Dollar supremacy undermined as petrodollar ally joins Shanghai Cohort
He will win who knows when to fight and when not to fight. He will win who, prepared himself, waits to take the enemy unprepared.
-Sun Tzu, The Art of War.
In early 1996, five countries, China, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan joined hands to deepen military trust among themselves. Named the Shanghai Five, it could have inspired many American spy novels.
The Shanghai Five has now evolved into the Shanghai Cooperation Organization (SCO), the world's largest regional organisation in terms of geographic scope and population.
Two recent developments indicate that the SCO is emerging as a strong geo-political power and may also be pivotal to propelling China's emergence as the predominant superpower of the world.
In March 2023, China brokered reconciliation between two arch enemies, Iran and Saudi Arabia, which has been hailed as a major diplomatic breakthrough, globally. And in April 2023, Saudi Arabia became the 21st country to join the SCO.
It is noteworthy, in this context, that post the abolition of the Bretton Woods Agreement, the dominance of the US Dollar was established primarily because Saudi Arabia agreed to trade petroleum through the USD. The regime of the petrodollar has stood strong mostly due to Saudi's close ties with the US.
In another development, closer home, Reuters has reported that Russia and India have abandoned efforts of devising a bilateral trade settlement mechanism in Rupee because Russia has refused payment in Rupee. Currently, India is paying Russia in US Dollars, UAE's Dirham and Renminbi.
It is also noteworthy that India has enjoyed close ties with Russia since independence and had managed to reinforce its friendship with Russia during the Russia-Ukraine war. However, Kremlin's refusal to trade in Rupee while being willing to accept payments in Renminbi indicates its affinity towards Beijing.
Out of all the currencies listed in the International Monetary Fund's special drawing rights (SDR) Basket, Renminbi is emerging to be the choice of the BRICS and SCO countries. Incidentally, these organisations also comprise the key nations that are actively resisting the US Dollar supremacy.
Patiently and steadily, the Chinese have been asserting Renminbi (RMB) by purchasing commodities, particularly oil, in RMB and using gold as a neutral settlement reserve. In 2016, the RMB became the first emerging market currency to be included in the IMF's SDR basket, which had earlier been the exclusive privilege of the Big Four.
Renminbi is estimated at 7% of international transactions and at the end of Q4 2022, foreign central banks across the globe hold Renminbi reserves worth $298.44 billion or around 3% of foreign currency reserves globally in foreign central banks. The size of the Renminbi Bloc, a group of currencies that all use the same currency, has climbed to 29% of global GDP from 15% in 2000. In the same period, the size of dollar currency blocs has declined from 50% of global GDP to 34% today, stated a Morgan Stanley report.
The Cross-Border Interbank Payment System (CIPS) launched by China in 2015 has emerged as an alternative to Dollar dominated Society for Worldwide Interbank Financial Telecommunications (SWIFT).
Early in 2005, the US was denied entry into the organisation when it had applied for an Observer status in the SCO. Following the incident, in November 2005, the Russian Foreign Minister, Sergey Lavrov had said, "Shanghai Cooperation Organisation (SCO) is working to establish a rational and just world order. The Shanghai Cooperation Organisation provides us with a unique opportunity to take part in the process of forming a fundamentally new model of geopolitical integration."
In hindsight, these words imply that the Sino-Russian powers had been strategising against the greenback hegemony for decades now. And the Shanghai 5 in its new avatar as the Shanghai Cooperation Organization is now getting poised to dethrone the US Dollar supremacy and usher in an era of Renminbi.