Following Saudi Arabia’s exit from the petrodollar deal, one wonders what prompted this move after such a long time. Coincidentally, this exit aligns with Saudi Arabia’s new membership in BRICS. What does this mean for the future of the US dollar?
What is the Petrodollar Deal?
The Petrodollar deal, devised by former U.S. President Richard Nixon and Secretary of State Henry Kissinger, offered Saudi Arabia military weapons and protection in exchange for the exclusive right to price oil in U.S. dollars. This arrangement required countries wanting to trade oil to obtain U.S. dollars, helping the U.S. maintain economic dominance and preserving the dollar as the world’s reserve currency for over 75 years.
The Exit of Saudi Arabia from the Deal
This week, Saudi Arabia announced it would not renew this contract, reflecting a broader trend where countries are moving away from using dollars in international trade and oil transactions.
BRICS Welcomes Saudi Arabia
The BRICS coalition—initially Brazil, Russia, India, China, and South Africa—aims to unite developing countries to challenge the political and economic power of wealthier nations. On January 1, 2024, Egypt, Ethiopia, Iran, Saudi Arabia, and the UAE were invited to join BRICS. Despite initial hesitation, Saudi Arabia attended the 2024 summit, indicating a potential shift toward joining BRICS.
BRICS’ De-Dollarization Push
BRICS has made it clear in recent years that they are planning to slowly transition away from dollar when it comes to international trade. India for example has signed a trade agreement with the UAE to sign transaction (of oil and gas) to be in Rupees instead of dollars. Saudi Arabia has also signed a deal with China to price some of Saudi Arabia’s oil sales in the Chinese Yuan rather than in dollars or Euros.
Thus Saudi Arabia has become the final nail in the coffin for the US dollar. Cutting off U.S. from the Petrodollar deal would be equivalent to stripping US of its most powerful import - its currency. This would then create a big dip in the value of dollars, resulting in depreciation in the international forex and currency markets.
Saudi Arabia then, is BRICS trump card.
Implications for the US Dollar
Does this spell doom for the US economy? Not necessarily. The dollar remains strong due to:
1. *Economic Strength*: The U.S. has a robust economy, encouraging continued use of the dollar as a reserve currency.
2. *Trust in Institutions*: The stability and reliability of U.S. governance and legal frameworks retain investor confidence.
3. *Inertia and Network Effects*: The dollar's established use in global trade makes switching to another currency difficult and costly, reinforcing its dominance.
Saudi Arabia's questionable alliance with BRICS
Saudi Arabia’s exit from the petrodollar deal and potential alignment with BRICS raises questions about the future of the US dollar. While we can speculate, the exact motives behind Saudi Arabia's decision remain open to interpretation. What propelled Saudi Arabia to leave this seemingly flawless deal, and what do they stand to gain?