Anyone in Iraq who wanted to buy a car or a house this week got a nasty shock. Last Sunday, the Iraqi government announced a ban on doing personal or business deals in US dollars.
Ordinary Iraqis usually make big-ticket purchases using dollars. Because of the ongoing devaluation of their own dinar, they’d need several large rubbish bags filled with paper dinar notes to buy a car or house. So they usually use a wallet full of dollars instead.
For decades, the US dollar has been the best currency to have in the Middle East if you don’t have enough dirhams, dinars, riyals or pounds on hand. But that may be starting to change. Over the past few months, senior politicians in a number of Middle East nations have made statements that suggest the dollar’s dominance in the region may fade.
In Iraq, US authorities had been making it harder to get dollars into the country — they were apparently worried that too much American cash was being smuggled to the neighboring Iranian government, which is under sanctions, but is tacitly supported by many Iraqi politicians. This shortage of dollars has led to volatility in the value of the Iraqi dinar, which is pegged to the US currency.
This volatility brought about last weekend’s ban. In February, also thanks partially to the US currency crunch, Iraq said it would do business with China using the yuan, instead of dollars.
Middle East nations seeking alternatives
Earlier this year, Saudi Arabia’s finance minister said his country was also “open” to selling oil using different currencies, including the euro and the Chinese yuan. The United Arab Emirates has said it will work with India, using the Indian rupee. Last year, Egypt announced plans to issue bonds — financial securities that help governments raise money — in Chinese yuan. It had already issued bonds in Japanese yen.
Additionally, several Middle Eastern nations — Egypt, Saudi Arabia, the UAE, Algeria and Bahrain — have said they want to join the geopolitical bloc known as BRICS, an acronym for Brazil, Russia, India, China and South Africa. Russia has already said that at an upcoming June meeting, the alliance will discuss the creation of a new kind of currency for cross-border trade between members.
The fact that the US and Europe froze Russian central bank reserve assets held in their jurisdictions has also weaponised central banks and possibly damaged the international financial system
Since 2021, the UAE has also been part of a pilot project run by the Switzerland-based Bank for International Settlements, a kind of central bank for central banks. This project looks at digital, cross-border payments that might bypass the dollar. Other participants are Thailand, Hong Kong and China.
Is the US dollar done?
These alternatives to the US dollar have led to a recent raft of alarmed headlines. “Is the dollar’s dominance under threat?,” The New York Times asked in February. “Prepare for a multipolar currency world,” the Financial Times warned in March. “De-dollarization is happening at a ‘stunning’ pace,” Bloomberg wrote late last month.
US dollars now make up about 58 per cent of official foreign reserves globally, Bloomberg reported in its story, a fall from 73 per cent in 2001. In the late 1970s, it was 85 per cent.
However, most experts insist the move away from the dollar is going far more slowly than recent headlines suggest. And this is certainly true for the Middle East.
In the Gulf, the dollar still rules
Since the 1970s, oil-producing Gulf states have had a partnership with the US, where America provides security and countries like Saudi Arabia and the UAE export oil. Most Gulf countries, with the exception of Kuwait, have pegged their own currencies to the US dollar.
“One of the biggest indicators of a serious shift away from the dollar would be a de-pegging of those currencies,” noted Hasan Alhasan, a research fellow on Middle East policy for the London-based International Institute for Strategic Studies. “But as of now, we haven’t seen that.”
“The key words here are ‘statements’ and ‘potentially’,” said Daniel McDowell, a political science professor at Syracuse University in New York, when asked whether assertions made by Arab leaders signal the dollar’s demise in the Middle East.
For oil-producing states, like Saudi Arabia, these sorts of statements and agitations are also a way to get America’s attention. Flirting with the Chinese may make American policymakers focus more attention on the interests of the Gulf states
“Statements are easy, action is more difficult,” he told DW. “For oil-producing states, like Saudi Arabia, these sorts of statements and agitations are also a way to get America’s attention. Flirting with the Chinese may make American policymakers focus more attention on the interests of the Gulf states.” McDowell doesn’t rule out the possibility that the dollar’s dominance will one day fade. “All empires eventually collapse,” he quipped. But right now, “much of this talk is symbolic and political. Any change we see will be marginal and slow.”
Motivated by war in Ukraine
The experts that DW spoke with all agreed there are likely two major reasons for Middle Easterners’ threats to use other currencies.
Firstly, they said, it has to do with Russia’s war in Ukraine.
Sanctions are a very significant part of the debate, McDowell thinks. His new book, “Bucking the Buck: US Financial Sanctions and the International Backlash Against the Dollar,” says as much, arguing “that the more the US wields the dollar as a weapon of foreign policy, the more its adversaries will move their international economic activities into other currencies.”
“Currently, there’s a lot of Russian money going through countries in the Middle East and Asia,” Alhasan explained. “Essentially those are countries that have chosen not to comply with, or not to enforce, American or European sanctions.” But should sanctions on Russia be toughened further, turning them into what are known as secondary sanctions, then those countries would have a much harder time avoiding them. Secondary sanctions also punish third parties — countries or businesses — that work with the sanctioned entity. Anybody who wants to do business with the US or European Union will find it hard to get around secondary sanctions.
Governments concerned about US sanctions are increasingly thinking about how they might get ahead of the curve, even if they are not yet ready or interested in making a radical shift away from the dollar
“So governments concerned about US sanctions are increasingly thinking about how they might get ahead of the curve, even if they are not yet ready or interested in making a radical shift away from the dollar,” McDowell reasoned.
Threat to oil business
Alhasan offers a second reason why some Middle East states may wish to move away from the dollar. “I think there’s the sense that the US is trying to rewrite the rules of the global oil market — to target Russian interests — and that presents a strategic threat to Saudi Arabia,” he argued. In March, Saudi Energy Minister Prince Abdulaziz bin Salman said that if any country tried to impose a price cap on Saudi oil exports, in the same way as had been done to Russia, his nation would no longer trade with it. A day later, Algeria’s energy minister, fearing a dangerous precedent, echoed that statement.
This is why the movement away from the US dollar looks likely to continue as long as sanctions do, argued Maria Demertzis, a professor of economic policy at the European University Institute in Florence, Italy, and a senior fellow at Bruegel, an economic think tank.
But it won’t happen overnight. Even if some countries want to bypass the US dollar as a currency, it will be more difficult to replace the settlement infrastructure provided by the dollar-driven system, Demertzis pointed out.
Banking as a weapon
“If you’re India and you want to sell something to Chile, for example, you are likely to do it in dollars. But you don’t only do that because you can more easily price a product in dollars. You also do it because you use the US dollar infrastructure to settle the transaction,” Demertzis said, explaining that settlement is “the legal action of taking money from one account and putting it into another account.”
To do that, trusted infrastructure is needed, she said, something the US has been providing for decades. Any alternative to that has “huge legal and governance implications,” Demertzis explained. “For example, does Chile recognise the legal framework of India? Even to get to where two central banks settle bilaterally is a long journey.”
The fact that the US and Europe froze Russian central bank reserve assets held in their jurisdictions has also weaponised central banks and possibly damaged the international financial system, according to Demertzis. In the Middle East, that has translated to “a genuine sense of concern about the US’, and even the EU’s, unprecedented weaponisation of international trade and finance, in the context of war with Russia,” Alhasan concluded. This is why countries in the Middle East “are preparing for a more multipolar global world, where they will want to be best placed to act inside and outside of dollarised zones.”