De-Dollarization: Is Pakistan Ready?
By Adeela Naureen and Waqar K Kauravi
Prior to its military actions against Ukraine in 2022, the US discussed possible sanctions against Russia, but did not include a SWIFT (Society for Worldwide Interbank Financial Telecommunication) suspension. As reported by Bloomberg, US and the United Kingdom started to exert pressure on European Union leaders to consider cutting Russia access to the SWIFT banking transaction system.
Lithuania, Latvia, and Estonia’s foreign ministers pushed for Russia to be cut off from SWIFT after the Russian special military operations in Ukraine in 2022. According to a Reuters article from February 2022, EU member states were wary since Russia had developed the SPFS replacement and because both European lenders held the majority of the over $30 billion in foreign bank exposure to Russia. The European Union, the United Kingdom, Canada, and the United States eventually forbade several Russian banks from utilizing the SWIFT messaging system. Along with the EU, the governments of France, Germany, Italy, and Japan also pushed. The Russian Federation got frustrated and outlawed the use of SWIFT on March 20, 2023. This kickstarted the process of de-dollarization in Russian economy; especially for her transaction with other countries.
Despite how little it is discussed in Pakistan, de-dollarization is a topic that is receiving a lot of attention abroad. 2022 was identified as a critical year for de-dollarization. The crisis in Ukraine has had a negative impact on Russia, Eastern Europe, and countries and organizations in the Euro-Atlantic region. As a result of Russia-Ukraine war, numerous sanctions were put in place against the Russian Federation and its leadership. These fines were imposed globally, mostly by the United States and the European Union.
On September 26, 2022, the Nord Stream 1 and Nord Stream 2 natural gas pipelines were covertly bombed in the Baltic Sea. Both pipelines carrying natural gas from Russia to Germany over the Baltic Sea were constructed by the Russian gas corporation Gazprom, which maintains total control over both. Russia started blaming the NATO alliance and US intelligence services for the sabotage, despite the fact that it was unknown who the saboteurs were and what their objectives were. The American investigative writer Seymour Hersh allegedly published a story on his Substack website on February 8, 2023, in which he claimed that the White House had ordered the attack and that it had been carried out with the assistance of American and other foreign intelligence services.
As the battle wreaked havoc on the majority of Ukraine’s eastern regions, the world was hit by the energy and food crises like lightning from the sky. On the map of Russia and Ukraine, the region east of the Dnieper River is one of the most fertile for growing wheat. This region provided the majority of the wheat that Ukraine sent to other nations.
US led sanctions against Russian Federation impacted all major domains to isolate Russia, these included diplomatic maneuvering, economic ostracization, legal and punitive measures and media onslaught. The Russian leadership understood that a complex hybrid war was being fought against their vital national interests and that, in order to exist in the international system, they would have to overcome these challenges and sanctions.
Russia, a major oil and gas producer, decided to find an alternative because Swift was forbidden. It chose to exchange energy for something other than dollar. The idea was embraced, and bigger energy importers like China and India started conducting commerce in currencies other than the US dollar. Even Pakistan started looking for affordable Russian oil imports.
According to the Wall Street Journal, the largest crude producers in the Middle East went into active talks with Beijing about pricing some of its oil supplies to China in Yuan, a move that would challenge the U.S. dollar’s dominance over the world petroleum market and represent another shift in the area. Similar to this, the BRICS countries were worried that the US could freeze their assets denominated in dollars if they had confrontation with the US.
Another element influencing the de-dollarization process is the US economy itself. Currently, the US owes more than 36 trillion dollars in debt. It’s growing tougher and harder to keep Washington’s public debt at this level.
In addition, voices are coming from African and South East Asian countries like South Africa and Malaysia. Former South African president Thabo Mbeki stated that if two big countries want to trade in their own currencies, why they should do so in dollars. Kenyan President William Ruto has warned his business community to stop hoarding of dollars since the new market would be very different.
Independent analysts like Gonzalo Lira have studied the potential effects of de-dollarization on the global economy. Especially since the US started using sanctions to weaponize the dollar against foreign rivals, he thinks the 1944-instituted Bretton Woods system of monetary regulation is no longer functional. Instead of keeping all of their assets in banks, China, Japan, the KSA, the UAE, and other countries with growing dollar reserves purchased US stocks and bonds. Over the past few decades, China has gradually accumulated US Treasury securities, according to Shobhit Seth’s Investopedia article. As of August 2022, China held Treasury securities totaling $971.8 billion, or roughly 13% of the U.S. national debt.
Gonzalo thinks the money flow will start to change when de-dollarization picks up steam. Consider the fact that commerce between China and Arab countries has led to a growing Yuan reserve in the Middle East. The affluent Arab countries will start buying Chinese stocks and other Chinese assets. Large investors will subsequently start moving their money away from the New York Stock Exchange, Nasdaq, or US Treasury bonds and toward the Russian, Chinese, or Saudi markets. As the pressure on the dollar grows, the US Federal Reserve will start printing additional dollars, which will lead to hyperinflation.
Will the dollar’s fall be gradual or sudden? Gonzalo believes that the fall will start out gradually but accelerate when large investors start moving their capital to other countries.
With a significant change in strategy, Pakistan has already begun purchasing Russian oil in Chinese yuan. This may be the beginning of a new chapter in Pakistan’s financial history
There is a need to have debate in Pakistan about pros and cons of de-dollarization.
Seminars should be held by Pakistani ministries, think tanks, and academics to analyze the advantages and disadvantages of de-dollarization. The goal of these seminars is to assist Pakistan in creating a financial plan that will enable Pakistan to get the most from the transition. How can Pakistan integrate its trade and commerce with developing economies, for instance, and what other currencies might be used as reserve currencies? Can de-dollarization ease the burden of Pakistan’s foreign debt, particularly when the value of the dollar starts to fall in coming years?
The authors are freelance journalists who keep contributing to Pakistani and international newspapers and magazines.They can be reached at firstname.lastname@example.org