USD De-Dollarization in world trades!!! Possible Risk?

Hello all, 

In continuation to my earlier blog on impact of Geopolitical Risks on our businesses operations and economic functionality, here is another key factor which can potentially be a medium to high risk factor in coming months.

Just recently announced that Saudi Arabia (one of the major oil producer and exporter) has declined to renew the Petro-Dollar pact with USA which was signed in 1974, earlier with then US President Nixon.

What is Petro-Dollar and why its discontinuation is an issue?

In simple terms, Petro-Dollars are USD exchanged for crude oil. In 1974 agreement between Saudi Arabia and the United States, established in the aftermath of an oil crisis, ensured Washington a steady flow of crude oil and a market for its debt, while Saudi Arabia received military aid and equipment. During these years, USD has become the synonym for the oil imports payments across world and the dominance of USD increased so much that it started to be called as world currency. This dominance of USD has helped USA directly and indirectly in attaining the world superpower title and excellent currency model tradeable across the countries for other commodities exports and imports.

Discontinuation has negative impact – Our Indian IT and Tech industry which has been renowned as one of the fastest growing industry deals in USD (both income and expenses), if De-dollarization happens, we may foresee following financial impacts:

Global currency realignment

• Indian companies with operations across multiple countries might need to retort to local currencies like Yuan, Euro, etc. In some case, even in crypto

• Operational costs calculation (currently being in USD) would become more complex due to local countries inflationary attributes

• Non standardization of the income and cost in terms of single currency

These are just few risks financially impacting the business operations, Indian majors needs a complete impact assessment and analysis based on the volume of their operations and business model.

Silver lining – In amidst of this turmoil, there seems to be an silver lining which is slowly gaining momentum, trust and a reply to universal currency rule.

1. Regional and countries specific trade agreements between India and other countries (ASEAN, SAFTA, CEPA, EU Free Trade, India-MERCOSUR)

2. Intergovernmental organization for global trade comprising Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia, and the United Arab Emirates – BRICS 

Still problem unresolved - These big and small scale efforts are some efforts to solve the dominance of USD and bring upon a parallel system. This however still seems very far-fetched and would take a lot of time, effort and acceptance from all member countries and states.

Logical Solution, free trade with Gold – So what would be the logical and immediate solution which Indian and global multinationals can work upon and hedge the impact of this financial risk. Potentially in a small way but as a start point, these multinationals can start investing in gold, gold bonds, gold certificates.