relied on its natural gas export to Europe. Not only that, but the war effort was expensive. Fortunately for them, China was more than willing to look past its actions in Ukraine to increase oil imports.
In the past, oil trade worldwide has been primarily conducted using the US dollar. This has resulted mainly from America’s dedicated efforts to keep the dollar the global standard. They have even gone as far as to start wars to keep their monopoly over the international oil trade. This is because many countries use the dollar as a reserve currency, which helps maintain its value. Initially, they would send their gold reserves to the US and would, in exchange, receive an equivalent amount of dollars.
This, however, was largely unsustainable, as the US began to print more money than they had gold to compensate. This led to the US rapidly heading towards economic collapse as countries started asking for their gold back. Recognizing this, President Nixon ended the convertibility of the dollar to gold in 1971. To compensate, he began a series of talks with Saudi Arabia, especially regarding their oil production. This resulted in the Saudi government pricing its oil in dollars in exchange for protection from the US.
This is how adopting the dollar as a global standard for oil deals came about. Moreover, this further allowed the US to stabilize its currency. The dollar has since become an essential part of the global financial system. This has given the United States significant influence over other countries. Moreover, it has also allowed the US to move much of international trade to the dollar.
Why China Wants Things To Change
Recognizing the importance of the Petro-dollar for the US stronghold over international affairs, it becomes increasingly understandable why China was so eager to switch to the yuan. By getting a significant oil and gas exporter to change the currency they price their oil, China can get many countries in the East to shift their reserve currency of choice. The yuan is already in a unique position, with governments issuing debt and conducting trade using it to favor the dollar. This allows China’s influence over the developing world to be even further strengthened.
Moreover, this placed the yuan as the only global currency with the potential to challenge the stronghold of the dollar. As if this wasn’t enough of a threat to the American stronghold, China has also seen rapid economic development in the last few years. This is precisely why America has been so bent on cutting ties with Chinese companies that the economic threat can be reduced.
However, this only ended up alienating China, causing them to take a hostile stance against America and its allies. While America did manage to ostracize China from the West, China did build up influence in the developing world, building a massive trade network, brick by brick. Moreover, their plan to include America in their global trade network took a backseat. By the time the Russian invasion rolled around, it had offered China the perfect opportunity to reduce American influence and build up its trading network.
The Long-Term Strategy in Shifting From The Dollar to Yuan
China’s One-Belt-One-Road (OBOR) initiative aims to create one unified global trade network, with China as its focal point. This initiative will benefit significantly from the increased influence that this deal likely offers.
This also acts as a sign of open hostility towards the Western world, both economically and in terms of lending support to a sanctioned country. Coupled with their recent exercises in the South China Sea near Taiwan, this fits in with the larger isolationist power political style that they have chosen to adopt in the wake of the US sanctions on Huawei and other major Chinese manufacturers.
This likely indicates that we are going to see more openly anti-US policies being adopted by China moving forward. This, along with an increased emphasis on expanding its sphere of influence. The Russian oil deal, in particular, will likely allow them access to important resources in the long run. This will be essential for the expansion of OBOR in particular. All of this will also probably lead to heightened polarization within international politics as well. At least for now, more countries will be forced to clearly define their stances. This especially applies to developing countries, who rely on them to access aid and other important resources.
The Impact on Saudi Arabia By Switching From Dollar to Yuan
As one of the long-standing allies of the United States, this recent shift has put Saudi Arabia in a unique position. While the Kingdom has recently been more distant from the States after a lack of outright support in the Gulf campaigns, it hasn’t explicitly moved to switch currencies.
Despite the yuan slowly emerging as a competitor, there is no immediate threat. This is since only 2.7% of international trade is conducted in yuan, compared to the United States’s 41%.
Since last year’s deterioration in American-Saudi relations, the Chinese president has also been invited to visit the Kingdom in December 2022. Moreover, since America is no longer the largest buyer of oil in the market (overthrown by China), there is quite a possibility of stronger relations between the two countries. China has offered many lucrative deals to the Kingdom recently, and the friendship has only grown stronger.
It would be a volatile move to make a large switch right now. However, there are talks about Saudi potentially diversifying its currency by starting trading in different currencies. The Saudi Representative also condoned this idea in the recent World Economic Forum.
While there won’t be any immediate dynamic change, we could expect to see the Kingdom potentially move away from the US dollar. This is especially likely as Russia, a fellow oil producer, also made the shift. This move could benefit the Saudi Riyal, offering it more independent power. This would allow it to stop relying on the dollar and US power.
In the next few years, we could see a major shift in the global trade network. In that case, it won’t be surprising if the leading currency switches from dollar to yuan.