While Europe is survival-mode as a result of a war and an energy crisis, the rest of the world is working diligently and purposefully for the future. A notable news item in this context received limited attention: Chinese President Xi Jinping’s visit to Saudi Arabia. During that visit, a straw fire was lit up that could eventually blow up the petrodollar’s omnipotence.
The context in a nutshell: in 1944, the Bretton Woods system was introduced. This involved a system of fixed exchange rates. Only the dollar could be exchanged for a fixed amount of gold at the US central bank. This was not possible for the currencies of the other 44 participating countries. They did have a fixed exchange rate with the dollar. It was a system that effectively amounted to a reintroduction of the gold standard.
In 1971, Bretton Woods came to an end. Cause: the oil crisis, to which the United States responded by refusing to accept exchangeability of dollars for gold any longer. Nevertheless, the United States managed to remain the hegemony of the post-war world. This was possible because Washington struck a deal with the Saudis, agreeing that oil could only be bought with dollars. This left the dollar as the world’s reserve currency, which to this day gives the US unprecedented advantages both in financing its government deficits and maintaining purchasing power.
World turns its back on West
The war over Ukraine could now lead to revolutionary changes. The trigger is the US response to Russian aggression. The Americans have denied Russia access to the international payment system Swift and, in addition, their foreign currency reserves have been frozen. This has sent shockwaves through the southern hemisphere and opened the eyes of many government leaders and heads of state. Conclusion: an alternative to the dollar hegemony of the Americans must be developed.
Earlier this month, Chinese President Xi Jinping travelled to Saudi Arabia, where he agreed with Gulf Cooperation Council (GCC) member states to settle oil and gas, through the Shanghai Stock Exchange, in yuan. This breakthrough could be achieved because GCC member states can now use the yuans paid for their oil and gas to pay for imported goods and services from China in the same currency. Moreover - and just as importantly - it was agreed that they could convert their yuan surpluses into gold.
New gold standard
The agreement between China and the GCC countries could herald the end of the 1973 modernised Bretton Woods. It could be an important first step towards a new world financial system. After all, the oil market is at least 20 times larger than the gold market, giving an indication of how much money will be exchanged into gold and what that will mean for the future price of the precious metal - not surprisingly, many countries are anticipating this development: gold stocks are at their highest point in 50 years. The ‘secret’ buyer in recent years has mainly been China.
The turn by oil-producing countries in their perspective on the world - from West to East - does not surprise: their irritation and opposition has been in play for some time. They denounce the criticism and interference of Western countries, especially the US, in their domestic affairs.
In response, the GCC countries refused to follow President Biden’s call for sanctions on Russia. Also, ahead of the US midterm elections, these countries refused to abandon their planned reduction in oil production. This forced President Biden to (temporarily) tap US strategic reserves.
Goodbye G20, hello Brics+
Against the backdrop, a new global infrastructure of cooperation and consultation is now accelerating. It is an alternative to the G20, which was established in 1999, and is slowly but surely becoming irrelevant. The new world has BRICS - the acronym for Brazil, Russia, India, China, South Africa coined by Jim O’Neill, then top executive of Goldman Sachs Asset Management. At least 12 countries, including Algeria, Argentina, Indonesia and Iran, have applied to become members. There is also interest from countries like Turkey, Egypt and Afghanistan to become part of it as well.
The combined GDP of this future group of countries is roughly 29,400 billion dollars, compared to 23,000 billion dollars for the US and 14,500 billion dollars for the EU. But more importantly, the Brics+ countries represent half the world’s population at 4.6 billion, and 45 per cent of oil and 60 per cent of global gas reserves.
No meddling
Not surprisingly, Saudi Arabia has shifted its gaze from the west to the east of the world. Crown Prince Mohammed bin Salman and President Xi Jingping, for instance, have entered into a 30-year strategic partnership. It covers almost all relevant sectors: energy, telecoms, trade, infrastructure and regional cooperation. It also contains an agreement, which can be considered a paradigm shift of the new era: the two partners explicitly stipulated that they will not interfere in the other’s domestic affairs.
That this cooperation was made world-famous during the World Cup in the Western-criticised host country Qatar (photo: emir of Qatar Sheikh Tamim bin Hamad Al-Thani, second from left) can therefore hardly be a surprise.
Welcome to the new world!