Is Dollar Hegemony Fading Away?

After the end of cold war, world became unipolar, where United State of America came up as a sole super power. It then imposed its ideas, liking and disliking not only on diplomatic fronts but on international financial affairs. The hegemony of dollar started after Bretton Woods’s conference of 1944 in the aftermath of World War II. In this conference 44 countries agreed to peg their currencies to US dollar. After fall of U.S.S.R, America started influencing the regional trade until China popped up as largest supplier of industrial goods and became a threat to USA. Eventually, when former US President Donald Trump set tariff against Chinese goods, it finally triggered a Trade War between the two countries. Previously, USA was using its currency as a tool to control those states which, according to its criteria, may be a threat to international peace but after this trade war, USA using it against China and its allies. However, when Russia attacked Ukraine, it changed the scenario altogether. USA and allies are trying to restrict Russia from executing international trade to pressurize it to stop war. But it seems that now the countries directly or indirectly affected by this US hegemony started thinking of alternatives. Global supply chain disruption and inflation are also those factors contributing into this change to come true.                                 

Even after affirming compliance twice in 2017, Trump Administration    withdrew from its deal with Iran on nuclear enrichment under banner of   Joint Comprehensive Plan of Action (JCPA) while boasting off that he would  have negotiated better terms but left his office without concluding it. It is important to mention here that JCPA agreement was finalized in 2015 where five permanent members of the United Nations Security Council i.e. China, France, Russia, United Kingdom, United States and, a EU representative state, Germany concluded the matter with Iran. Now in Biden administration and where EU signalled positive notes during negotiations with Iran on most wanted nuclear deal when oil prices are on  the rise, Israel jumped in and influencing USA to not to conclude it. Due to   Covid – 19 pandemic world has witnessed a huge supply chain disruption  and extreme inflation thereon. Russia – Ukraine war added fuel to the fire of inflation which even compelled USA and 90 other countries to increase  interest rates to the maximum. Iran or any other country is not an exception  to this changing scenario and facing acute pressure on its external payments where country cannot even export much to get dollar based foreign exchange for its necessary imports. Please note that Iran is one of the major producers of oil and gas. It has excess electricity which it can offer on cheaper rates.

In February this year Russia launched attack on Ukraine when coincidently former Prime Minister of Pakistan Mr. Imran Khan landed Russia. It was first official state visit of any PM of Pakistan to Russia since two decades. Regime of Mr. Imran Khan has been changed right after one month of his visit to Russia where he claimed that his government is toppled through an imported conspiracy. Political instability inflicted in Pakistan through regime change and Foreign Exchange Reserves fell drastically. Even after release of two tranches in one go by International Monetary Fund with very tough conditions and roll overs from friendly states, FX reserves in Central Bank could not hold on its depletion. Therefore necessary and unnecessary imports restricted which is resulting a slowdown in economy that will make GDP of Pakistan to fall accordingly if one may compared it with previous financial year. Pakistan's major import item are either oil or energy related goods whereas now after devastating floods it requires not only food items but ingredients of fertilizers as well, to revive agriculture, preferably on cheaper rate or on deferred payment basis. On the same time Pakistan does not have sufficient dollars to finance its imports therefore any other currency for settlment would be an added advantage. When USA sanctioned Russia, as international trade is under its control due to dollar hegemony, Russia allured rest of the world to buy oil, gas and grains on discounted rates in a currency other than dollar. Countries already stressed on their external liabilities like Srilanka picked up the offer of cheaper oil from Russia while foreseeing such need previous government of Pakistan started negotiating with Russia for import of oil, gas and grains on cheaper rates. The matter even now is under discussion as Russia offered discounted oil to Pakistan’s new government in Shanghai Conference recently. However Pakistan seeks an amicable understanding from relevant international authorities to proceed further.                                          

In regional countries, India, who already playing very smart by procuring oil for food from Iran, bought good amount of oil from Russia on discounted price. Statistics showed that India almost doubled its oil import from Russia in initial months of war with Ukraine and also tried to satisfy USA as well. India took another initiative after observing developed nations like Russia and China in trouble in international trade due to dollar hegemony, It started negotiating countries to settle trade either on barter system or exchange of local currencies. For example, recently India negotiated Indian Rupee to Riyal trade settlment mechanism with Saudi Arabia, Taka with Bangladesh whereas Indian Central Bank offering its buiness communites some relaxation in taxation if they deal in Roubles with Russia. It is a notable fact that India is member of BRICS (an orgamization comprised of Brazil, Russia, India, China & South Africa). According to BRICS initiative in 2009 the governor of the Central Bank of China proposed a commodity-backed currency, an idea backed by the five BRICS countries. After Russia, China and India another country who is in dire need to trade with the world in a way other than dollar due to imposed sanctions, is Iran. Recently Iran contracted an import of around equivalent USD 10 Million by using crypto currency. This settlment mechanism is instant and can bypass any restrtiction imposed on intermediary banks due to dollar based settlment system. It is also important to mention here that even the US allies like European Union established the euro to protect the EU economy from foreign exchange shocks and after the dollar has emerged with the second largest share of global currency reserves at nearly 21 percent. Furthermore in March this year the Eurasian Economic Union (Russia, Armenia, Kazakhstan, Kyrgyzstan and Belarus) agreed to develop a new international currency as well.