Saudi Arabia Wants To Join BRICS – Here’s Why US Dollar’s Global Dominance Is Toast

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Oct 27 2022
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As the world’s reserve currency, the U.S. dollar is the king of the financial world. However, the American government abuses the currency hegemony as a primary tool to advance its geopolitical interests to the extent of arm-twisting the rise of other nations. Not only Russia’s US$630 billion in foreign reserves were frozen, the world has plunged into economic crisis due to the U.S. irresponsible financial policies.


But the U.S. dollar hegemony may soon come to its end. Saudi Arabia, the traditional close ally of the United States, has expressed the kingdom’s desire to join BRICS – a group of 5 major emerging economies comprising Brazil, Russia, India, China and South Africa. The bloc covers about 26.7% of the world’s land surface and 41.5% of the world population.


More importantly, the BRICS bloc has a combined nominal GDP (gross domestic product) of US$26.6 trillion – about 26.2% of the gross world product or a combined GDP (PPP) of around US$51.99 trillion (32.1% of the world’s GDP PPP). All the five nations of the bloc are members of G20 or Group of Twenty. Of course, China has the largest GDP of the BRICs country at US$18.32 trillion.

First formed in 2009, the bloc was originally known as BRIC before the acronym was expanded to BRICS after its fifth member – South Africa – joined in 2010. Since then, numerous other countries have expressed interest in joining the bloc. Iran, which holds the world’s second largest gas reserves, has applied to join in June 2022, while Argentina has formally applied last month (Sept 2022).


Other countries that have expressed interest in membership of BRICS included Algeria, Indonesia, Mexico, Nigeria, Pakistan, Syria and Venezuela. Talks of Saudi Arabia, Turkey and Egypt to join BRICS hit the news in July this year. But the interest of Saudi appears to have grown when President Cyril Ramposa of South Africa made a visit to the kingdom last week.


During an interview at the South African Broadcasting Corporation, Ramposa revealed what had transpired when he met Saudi Crown Prince Mohammed bin Salman. He said – “Crown Prince Mohammed bin Salman expressed the kingdom’s desire to join the BRICS. In 2023, the BRICS summit will be held under the South African presidency and this request will be studied.”

President Ramposa’s revelation was both interesting and stunning. His state visit to Saudi on 15-16 October was at the invitation of the Custodian of the Two Holy Mosques – King Salman bin Abdulaziz Al-Saud. The agenda was for both countries to explore investment sectors and opportunities in areas of common interest – renewable energy, industry, mining, tourism, logistics and agriculture.


Not only Saudi Arabia and South Africa have signed agreements and memorandums of understanding worth about US$15 billion, the Saudi Crown Prince took the opportunity to express interest in joining BRICS – just months after Russian President Vladimir Putin announced in July that the BRICS economies plan to issue a “new global reserve currency.”


So, what’s the big deal about Saudi joining BRICS and its relevance to the creation of a new global reserve currency? It means the BRICS, with Saudi as its newest member, could finally undermine the U.S. dollar dominance. If Saudi starts trading its crude oil in “BRICS currency”, it may completely obliterate the dominance of petrodollar in global trade.

BRICS Reserve Currency

To understand how Saudi’s membership in BRICS could destroy the U.S. dollar hegemony, one has to take a journey back in time. After the World War I, the gold standard had been abandoned. When Europe was at its worst during World War II, a new international monetary system was adopted by delegates from 44 nations in Bretton Woods, New Hampshire, in July 1944.


Called the “Bretton Woods System”, it was decided that all the nations will adjust their currencies to the U.S. dollar, which in turned was fixed to gold at US$35 an ounce. The 44 allies believed the standardization will reduce global economic instability. Delegates to the conference also agreed to establish the International Monetary Fund (IMF) and what became the World Bank Group.


Everything went smoothly till the early 1970s, when the U.S. lost the Vietnam War. The irresponsible increase domestic spending on President Lyndon Johnson’s Great Society programs and the skyrocketing in military spending caused by the Vietnam War forced U.S. President Richard Nixon to suspend the dollar’s convertibility into gold in August 1971.

US Lost Vietnam War - Soldiers

Nixon had to dump the fixed exchange rate system because the U.S. treasury discovered in 1970 that if everyone who held dollars came asking for an ounce of gold, the US would not only be depleted of its gold but would also have to borrow a lot of it to keep its promise. Essentially, the “Bretton Woods System” collapsed because the U.S. cannot pay and Nixon simply told the world to go fly a kite.


Because the U.S. was a military superpower, it can do anything it likes, included unilaterally ending the dollar’s convertibility to gold. Meaning anyone with US$35 will get back the same US$35 paper note instead of an ounce of gold. Besides burning a huge hold in the Vietnam War, to fight the Communist USSR, the U.S. backstopped the West European economies by buying more than it sold to them.


Suddenly, the world monetary system crumbled. The U.S. plunged into “stagflation” in 1971, while many countries lost confidence in the greenback because it could not be redeemed for gold. Thanks to America, volatility of the dollar became the main problem for everyone throughout the 1970s. Inflation became a permanent feature, along with skyrocketing unemployment and declining productivity.

Bretton Woods System

At the same time, Nixon knew that the collapse of the Bretton Woods System would cause a decline in the “artificial global demand” of the U.S. dollar. In order to continue expanding its “welfare and warfare” spending, it had to find a replacement to make its currency valuable again. After removing the U.S. dollar from the gold standard in 1971, the dollar became “fake money”.


In 1973, the Arab-Israel conflict continued when Egypt tried to take back the occupied land of the Sinai Peninsula, starting the Yom Kippur War. The “Fourth Arab-Israeli War” triggered the 1973 oil crisis when Saudi King Faisal led the Organization of Arab Petroleum Exporting Countries (OAPEC) to slap an oil embargo on Western countries, including the U.S., for providing military aid to Israel.


The “first oil shock” saw the price of oil exploded nearly 300% – from US$3 per barrel to US$12 per barrel. But the U.S. also saw an opportunity as a result of the war. In a series of meetings, the United States – represented by then U.S. Secretary of State Henry Kissinger – and the Saudi royal family made a powerful agreement that gave birth to “petrodollar”.

Saudi Arabia Military Armour Truck 

According to the agreement, the U.S. would offer military protection for Saudi Arabia’s oil fields. The U.S. also agreed to provide the Saudis with weapons, and most importantly – guaranteed protection from Israel. In return, the kingdom must agree to price all their oil sales in U.S. dollar only. Also, the Saudis would be open to investing their surplus oil proceeds in U.S. debt securities.


Saudi, thinking they had a great deal, immediately agreed. They couldn’t believe their ears – not only the Americans didn’t want their oil or money, but gave them weapons, military support and protection from enemy Israel. They didn’t realize that the U.S. had cleverly calculated that with the new “dollars for oil”, the new gold standard will entrench the position of the U.S. as the global superpower.


In 1974, the petrodollar system was fully operational in Saudi. By 1975, all OPEC oil-producing nations agreed to price their oil in dollars in exchange for the so-called generous offers by the United States. Because every country needs oil, they would buy from Saudi or OPEC nations. And because the oil is being sold only in U.S. dollars, they must have dollars to buy oil.


When a country does not have a surplus of U.S. dollars to buy oil, the easiest way to obtain U.S. dollars is through the foreign exchange markets. Therefore, it greatly benefits the U.S. because the petrodollar increases global demand for U.S. dollars, increases global demand for U.S. debt securities and gives the U.S. the ability to buy oil with a currency it can print at will.


Virtually all global oil transactions are settled in U.S. dollars – until the Ukraine War changes the landscape. It was a mistake when the Western powers seized US$630 billion of foreign reserves belonging to Russia. Suddenly, other countries realize they could lose their foreign reserves in U.S. dollar, the same way the currency lost its value after the U.S. refused to honour its pledge by ending the dollar’s convertibility to gold in 1971.


Today, Russia demands ruble for oil from unfriendly countries, while China and India have started paying for Russian oil and even other trades in ruble, yuan and rupee. Now, if Saudi Arabia, the largest exporter of crude oil in the world, were to join the BRICS nations, it could lead the OPEC to use “new global reserve currency” introduced by BRICS as a new denomination for oil.

China Yuan Renminbi and Russia Ruble

Saudi will not dump the U.S. dollar entirely, but it would be disastrous to the U.S. even if the kingdom opens to selling its crude oil in other currencies. And if Iran, which has the world’s second largest gas reserves, also joins BRICS and sell its commodity in BRICS currency, the U.S. dollar would be further undermined. China and Japan have already started selling dollars to prop up their currencies.


In addition, the Ukraine War has also created a new problem – food security. Concerns about global food security could prompt BRICS members to create a food exchange, including Argentine corn, Indian rice and wheat, Russian barley and sunflower oil, Chinese grain and cotton, and Brazilian soybeans. Food importers such as Saudi could gain greater food security after joining BRICS.


Clearly, it wasn’t a coincidence that the 14th BRICS summit on July 24, 2022 officially announced BRICS payment system and BRICS basket reserve currency. The new currency could be used as an alternative to the U.S. dollar in trading not only Saudi crude oil, but also food from existing BRICS nations and new members interested to join the bloc.

US President Joe Biden vs Saudi Crown Prince Mohammed

But is Saudi really serious about joining BRICS in the first place? On Oct 3, OPEC and non-OPEC allies, an alliance known as OPEC+, decided to ignore U.S. President Joe Biden’s begging for an increase in oil production. At their first face-to-face gathering in Vienna since 2020, OPEC+ announced a dramatic reduction in production quota – slashing output by 2 million barrels per day effective November.


Accusing Saudi of pro-Russia, Joe Biden angrily warned that there will be “consequences” for U.S. relations with Saudi Arabia. But the Saudi Crown Prince retaliated by exposing how Biden asked Saudi to delay its decision on oil output by a month – until after the U.S. midterm elections. It was a move to embarrass Sleepy Joe, who had flown to Saudi to suck up to the crown prince.


On Oct 16, U.S. National Security Advisor Jake Sullivan said that President Biden had “no plans” to meet with Saudi Crown Prince, popularly known as MBS, on the sidelines of the G20 summit coming up next month in Indonesia. The next day (Oct 17), Saudi retaliated, announcing that “no invitations” will be sent to US government officials to attend the “Davos in the Desert” investment conference to be held at the end of Oct.

G20 Summit – Saudi Crown Prince with Russia Vladimir Putin

Very few knew that Iraq’s Saddam Hussein and Libya’s Muammar Gaddafi relentless attempts to derail the petrodollar had led to the invasion, assassination, and extermination. That’s how important petrodollar is to the United States. But BRICS is more powerful. With China’s economic powerhouse and Russia’s military superpower behind BRICS, the entrance of Saudi would spell the end of dollar dominance.


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