What Saudi's decision to end the 'Petrodollar' deal mean?

Saudi Arabia officially ended its 50-year 'Petrodollar' agreement with the United States, shifting to a multicurrency system for oil sales.

This transition allows the kingdom to sell oil in various currencies and is a welcome sign for those countries looking at options other than the dollar use.

Now, let's understand the Saudi-US deal for pegging the dollar for global oil sales.

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The dollar's dominance was influenced by an agreement between Saudi Arabia and the US in which the kingdom agreed to exchange US dollars for crude oil shipments.

So, after the historic deal in 1974, much of the world followed a dollar-based price in the international oil market.

The shift away from the so-called Petrodollar deal by Saudi Arabia would alter the global economic landscape and threaten the dollar's dominance in international trade, even though the kingdom has not officially acknowledged the shift away from the greenback completely.

BRICS & multi-currency trade

This move coincides with Saudi Arabia's recent participation as a guest nation at the BRICS outreach ministerial meeting in Russia.

BRICS, now comprising 10 full members, including Saudi Arabia, Egypt, Iran, UAE, and Ethiopia, is pushing for greater use of local currencies in international trade and financial transactions.

The BRICS meeting, held for the first time since the group's expansion in 2023, emphasised the necessity for reforms in International Financial Institutions, including the IMF and World Bank.

Meanwhile, both China & Russia have called out the West for 'building walls' & disrupting global trade.

Why is this happening?

The broader rhetoric of financial sanctions as a geopolitical tool by the US is driving these decisions of countries trying to move away from the dollar for global trade settlements.

The recent sanctions by the US and its Western allies on Russia to isolate it from the global financial system are a significant reason, as other countries worry about similar consequences in the future.

While Russia has managed to trade and expand outside the dollar-denominated markets, the sanctions have weighed on its exports and imports.

'Weaponisation' of foreign exchange reserves?

According to a poll by the UBS Group, central bank reserve managers are increasingly worried about the safety of their foreign currency holdings.

For 87 per cent of the 40 central banks polled by UBS, the situation in West Asia, increasing tensions between China and the US, and the ongoing war between Russia and Ukraine were the top concerns.

With the risk that if hostilities intensify, central banks could face sanctions, seizures, or asset tapping, the viability of FX reserves as a viable option is being questioned.

The proposal to use the proceedings from Russia's frozen foreign-currency assets to aid in Ukraine's reconstruction endangers the usefulness of FX reserves, the safest and most liquid way for a nation to hold its money.

De-dollarisation jumps ahead?

If these worries cause people to flee dollar-denominated assets, the dominance of the US currency could be further challenged.

Global central banks, which manage the world's foreign exchange reserves, hold an average dollar amount of 55 per cent in their import war chest, which has remained relatively unchanged from 56 per cent a year ago.

However, that proportion has steadily declined from 67 per cent in 2021.

About 8 per cent of the respondents reported increasing their yen holdings, and 25 per cent said they increased their euro allocations in an attempt to diversify away from the dollar in their reserve mix.

As geopolitical risks rise, central banks are also increasing their gold reserves.

Some analysts think that political forces will use currency reserves as a weapon and that the dollar will suffer as a result.