When the U.S. removed the reserve currency from the gold standard in 1971, it quickly needed a new backstop to ensure global trade would continue using the dollar as the primary trade currency. They found this in 1973 through the petro-dollar agreement with Saudi Arabia, and it has been the main form of collateral keeping dollar hegemony afloat for the past 43 years.
But in 2013, agreements between Russia and China forced the first crack in the dollar’s armor, and on Jan. 5 that crack widened even more as India and Iran signed a new agreement where oil sales would no longer be settled in the global reserve, and instead they would be transacted using the Indian Rupee.
Yet even this agreement is not the only new currency exchange to take place in Middle Eastern oil producing countries. Last month, the United Arab Emirates (UAE) created a new currency swap for the Chinese Yuan, and made oil sales one step closer to having multiple OPEC nations allow for petroleum transactions to be done in a currency other than the dollar.
Ditching the dollar, Iran and India have agreed to settle all outstanding crude oil dues in rupees in preparation to future trade in their national currencies. The dollar dues — $6.5 billion equaling 55 per cent of oil payment — would be deposited in National Iranian Oil Co account with Indian banks.
Sources said work was underway to amend the agreement with Iran to allow entire crude oil payment to be made in rupees. “Finance Ministry is moving a Cabinet note on withholding tax exemption on oil payments,” they said.
Since 2013, Indian refiners have been depositing 45 per cent of their oil payments to Iran in rupees with UCO Bank and withholding the remainder after a payment route through Turkey’s Halkbank was stopped under US and European sanctions.
The payment agreement needs amendment as tax exemption is contingent on the pact notified by the Centre in January 2012 which allows only 45 percent of oil payments in rupees. Budget 2012-13 exempted Indian refiners from withholding 40 per cent tax while paying NIOC. – Indian Express
There are many catalysts for this move away from the dollar, but two large ones are tied to America’s use of the dollar as an economic weapon through sanctions and restrictions in the SWIFT system, and the devaluation of the currency that has come from the central bank’s massive money printing that exported inflation to nearly all country’s required to hold dollars for commodity purchases.
It is only a matter of time before rising currencies like the Chinese RMB steal a big enough share of global trade to reach a critical mass where the dollar is no longer the singular reserve currency, and the Yuan becomes accepted as such through de facto means. And while the Yuan currently functions in 13% of all global trade, the most important indicator to keep in mind is the decline of the dollar, which has fallen to a decades low 45% from its former high of over 70%.