Recent reports indicate that Saudi Arabia is the latest country to join a political alliance with other nations such as China, Russia, India, and Pakistan. Economically, this is not surprising considering that China is Saudi Arabia’s largest trading partner, where the two countries conducted over $87 billion in bilateral trade. However, the countries in this alliance are considering using the Chinese Yuan over the U.S. Dollar, which could threaten the dominance of the American currency.
Saudi Arabia’s cabinet approved the decision to join the Shanghai Cooperation Organization, strengthening the country’s eastern ties. The decision indicates a shift away from the Western interests of the United States. According to the United Nations:
The Shanghai Cooperation Organization (SCO) is an intergovernmental organization founded in Shanghai on 15 June 2001. The SCO currently comprises eight Member States (China, India, Kazakhstan, Kyrgyzstan, Russia, Pakistan, Tajikistan and Uzbekistan), four Observer States interested in acceding to full membership (Afghanistan, Belarus, Iran, and Mongolia) and six “Dialogue Partners” (Armenia, Azerbaijan, Cambodia, Nepal, Sri Lanka and Turkey). In 2021, the decision was made to start the accession process of Iran to the SCO as a full member, and Egypt, Qatar, as well as Saudi Arabia, became dialogue partners.
The decision to admit Saudi Arabia to the SCO shows China is looking to strengthen its influence in the Middle East and test that of the United States. All this in a world where power is becoming more multi-polar, instead of the Western hegemony America has maintained since the end of World War II. According to CNBC:
Saudi Arabia’s decision to join the SCO, while falling short of full membership, takes Riyadh’s interests further east, at a time when Beijing is testing out its sway in the Middle East in a potential hit to U.S. influence. In early March, China brokered a deal for long-time Mideast rivals Saudi Arabia and Iran to resume diplomatic relations and reopen embassies in each other’s countries.
Deeper in Europe, Beijing just as ambitiously, if so far less successfully, submitted a 12-point plan to achieve peace between Russia and Ukraine.
Another threat to the dominance of the U.S. dollar is the recent first “Yuan-settled” liquified natural gas trade completed on a Chinese exchange. This challenges the “petrodollar”, where the dollar is usually used to purchase energy on the global market. This could further challenge the dollar’s long-held status as the global reserve currency. According to US Global Investors:
All things must come to an end, however. We may be witnessing the end of the petrodollar as more and more countries, including China and Russia, are agreeing to make settlements in currencies other than the U.S. dollar. This could have wide-ranging implications on not just a macro scale but also investment portfolios.
The implications of the dollar potentially losing its status as the global reserve are numerous. Obviously, there may be currency risks, and a decrease in demand for U.S. Treasury bonds could result in rising interest rates. I would expect to see massive swings in commodity prices, especially oil prices, which could be an opportunity if you can stomach the volatility.
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