Towards a New Global Currency Regime in Future at Circa 2023!

The current geopolitical tensions between Ukraine and Russia has a larger dimension which is slowly emerging and may become quite obvious as we go down into 2023! While the tensions between these neighbors go back to February, 2014; the current war which started in February, 2021 has brought about a global turmoil not seen since World War II. As the world sees it, there seems to be a proxy war going on between the US and it’s democratic western allies on one hand and Russia supported by China on the other hand. India has been caught in between and is walking the middle path according to its understanding of its best interests! In all this, the European countries are caught in between and facing the double whammy of high inflation and increasing energy prices.

This, therefore, brings us to the current global scenario where the hegemony of the US dollar as a global reserve currency is being challenged day in and out. Going back to data available from 2019, U.S. dollar has been the major currency of reserve as well as international forex exchange between the countries of the world (source: 2019 triennial survey by Bank for International Settlements -BIS, Basel, Switzerland). As things stand, U.S. dollar accounts for nearly 88% of the international settlements. Way back in 1999 when the European Union currency – Euro was launched, it was thought that it would give a big challenge to the US dollar. However, Euro failed to live up to its role and is just 32% or 1/3 of the international forex transactions followed by Japanese Yen (17%), Great British Pound (13%) and Australian Dollar (7%). In fact, the emerging market economies (EME) currencies such as those from China, Russia, India, etc. have grown to nearly 25% of the international forex settlements.

With the current sanctions on Russia by the Western countries which are trying to stop its revenue generation via sales of oil and gas, countries like China and India has been trying to source the energy – oil via trade arrangements where the payment is made in Chinese Yuan or Indian Rupee. This has been made even more necessary due to the removal of Russia from the international settlement system – SWIFT (www.swift.com) and thus devoiding it’s trade partners of US Dollar settlement mechanism. A recent development has been imposition of further stringent measures like not providing international insurance and other facilities for Russian oil tankers / oil trade. Due to the war and the increasingly stronger ban on Russian oil and gas, the European countries are now looking towards US and Gulf countries for supply of their requirement of these energy sources. Incidentally the US and Gulf countries have been traditional suppliers of oil and gas to India and China, two of the largest energy importers in the world. Since it would be difficult for India and China to meet the price competition for supply of these energy sources with the European countries, they have been increasingly looking towards Russia for supply of discounted or low-priced oil.

A mélange of all the above factors have led to the emergence of the alternative currency exchange mechanism between the largest exporter of energy and the two largest importers of energy! Iran, another large oil exporter has been facing western sanctions and has started supplying oil to China with payments in Yuan. With increasing political tensions between US and Saudi Arabia (the Khashoggi imbroglio), the gulf nation has agreed to supply oil to China with payments in Yuan.

All the above events point to an emerging alternative currency exchange mechanism for trade in the world in the coming days and this would be a real challenge to the established hegemony of the US dollar as the main currency of exchange around the world. Will the US dollar survive the coming onslaught on its pole position – only time will tell!

Dr. Kapil Arora
Professor – Finance
Alliance School of Business, Alliance University, Bangalore