End of the Dollar Raj?

Arshad Shaikh studies the recent talk about de-dollarisation and the imminent decline of the dollar as the preeminent global reserve currency. The Ukraine crisis has put the spotlight on how countries, including India, are slowly moving away from the dollar in their bilateral trade, a policy initiated by Russia many years back. Although experts say…

Written by

Published on

Arshad Shaikh studies the recent talk about de-dollarisation and the imminent decline of the dollar as the preeminent global reserve currency. The Ukraine crisis has put the spotlight on how countries, including India, are slowly moving away from the dollar in their bilateral trade, a policy initiated by Russia many years back. Although experts say that de-dollarisation will not be easy and is a long and protracted battle, the diminishing stature of the US as a superpower is bound to accelerate the end of the ‘dollar raj’.

Not many may recall that almost eight years before the Russian invasion of Ukraine, Russia annexed the Crimean Peninsula from Ukraine in 2014. After sanctions were imposed on Russia, it began efforts to de-dollarize. It began to reduce its share of dollar-denominated assets. It encouraged bilateral trade in national currencies and reduced the use of the dollar in Russian exports. It tried to build its own national electronics payments system after Russian banks were denied access to many payment-processing firms.

Responding to the invasion of Ukraine, the European Commission (EC) disconnected Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a messaging service for the facilitation of cross-border payments between companies banked in different countries. China immediately came to the aid of Russia by offering its own version of SWIFT called the China National Advanced Payment System (CNAPS).

All these events have put the spotlight on the concept of de-dollarisation and the quest of different central banks to diversify their reserves from the dollar to other currencies like the Euro, Renminbi and even gold.


The process of dollarisation or dollar hegemony started in the early 1970s when the United States convinced oil-rich Saudi Arabia to sell its oil in dollars only and no other currency. The collapse of the Bretton Woods system was signalled by President Nixon as he announced in August 1971 that he was suspending the dollar’s convertibility to gold allowing major currencies to float against each other. With this, the position of the US dollar was sealed as the global reserve currency.

Currently, around 60% of foreign exchange reserves and about 70% of global trade is conducted using the US dollar. Despite the enormous national debt and trade deficit piled up by the US, the American dollar continues to enjoy the tag of a “safe-haven” asset and remains the currency of choice for central banks around the world. As the case of Russia demonstrates, de-dollarisation is motivated by the need for countries to shield themselves financially from the US dollar being used as an instrument of aggression.

De-dollarisation entails reducing the dollar’s dominance in global trade. It is a process of replacing the dollar as the currency of choice for international trade, maintaining foreign exchange reserves, bilateral trade agreements and dollar-denominated assets. De-dollarisation has the potential to upset the geopolitical influence of the USA on countries and create a multi-polar world with a financial system that is devoid of unchallenged monopoly.


Despite the efforts of major countries like China, Russia and even India, the path towards de-dollarisation is long and arduous. According to IMF data, the share of the US dollar in global foreign exchange reserves continues to remain almost constant at 59% since 1995.

For any country to make a serious dent into the dollar hegemony, its economy must match the size of the American economy. Case in point, Russia’s GDP at US $1.71 trillion is still no match for America’s nearly US $23 trillion GDP in 2021.

Gold and digital currency will be important tools in the drive towards de-dollarisation. If rival central banks decide to suddenly dump their dollar assets, there may arise balance sheet risks to the value of their dollar-denominated holdings. Central banks are reluctant to go back to using the local currency, as the cost of redenominating transactions is high until de-dollarisation or transacting in local currencies gains substantial traction.

Indexation or a fixed exchange rate aids the switch from foreign currency to local currency, but it is possible that this indexation may become sticky and the inherent guarantee of a fixed exchange rate can then reinforce dollarisation.


China formed a network of countries that use its currency the Renminbi to carry trade through its Bilateral Swap Agreements (BSA). One of China’s far-sighted measures as part of de-dollarisation is the creation of a Yuan-centred trading and investment system through the Belt and Road Initiative and the Asian Infrastructure Investment Bank. The Yuan-based trading is mostly between China and Central Asian and African countries.

China was also successful in ensuring the Renminbi’s inclusion in the International Monetary Fund-Special Drawing Rights in 2016 further to enable it to play a greater role in international finance and trading. In 2018, with the launch of yuan-priced oil contracts the Shanghai International Energy Exchange created the “Petro-Yuan”.

Oil is the world’s largest traded commodity, estimated currently to be worth $14 trillion. However, the crude oil market is still dominated by dollar-denominated international benchmarks of West Texas Intermediate (WTI) and Brent. Talks between China and Saudi Arabia have been going on for many years to agree to price and sell some oil in yuan rather than in dollars. This is a very important development for de-dollarisation.

One must bear in mind that both China and Saudi Arabia still run a dollarized economy and both the Saudi Riyal and the Chinese Renminbi are still pegged to the American dollar. Still, the emergence of the Petro-Yuan is an imminent threat to pax-Americana and an important factor in the fast-changing geopolitical landscape. It is projected that the Chinese Yuan will account for 5% to 10% of global foreign exchange reserve assets by 2030. It presently makes up around 3% of global foreign exchange reserve assets behind the US dollar and the euro.


The lust for political hegemony through the path of economic imperialism and ultra-nationalism resulted in two world wars and caused untold destruction along with a humungous waste of useful resources. The Cold War and its aftermath have seen an economic order marked by American expansionism through the dominance of its currency in trade and asset creation.

With the decline of American supremacy after its misadventures in Iraq and Afghanistan and the rise of China and India, the “dollar raj” is being seriously challenged and the days are not far when we will see the imminent decline of the dollar.

However, we should not cherish moving from the petro-dollar to the petro-yuan. The world must evolve a system that is just, fair and has a regulating mechanism that prevents the emergence and domination of one nation exuding unchallenged power in global finance and trade.

Prominent American economist Michael Hudson accurately describes the negative externalities of an overriding currency – “Strange as it may seem and irrational as it would be in a more logical system of world diplomacy; the dollar glut is what finances America’s global military build-up. It forces foreign central banks to bear the costs of America’s expanding military empire. The result is a new form of taxation without representation. Keeping international reserves in dollars means recycling dollar inflows to buy U.S. Treasury bills – U.S. government debt issued largely to finance the military spending that has been a driving force in the U.S. balance-of-payments deficit since the Korean War broke out in 1950”.

We need to do away with ‘dollar raj’ but not by bringing in ‘yuan raj’.