The world embarks on a new payment system to end dollarization of currency

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As many as 25 countries across the world are feeling the pinch of US and EU trade sanctions as the new year gets underway, since the bulk of them do not share Washington's and the Group of Seven's stances on many local and international issues.

The de-dollarization drive has been reignited, giving a push to a new cross-border payment system for reciprocal trade transactions. The attempts to use the US dollar and the global financial system as weapons to impose sanctions on countries that disagree with the US policies, such as Russia, Iran, China, Cuba, North Korea, and others, were unsuccessful.

Smaller countries, at least a dozen of which are in Asia, are also thinking about abandoning the dollar, and businesses throughout the world, and are selling a record amount of their debt in local currencies out of fear that the dollar will only get stronger.

Iran is attempting to get around the broad sanctions by establishing a new trading route that is independent of the Western trade lane as a result of the sanctions-busting tactics adopted by Russia, Central Asian countries, the Caspian region, Iran, and India.

Sanctions hit Russia

In February of last year, after US President Joe Biden imposed trade restrictions on Russia because of “its military activities against Ukraine”, Russia was subject to sanctions from all around the world. Two state-owned Russian financial institutions, Vnesheconombank and Promsvyazbank, which predominantly financed Russian military expenditures, were initially barred by the sanctions.

Sanctions imposed by the West have cut Russia off from the worldwide financial system dominated by the US. The connection between a significant number of Russian banks and the SWIFT inter-bank messaging system was severed. Even more extreme, the US and European Union froze a whopping $300 billion of the foreign exchange reserves held by the Russian central bank.

As a direct response to this, Russia's central bank has mainly abandoned the euro and the US dollar in favor of the Chinese yuan, which it intends to purchase on the currency market. In a period that is significantly less than one year, the yuan has swiftly supplanted the dollar as the foreign currency that is in most demand in Moscow.

Reaction

The escalating geopolitical strife, which is being stoked by Washington's new cold war, has prompted Russia, China, Iran, and an increasing number of other countries to strive to de-dollarize, or at the very least, to diversify their foreign reserve holdings.

According to media reports, "yuan-ruble trading volumes on the Moscow Exchange  are already topping dollar-rouble trades." Media highlighted that this tendency is likely to continue from 2023 onward. To put pressure on the petrodollar, Russia has already begun requiring importers of its oil and gas to pay in rubles rather than dollars. Only half of Russia's exports are now valued in US dollars, compared to 2013, when all payments were made in dollars.

China

Russia and China are now less dependent on the dollar in the settlement of international trade as a result of their mutual decision in 2019 to start using their currencies rather than the US dollar for cross-border corporate transactions. This is because the dollar was no longer the standard currency for international trade.

Currently, the majority of Chinese trade with Russia is conducted in renminbi and rubles rather than dollars. The funding for the exchange of foreign currency for local currency was made feasible by the improvement of economic ties between China and Russia. Following the invasion of Ukraine, plans that were already in place in Russia and China to encourage the use of their currencies in international transactions through a variety of strategies, including the use of blockchain technologies, quickly gained momentum. For instance, Russia started requiring payment for electricity supplies in rubles.

Soon after, talks with China to increase their use of the yuan were intensified by several nations, including Bangladesh, Kazakhstan, and Laos, India began setting up a bilateral payment system with the United Arab Emirates last month as it began to focus on the internationalization of the rupee more regularly.

But it appears like progress is being made slowly. Yuan accounts, for instance, have not taken off in Bangladesh because of the country's huge trade deficit with China. Bangladesh tried to seek de-dollarization in its commerce with China but the flow was one-sided.

Countries under sanctions                                                                                            

The countries or regions so far bracketed with severe trade restrictions until March 2022, either unilaterally or in part, include Afghanistan, the Balkans, Belarus, Burma, the Central African Republic, Cuba, the Democratic Republic of the Congo, Ethiopia, Hong Kong, Iran, Iraq, Lebanon, Libya, Mali, Nicaragua, North Korea, Russia, Somalia, Sudan, South Sudan, Syria, Ukraine, Venezuela, Yemen, and Zimbabwe.

Since 1959, when Fidel Castro became Prime Minister of Cuba, overthrowing the US-backed Batista administration, Cuba has been sanctioned. In an unexpected turn of events, the United States helped bring down Cuba's Batista regime by imposing an arms embargo on the dictatorship it most favored.

Similarly, following the 1979 Iranian Revolution, Washington put a trade embargo on Iran. With the US and EU irritated by the removal of a Western-friendly king, the Iranian hostage crisis, terror-sponsorship allegations, and uranium enrichment difficulties remain controversial topics with the Iranian Islamic Revolution. The US-sponsored sanctions are becoming increasingly punitive over time.

The US imposed economic sanctions on North Korea in the 1950s when the US entered the Korean War to counter the Soviet Union's support for a unified, communist Korea. With tensions easing, South Korean President Moon Jae-in and North Korean leader Kim Jong-Un signed the Panmunjom Declaration in 2018, pledging better cooperation between the two countries.

Declaring the Syrian regime to be "beyond the axis of evil," the US and UN slapped the strongest trade sanctions on Syria, severely affecting the country's economy. The US suspects the Syrian government of collaborating with terrorist groups, but Washington has never presented substantial evidence to back up its assertions.