The End of Doller empire! 

Saudi Arabia is in discussions with China to price some of its oil sales in yuan, but as ties with Washington continue to be strained.

Beijing and Moscow are diversifying. China and Russia have taken another step closer towards dumping the dollar and agreed to trade in their respective national currencies, the Russian ruble and the Chinese yuan.

The End of Doller empire

Hi everybody. the US dollar has been the most powerful currency in the world for 80 long years.  This reserve currency status gives the United States such unprecedented power over the world economy that can cripple the economy of any country within a fortnight. And because of this power, it has even dominated giant players like Russia and China. But you know what guys? This is where China and Russia have actually come up with a master plan to kill the dollar dominance in the world. And if you look at the past 10 years data, you will see that it's actually working out quite well. In 1999, USD had 71% market share among the global reserve currencies. But in the past ten years it has dropped to less than 59%. And in the next 10 years, if this strategy of China and Russia works out, we might see the rise of a new reserve currency in the form of Chinese yuan. 

So the question is what is this master plan of China and Russia to kill the dollar dominance in the world? How do they plan to dethrone us from the superpower status of the world? And lastly, what are the challenges that China and Russia will face in this currency Words of the world ?

To understand this China, Russia strategy, we first have to understand why is the US dollar so so powerful and why does it have almost a monopoly status among the reserve currencies of the world.

Firstly, dollar served as a reserve currency of trust whereby in 1934 US said if you have dollars, we would exchange its value in gold at $35 per ounce. So now two countries that may or may not trust each other could do trade with each other without trouble. So this way, when Indonesia got $1,000,000 from Pakistan, even if Indonesia did not trust Pakistan, they know for sure that the $1,000,000 that they got could be exchanged for gold with the US. So it was definitely worthy. Otherwise, if they do trade with Pakistan and Pakistani rupees today, 10,000 Pakistani rupees might be worthy of buying 1 gram of gold. But then next week itself, if Pakistan prints more money and declares that 20,000 Pakistani rupee will buy you one gram of gold. Do you realize what would happen? The entire value of trade with Indonesia would actually collapse. Moreover, if Indonesia wants to use Pakistani Rupees, then if other countries do not trust Pakistan's economy, then that money again could not be used for trade. But if the same transaction happened in dollars, the United States guaranteed the value of dollars with gold. So you could trade with any country with the US dollars and be rest assured that it could be used to trade with any other country to buy any other commodity. But in 1971, Richard Nixon came out of nowhere and ended this gold standard where everyone was free to choose any currency to trade. " The strength of a nation's currency is based on the strength of that nation's economy. And the American economy is by far the strongest in the world. I have directed Secretary Connolly to suspend temporarily the convertibility of the dollar into gold or other reserve assets. The effect of this action, in other words, will be to stabilize the dollar." 

But even then, almost all countries stuck to the dollar. Why? Because Dollar was the only currency that could buy you oil from the Saudis. And why is that? Because in 1975, the US President Franklin Roosevelt made an agreement of the century the Saudi king whereby the US guarantee the security of Saudi Arabia and in exchange the Saudi king agreed to sell oil in U.S. dollars. So if you wanted to buy oil you needed to have U.S. dollars. This is a second reason for the dominance of the dollar and that is the power to purchase oil. And these two superpowers of trust and oil give the US the third superpower through the SWIFT network. And how does the SWIFT network work through the US dollar stored in U.S. bank accounts? So if an Indian trader wanted to make a transaction the Sri Lankan trader this system would have an Indian trader, an Indian bank, an American bank, one American bank, two foreign bank and foreign trader. The highlight over here being both Indian and Sri Lankan banks will have an account in the American bank where it has its money stored in dollars. So if Reliance wants to import minerals worth ₹1,00,00,000 from Sri Lanka, they would give the Indian bank one crore Indian rupees and ask them to pay the same amount in dollars to the Sri Lankan traders account. So now that Indian bank has ₹1,00,00,000 in its Indian account, it would send a message to its dollar account America to send one crore worth of dollars to the Sri Lankan banks dollar account in the US. In this case, assuming ₹80 to the dollar to be exchange rate one $25,000 would be transferred from the Indian account in the US to the Sri Lankan account in the US. And now that the Sri Lankan bank has one $25,000 in the US account, it would pay the Sri Lankan trader the equivalent of one $25,000 from its account in Sri Lanka. This is how the SWIFT network works and just like India and Sri Lankan banks today more than 200 countries and  10,000 banks trade with the US dollars and have their Forex reserves with the American banks. And the catch over here is that if a country has $100 billion in Forex and spends only $30 billion in import and export, they would have $70 billion in surplus, right? So you know what, just like we avoid keeping a lot of savings and invest our money in stocks, these countries invest their excess foreign reserves in U.S. Treasury bonds. And just like our government bonds, this is a mega bond whereby countries are lending billions of excess to the US and expect a return after maturity. And this is where the unfair advantage of the US dollar comes in. As of January 2022, while Japan had $1.3 trillion in U.S. Securities, China holds $1.06 trillion, and UK held $608 billion in U.S. Treasury bonds. And in total, the US held $7 trillion by foreign and international investors as of September 2021. This is so much money that it's more than the GDP of France, India, and Russia combined. So in simple words, the US dollar has three superpowers. 

Trust for trade, power to buy oil. And lastly it has all the excess Forex reserves invested in its own economy. With $7 trillion in bonds. 

By the way, guys, these excess dollars are called as Petro dollars.

And this is where both Russia and China have a problem.  China has extremely annoyed at the US for supporting Taiwan, and Russia has already the most sanctioned country in the world. So now Russia is not able to use its dollar accounts in the US to do trade. And at the same time, most of the Russian companies have also been removed from the SWIFT network. So with two superpowers being bullied by one big Uncle Sam, both of them got pissed and joined hands to take down the mighty United States of America itself. And this is where. China and Russia started their game plan. So the question is, how can China and Russia together kill the dominance of the dollar? And what exactly is their strategy? Well, the first thing we need to understand is that leverage is one of the most powerful tools in geopolitics. In this case, Russia is one of the largest oil and gas producers in the world. So although Saudi and other countries were selling oil and gas in dollars, Russia punished its unfriendly countries by asking them to buy Russian oil in rubles. So by default, most of the European countries had to buy Rubles in spite of their hating Putin for it, which means what in the payment network diagram, instead of U.S. bank having dollar reserves, all the unfriendly countries that bought oil from Russia now had to keep their money in Russian Central Bank. So just like dollar reserves held the US economy, the ruble reserves are expected to compromise for the damage to the Russian economy. Which means just like petrodollar, we are seeing the rise of Petro Rubles and if you look at Russia's.l good results. They've been preparing to get rid of the dollar since 2014 itself, and if you see this graph, the US treasuries have gone down from one $50 billion in 2013 to just $3.98 billion as of 2021. This is the leverage that Russia has over Europe. Similarly, China has its leverage with the belt and Road initiative countries.  China's belt and Road initiative is a $3 trillion project whereby the Chinese have given out over generous loans to countries all across the world. And you know what? Under the Bri initiative, in total there are 165 countries in the world who owe a collective debt of three $85 billion to China. And many of these countries have taken so much debt from China that they cannot afford to pay it back to China. And we saw this very, very clearly with both Pakistan and Sri Lanka, right? And this is where China's strategic move comes in. And now that China has a leverage over these countries, experts say that China would now ask these countries to take and pay back loans in yuan. And in exchange, China could incentivize the scheme by giving them a 1% discount on their interest. Now, do you realize if Pakistan owes $24.7 billion in debt to China, considering its economic crisis right now, a 1% discount on a $24.7 billion in debt is a big, big deal for Pakistan. In fact since the inception of the Bri initiative, China has already issued 14% of all its loans in its own currency without depending on the dollar. And guess what? In 2018, the Central Bank of Pakistan had already agreed to conduct their bilateral trade with China in Yuan, and even other countries like Myanmar, Cambodia and Russia are doing the same now. On top of that, China is now the largest trade partner with 25 Bri participating countries. So again, the leverage of trade for China is very, very strong. So you see with the combination of both trade and debt, China could pressurize these countries to use yuan over the dollar. So this way overtime China could pull the strings of 165 nations and could drastically increase the circulation of yuan. Now the question over here is all these countries are mostly poor countries, right? So how would China and Russia get rich countries like England and South Korea to skip the dollar?

Well, firstly, Russia has strongly supporting China and has already turned the Chinese yuan into their reserve currency. So this is a major, major move. And as far as other countries are concerned, they have something called bilateral currency swap agreement. And this is something that even India is pursuing very, very strategically with its ally countries. So the question is what is the bilateral currency swap agreement and how does it actually work in international trade? As usual, let's try to understand this using a story. Let's say China and UK sign a bilateral currency swap agreement of five years for a value of $1,000,000. What this means is that China will sell $1,000,000 worth of yuan to UK and UK will sell $1,000,000 worth of pounds to China. So after conversion, China will give CN¥6.842 million to UK and UK will give China eight forty £7250, and they will agree upon the exchange rate to be 8.07. So for five years, Chinese Central Bank can sell these pounds and get U.S. dollars, or it can lend these pounds to domestic bank and companies to settle their trade. Similarly, the Bank of England can do the same with Yuan. So now if an English businessman wants to buy CN¥1 million worth of goods from China, if he went by the conventional means, what would he have to do? He would have to pay in pounds to the English bank, which will then convert the sum to dollars, then transfer the dollars to the US bank account of China, and then the Chinese bank will transfer the converted. some of you want to the Chinese businessman. This will incur both a lot of time and a lot of cost. But now the English businessman would simply borrow CN¥1 million from the Bank of England and directly pay the Chinese bank account in England. And as soon as this money is transferred in the Chinese bank account in England, the Chinese bank in China would transfer CN¥1 million to the Chinese businessman. And the same thing could be done vice versa when a Chinese businessman wants to buy something from UK. So if you see two big players can now do international trade without depending on the US Dollar. This is how the currency swap agreement works, and after five years both the central banks of UK and China will pay their respective currencies back at the agreed exchange rate of 8.07. So this way both countries get three major advantages #1 both countries can eliminate their exchange risk #2 both countries can use this currency to exchange it for dollars if needed. And thirdly, businesses in both countries can carry out trade more economically, so the business relationship between both the countries gets better and better with time and last and most importantly, the dependency on U.S. dollar decreases by a large, large extent. And guess what?

Beijing has signed more than CN¥3 trillion worth of bilateral currency swap deals with more than 40 countries across the world. And this includes CN¥400 billion each with Hong Kong and South Korea, three CN¥50 billion each with the Bank of England and the European Central Bank CN¥300 billion with Singapore and one CN¥50 billion with. Russia and the cherry on the cake. Since China is the world's largest manufacturer, with almost 20% of the entire world's manufacturing happening in China, they could further leverage this to push the companies to pay in yuan instead of US dollars. And guess what? Now Saudi Arabia is considering selling oil in yuan, which means if Saudi Arabia starts selling oil in yuan, a lot of countries would rush to buy Yuan. And again, as we saw in the case of excess Forex being invested in US bonds. The excess yuan would then be invested in Chinese bonds, making the Chinese economy more and more powerful. This is how China and Russia slowly building currency strategies to overthrow the reserve currency thrown from the US dollar. So this strategy looks pretty clean and straightforward right now. Does this mean that the yuan is going to overthrow the dollar? Well, not really. And this brings me to the last part of the episode and that is the challenges that the yuan is going to face in this currency war against the dollar.     

Now moving on, the first challenge that both China and Russia are going to face is their notorious reputation in the world. China has a reputation for being notorious for the debt trap diplomacy and the Taiwan invasion, and Russia has already been cornered by the West. Secondly, China has been devaluing its currency very very frequently. In fact, the US has even accused China of currency manipulation. On top of that, by now it is pretty clear to the world that China is not as transparent as the US, so it's going to deter the country from actually adopting the yuan over the US dollar. And lastly, the US obviously does not like the rise of the yuan and the amount of money and military leverage that the US has. It's not so difficult for them to actually push against the Chinese yuan. And the key to this is going to be something called the digital dollar and its war against the digital yuan.