Two key geo-political events caught our eye over the past two days
Russia and Iran in discussion to issue gold-backed stable coins for cross-border settlement
Saudi Arabia Is Open To Discuss Non-Dollar Oil Trade Settlements
Both the announcements coming on almost the same day and too during the first few days of the launch of the World Economic Forum in Davos are what we found quite intriguing.
The announcements gain further significance when the dollar index is near its highs.
The Western Allies have imposed severe trade restrictions on Russia on the back of the Russia-Ukraine war which started in late February 2022. Russia has been looking for ways to circumvent the sanctions in one way or the other. Its Finance Ministry and Central Bank are finding it difficult to execute cross-border settlements without cryptocurrencies.
Against this backdrop, its decision to adopt cryptocurrency-based systems does make some sense, however, gold-backed crypto is something unique. A stablecoin pegged to gold will make its value clear and observable for all participants. The system will also enable other countries to buy or sell this stable coin amongst themselves.
Russia has joined hands with Iran, a country that has been facing US sanctions due to its nuclear program.
Iran has already started utilizing the cryptocurrency network for imports into the country. In August 2022, Iran’s Industry, Mines, and Trade Ministry approved the use of cryptocurrency for imports into the country. Iran placed its first international import order using USD 10 million worth of cryptocurrency.
It is essential to understand that the gold-backed stablecoin may not replace Ruble or Rial but rather will allow the two countries to execute cross-border transactions and settlements seamlessly and smoothly without any external inference.
However, this kind of trade settlement system will be possible after the cryptocurrency market gets fully regulated in both countries. The use of cryptocurrencies had been completely banned for residents of Iran and Russia, until recently.
In the case of Saudi Arabia, its finance minister told Bloomberg TV in an interview in Davos that the country is open to discussions about trade in currencies other than the US dollar. The Saudi Riyal has always been pegged to the US dollar since 1974 as part of the deal with the Nixon administration that included security commitments for Saudi Arabia.
This is not the first time, though. The Kingdom, in 2016, was in discussions with China over crude trade settlement in yuan.
However, this time Saudi Arabia’s intentions look firm and in earnest on the back of a growing chasm with the political establishment in the US. The Kingdom has grown increasingly disappointed over the lack of support from the US over commitments to protect Saudi’s security interests.
Saudi Arabia receives US dollars by selling crude oil in the international markets which are then utilized for buying US government bonds. In light of the deteriorating relations with the US, the kingdom is looking to diversify its foreign holdings away from the US dollar.
Saudi Arabia is one of the biggest exporters of crude oil and China is one of its largest importers. Both countries are strategic partners. China is bringing billions of dollars of investments in Saudi Arabia in Saudi Prince’s pet projects such as Neom, a futuristic city. China is further extending support to the kingdom to build its defense and nuclear arsenal. A section of the bureaucracy in Saudi Arabia is in favor of adopting yuan-based trade with China which may, in turn, help the kingdom to pay off Chinese contractors involved in domestic projects thereby eliminating any currency control risks. However, the Saudis are well aware of the limited availability of the yuan outside China.
Indeed, this does not bode well for the US dollar. If the events do unfold as such, it may lead to the establishment of a new world economic order and put a dent in the dollar’s status as the world reserve currency, and may reduce Washington’s clout in global trade.
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