[Global Focus] Saudi Arabia Shakes the US Power Pillar 'Petro Dollar'

New Currency War ① 'De-dollarization' Challenge of Saudi Arabia

"The ‘Petro dollar’ system is facing a critical crisis"

Can the Petro dollar, which has supported the global financial order for over 50 years, maintain its stable dominance amid challenges such as Saudi Arabia’s change of heart and China’s rise? As the United States, which had taken a hardline stance against Saudi Arabia’s direct challenge to dollar hegemony, lowers its response level, the rise of the ‘Petro Yuan’ has emerged as a variable threatening the dollar’s status.

Shaking the Pillar of American Power, the ‘Petro Dollar’

On October 17, 1973, the first oil shock erupted, and a month later, Henry Kissinger, then U.S. Secretary of State under the Richard Nixon administration, met with King Faisal of Saudi Arabia, the world’s largest oil producer, to strike what would later be called the ‘deal of the century’ that changed the world order.

When Saudi Arabia cut off oil supplies to the U.S., which had sided with Israel in the Yom Kippur War between Israel and Arab countries, panic buying caused oil prices to soar more than fourfold, and the dollar’s value plummeted by nearly 30%.

The U.S. devised a clever strategy to protect the dollar’s hegemony as the global reserve currency. In exchange for guaranteeing Saudi Arabia’s security, Saudi Arabia agreed to conduct all oil transactions exclusively in dollars. This was the birth of the Petro dollar system, which later made the dollar an irreplaceable global reserve currency.

However, after 50 years, cracks are appearing in the relationship between the U.S. and Saudi Arabia. Saudi Arabia, which created and stood at the center of the Petro dollar system, has recently begun moving away from the dollar.

The turning point in bilateral relations came in October 2018 with the assassination of Saudi dissident journalist Jamal Khashoggi. The U.S. Central Intelligence Agency (CIA) pointed to Saudi Crown Prince Mohammed bin Salman as behind the assassination, and during the 2019 presidential campaign, President Joe Biden pressured that “the Saudi monarchy will pay a price,” causing cracks in the long-standing alliance.

After Biden took office, when Saudi Arabia faced missile attacks from the Houthi rebels, a major threat in the Yemen civil war, the U.S. withdrew Patriot surface-to-air missiles from Saudi Arabia. Subsequently, in August 2021, the U.S. withdrew troops from Afghanistan, signaling a distancing from the Middle East and weakening Saudi Arabia’s security guarantees.

As relations between the U.S. and Saudi Arabia seemed to cool, Saudi Arabia made a different decision. Ignoring the U.S.’s all-out effort to curb soaring prices caused by Russia’s invasion of Ukraine, Saudi Arabia led OPEC+ production cuts. These cuts occurred twice, last year and again earlier this month.

The U.S. foreign affairs magazine Foreign Affairs noted, “Bin Salman’s decision to cut production marks Saudi Arabia’s beginning to break away from the Petro dollar system, which symbolizes U.S.-Saudi economic cooperation,” and pointed out that “Saudi Arabia is beginning to see itself as a strong power capable of playing an independent role in international politics, not a vassal of U.S. security.”

Intensifying U.S.-China Currency War... ‘Is the Petro Dollar Era Ending, and the Petro Yuan Era Coming?’

China, another economic powerhouse, supported Saudi Arabia’s independence. China began to actively exploit the worsening U.S.-Saudi relations.

At the first-ever China-Gulf Cooperation Council summit held in Riyadh last December, Chinese President Xi Jinping, in his keynote speech outlining cooperation priorities for the next 3 to 5 years, requested Middle Eastern oil-producing countries to conduct oil transactions in yuan. This was the first official formalization of the Petro Yuan by China.

Prior to this event, China’s Ministry of Foreign Affairs posted an article titled “US Hegemony and Its Perils” on its official website. The article’s main point was that China would pursue confrontation by enhancing the yuan’s role against the U.S. dollar hegemony in the economic arena, one of the core battlegrounds in the political, military, economic, technological, and cultural struggle with the U.S.

China is the largest oil importer, purchasing 25% of Saudi Arabia’s oil exports. The bond between the two countries as trading partners is growing stronger. Trade volume between Saudi Arabia and China surged from $500 million (about 668.8 billion KRW) in 1990 to $87 billion (about 116 trillion KRW) in 2021.

Along with the increase in trade, the share of yuan settlements in China’s trade payments rose to 48.4% as of March, surpassing the dollar’s 46.8% for the first time. This is remarkable growth compared to 2010, when yuan settlements were virtually nonexistent.

This ratio is likely to grow further. Since the Western sanctions against Russia following its invasion of Ukraine in February last year, trade between the two countries has expanded. Currently, China accounts for about 15% of the global merchandise trade market.

China’s allies, Brazil and Russia, are also supporting the de-dollarization trend. Brazilian President Luiz In?cio Lula da Silva visited the Shanghai headquarters of the New Development Bank on the 13th and expressed discomfort with dollar hegemony, saying, “During my first term, I asked myself every night why all countries trade in dollars.”

Brazil and China agreed on the 14th, during a summit, to expand transactions using the yuan and the Brazilian real. Russian President Vladimir Putin also stated during a meeting with President Xi last month, “We support the use of the yuan in transactions among Russia, Asia, Africa, and Latin American countries.”

Recently, French President Emmanuel Macron, who visited China, also expressed solidarity with the de-dollarization movement, emphasizing, “The U.S. dollar enjoys extraterritorial privileges in the international economy. We need to reduce Europe’s dependence on the dollar.”

Where U.S. Silicon Valley VCs Are Turning... The U.S. at a Crossroads

In January this year, Saudi Arabia declared its willingness to conduct trade settlements in currencies other than the dollar, effectively declaring war on dollar hegemony.

In an interview with Bloomberg TV in January, Saudi Finance Minister Mohammed Al-Jadaan said, “We are ready to discuss transactions in any currency, including the dollar, euro, or Saudi riyal,” and added, “We enjoy a very strategic relationship with China and have the same strategic relationship with other countries, including the U.S.,” seemingly placing China in a position of relational advantage.

In December last year, Xi Jinping (left), President of China, who made a state visit to Saudi Arabia, arrived at Al Yamamah Palace in the capital Riyadh and shook hands with Crown Prince Mohammed bin Salman.
[Image source=AP Yonhap News]

How the U.S. will respond to Saudi Arabia’s challenge to dollar hegemony remains uncertain. With the next presidential election coming up next year, President Biden, who must focus on stabilizing oil prices and inflation, is unlikely to take harsh measures against Saudi Arabia.

President Biden suffered humiliation last summer when he visited Saudi Arabia to request increased oil production but was rebuffed, and last month, diplomatic damage increased as Saudi-Iran diplomatic relations were restored through Chinese mediation.

Another reason the U.S. cannot provoke Saudi Arabia is that Silicon Valley venture capital (VC) firms are actively courting Middle Eastern capital. After the banking crisis triggered by the collapse of Silicon Valley Bank (SVB) amid high-intensity tightening, U.S. VCs, facing a dry funding pipeline, have been seeking Middle Eastern capital one after another.

Saudi Arabia’s sovereign wealth fund (PIF) venture subsidiary, Sanabil, a government-affiliated investment fund, recently invested in about 40 U.S. VCs, including the famous Silicon Valley VC Andreessen Horowitz. The well-known U.S. VC Tiger Global Management also sought to attract $6 billion in Saudi investments. Tesla CEO Elon Musk also utilized funds from Saudi Prince Alwaleed bin Talal in acquiring Twitter.

Meanwhile, some view the threat to dollar hegemony as exaggerated. A British media outlet pointed out, “Although trade volume based on the yuan is increasing, the yuan’s share in central bank reserves remains only 3%,” and added, “Global economic activity is still led by the U.S. and its allies, and the U.S. remains the only country capable of supplying sufficient currency liquidity to the global economy.”

The dollar’s power stems from its massive liquidity, the U.S.’s openness in trade and investment, and trust in its institutions. China’s financial system is less developed, currency exchange is difficult due to capital controls, and the rule of law is lacking, making it an unsuitable alternative to replace the dollar.