Since the 2008 financial crisis, U.S. regulators have found a number of corporations guilty of violating American law, forcing them to pay fines running into billions of Dollars. In some cases, the targeted companies were American and the action was justified as needing to protect the global financial system – for instance, fines imposed for misselling mortgage-backed securities (Bank of America, JP Morgan, Citigroup and Goldman Sachs). In other cases, the U.S. action targeted foreign companies for causing environmental damage within the U.S.–BP for the Gulf of Mexico oil spill and Volkswagen for falsifying emission data. The third group of companies was punished for violating geopolitically motivated U.S. sanctions in what might be considered a form of regulatory extortion (BNP Paribas, HSBC). In many cases, companies agreed to pay the penalties to buy peace rather than get into potentially ruinous litigation with the U.S. government; one example is BNP Paribas, which agreed to pay $8.9 billion to the U.S. In some of these cases, especially those linked to sanctions, the companies had not broken any law in their home countries. However, the threat of losing access to the U.S. banking system would have finished them as viable commercial entities, so they were willing to pay large fines. For some departments of the U.S. government, these fines have become a source of revenue. Virtually all of these mega fines have been levied since 2010. With several of India’s oil suppliers under sanctions, there is an increasing risk that an Indian oil company may get caught violating American law – and end up paying heavy fines.
Is the status quo changing?
The dominance of the Dollar in international transactions results from the dominance of the U.S. economy. But the rise of Asia – in particular, China and India – represents a challenge to the Dollar’s supremacy. China is now the second largest economy in the world, having grown from the equivalent of 6% of the U.S. economy in 1990 to 66% in 2018. Over the same period, India has grown from the equivalent of 5% of the American economy to 13%. China, and eventually India, are each projected to overtake the U.S. economy in sheer size. While the U.S. is now less enthusiastic about globalisation than in the past, China is pushing ahead with it, advocating its own version of free trade and promoting institutions such as the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB) as alternatives to the International Monetary Fund and World Bank. These are filling gaps created by the 2008 financial crisis, which raised questions about the sustainability of the Western-centred global financial system. The oil market has seen a shift too. While the U.S. remains the world’s top consumer of oil, it is no longer the largest importer, having dropped behind China because of its substantial shale oil production. Japan and the major European economies consume less oil today than they did in 1990, even though global consumption has risen. China is now the world’s second largest oil consumer, followed by India. These two are now the largest and third largest importers of oil worldwide. The changing structure of the world economy makes alternatives to the Dollar and the U.S.-dominated financial system possible.
Alternatives to the Dollar: early challengers
The first global challenge to the Dollar’s dominance came from the Euro, which was created in 1999. The Eurozone is the world’s second largest economic bloc after the U.S., and includes economic heavyweights such as Germany, France and Italy. Like the U.S., the Eurozone is a democratic area governed by rule of law and transparent regulation – key requirements for foreigners to trust a currency. Since its inception, the Euro has gained market share and now accounts for 20% of global foreign exchange reserve holdings. But it still lags the Dollar by a wide margin. The Euro is unlikely to progress much further as an alternative because of multiple factors.
1. Economic Problems with key members: Some European economies are struggling under heavy public debt. Greece, Portugal and Italy have debt-to-GDP ratios exceeding 100%. In the case of Italy, Spain, Portugal and Greece, the current GDP (2018) is lower than the 2008 figures.
2. Brexit: Britain, which was a part of the European Union but not the Eurozone, has voted to withdraw from the union. The confusion surrounding Brexit is unlikely to increase public confidence in the Euro.
Over the last 20 years, governments hostile to the U.S. and facing American sanctions also attempted to break away from the Petro-Dollar dominance. Specifically:
1. In the early 2000s, Iraq decided to price its crude oil exports in Euros instead of Dollars.
2. China and Russia have moved part of their oil trade from the Dollar to their respective currencies. The large volume of Chinese exports to Russia makes this possible. Wide-ranging U.S. sanctions on Russia have catalysed this trade.
3. During the earlier U.S. sanctions on Iran, India paid for Iranian crude in rupees via Turkish and European banks without exposure to the U.S. financial system. Because of the imbalance in trade between the two countries, Iran was left with a large amount in Indian rupees – which could only be used to buy Indian goods, demonstrating that the practice was only viable as a short-term stopgap.
4. Venezuela tried to sidestep U.S. sanctions on its oil industry by introducing the ‘Petro’, a cryptocurrency. This is considered a failure.
Oil exporters sanctioned by the U.S. have tried to find alternative markets, rather than seeking an alternative financial architecture. These don’t represent a challenge to the Dollar’s status as a basis for the world oil trade, but such activity shows that if there were an alternative to the U.S. Dollar for trading oil, there would be a ready base of customers. The challenge from China is of a different nature, and far more credible than any of the scattershot measures tried in the past. China is now the world’s second largest economy, and has started projecting itself as a rival to the U.S. on numerous fronts, including by trying to encourage the use of the Yuan as an international medium of exchange, in oil trade as well.
Bhandari, Amit, India and the Changing Geopolitics of Oil. Routledge India, 2022.
Amit Bhandari is Fellow, Energy and Environment Studies Programme, Gateway House.
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