Report of Monday Morning Meeting on “US-Saudi Tensions: Possible Implications for the Petrodollar”

Dr. Adil Rasheed, Research Fellow, Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA), spoke on “US-Saudi Tensions: Possible Implications for the Petrodollar” at the Monday Morning Meeting held on 02 January 2023. The session was moderated by Dr. Muddassir Quamar, Associate Fellow, MP-IDSA. Ambassador Sujan R. Chinoy, Director General, MP-IDSA, and scholars of the Institute were in attendance.                                                             

Executive Summary

As the world experiences tumultuous geopolitical challenges on the Eurasian front, stagflation in the US, and continental energy crisis in Europe, the deteriorating Saudi Arabia-US ties can profoundly impact the global financial system. This has become an increasing possibility as the oil for security theme dictating the US-Saudi relationship has come under great strain due to the OPEC+ countries’ decision to reduce the oil output in the backdrop of the Ukrainian crisis. This has occurred despite several overtures on the western leaders’ part. It is all the while as the Saudi leadership has sought to diversify its security and economic partners, growing close to BRICS, Russia, and China, and further away from its traditional western allies. In light of these developments, India must act decisively to mould a new and more just international monetary system based on a basket of currencies and commodities. The Special Drawing Rights (SDR) is an interest-bearing international reserve asset created by the International Monetary Fund (IMF) in 1969as an alternative to US Dollar and China-backed Petroyuan.

Detailed Report

Dr. Quamar introduced the topic of the Monday Morning Meeting by highlighting the evolution of the US-Saudi relationship, premised on the theme of security for oil. As per this key feature, US Dollar would be the medium of oil trade, ensuring global American hegemony. However, it has recently faced several challenges ranging from ones that are personality-based to that including international turmoil in the oil market.

Following the brief introduction, the Dr. Quamar gave the floor to Dr. Rasheed.

Initially, the speaker briefly delved into the recent debates about how the international order is in flux and asserted how there is great uncertainty about whether the year 2022 has ushered in the post-pandemic world. Political experts have debated the possibility of a worldwide transition into a post-liberal, if not a post-American global order. The Ukrainian crisis and the negative impact on international trade due to protectionist policies and economic sanctions are considered by observers to have played a critical role in ushering in this new system. Finally, Russia and China’s concerted efforts to draw the Kingdom of Saudi Arabia (KSA) away from the western fold and de-dollarise the international economy can potentially transform the global financial order. 

Subsequently, he shifted the focus to the widening rifts in the US-KSA oil for security ties and the latter’s willingness to enhance cooperation with Russia and China instead. Amid such developments, western leaders ranging from former British Prime Minister Boris Johnson, American President Joe Biden, French President Emmanuel Macron, and German Chancellor Olaf Scholz have visited oil-rich Arab countries, including the Saudi Kingdom, to ensure they remain in the western fold and do not gravitate towards the Russia-China nexus. The primary motive behind their visits was to convince the oil-producing states to help in mitigating the European energy crisis and stagflation in the US.

However, despite several of these overtures, KSA has refused to pay heed. Instead of cooperating with the western world by increasing oil production, it, along with 22 other Organization of the Petroleum Exporting Countries (OPEC)+ member states, reduced oil production by 2 million barrels per day. The White House and the American allies perceived this decision as supportive of Russian actions in Ukraine, despite the OPEC+ countries’ claims of being guided solely by their economic forecasts.

There has been a visible Saudi tilt towards Russia with doubling oil imports to meet its domestic needs and a US$500 million investment in Russia’s three primary energy companies. While these decisions aided the sanctions-hit Russian economy, they also created an uproar in the US Senate’s Foreign Relations Committee. Threats to withdraw 3,000 troops stationed in the Persian Gulf and halt arms sales to Saudi Arabia were a part of the broader American counter-response.

Over the past two years, despite President Biden’s harsh rhetoric during his campaign, the White House has demonstrated a profound willingness to maintain KSA as a critical regional partner, by granting Crown Prince Muhammad bin Salman (MBS) immunity from lawsuits related to Jamal Khashoggi’s murder and preventing NOPEC and Yemen War Powers Bill from becoming laws, among others. Nevertheless, the Crown Prince has been dismissive of these initiatives.

Moreover, MBS hosted Chinese President Xi Jinping in December 2022, where the two leaders signed a Comprehensive Strategic Partnership Agreement and agreed to enhance oil trade. In addition, President Xi discussed with other Arab heads of the state the potential of trading oil and gas, if only partly, in Renminbi. Notably, Petroyuan was launched on the Shanghai International Exchange in 2018.

Overall, there are several reasons for this increasing discord between Saudi Arabia and US. Some of them include ideological differences, i.e., the clash between a pre-modern Wahhabi and a secular republic state, dredging up human rights-related issues with the Gulf States and Israel or courting of Iran by Democratic Presidents, and the gradual American pivot to Indo-Pacific from West Asia.

Here it is vital to understand the potential consequences of US-Saudi friction on the global financial system. Since the 1974 agreement between the Saudi Kingdom and US and the subsequent 1975 agreement between OPEC countries and the US about only conducting oil trade in US Dollars, the US has been able to exercise its economic hegemony or ‘exorbitant privilege.’ This was supposed to be a temporary measure to salvage the floundering American economy. However, this ‘privilege’ expanded to the trade of gold, agricultural products, and copper, among other goods. Today, every country participating in the oil trade must keep US Dollars as reserves to purchase oil. Consequently, global trade will be impacted gravely should the petrodollar system unravel. Before this, the dollar's value was linked to gold until it suffered a blow due to countries such as France picking up its reserve of gold from America.

Interestingly, KSA’s primary oil purchasers, i.e., India and China, are part of the BRICS, an organisation the kingdom has expressed interest in joining as a member. Within this context, it is crucial to look back on the Russian Foreign Ministry’s 2022 proposal to establish a BRICS reserve currency backed by commodities such as gold. The Saudi Kingdom’s bid to become a BRICS member, mainly due to its petroleum reserves, might bolster this idea. This possible reserve currency is being seen (at least by Russia) as an alternative to the US greenback and the IMF’s Special Drawing Rights currency.

Therefore, it is necessary to explore how these developments might impact the Indian economy. Over the years, the US Dollar has proven unreliable, and its costly exchange rate against other currencies results in other countries incurring high costs. These monetary fluctuations subject the Indian Rupee to volatility, and as recently indicated by our Finance Minister, it is not the Rupee that is falling. However, the dollar is rising because of the Federal Reserve’s policies and not the strengthening of the US economy. Nevertheless, India cannot back the China-backed Petroyuan because it would entail transitioning from one currency’s exorbitant privilege to that of another. Thus, India needs to take the lead in building an international consensus towards developing a safer and just monetary order for the future. 

Q/A Session

Dr. Quamar expressed his gratitude to the speaker for his detailed presentation and invited questions from the attendees.

The Q/A session broadly revolved around themes such as the debate about the world transitioning into a post-pandemic world, the feasibility about establishing the BRICS currency reserve, the long-existing partnership between KSA and China, the Saudi Kingdom’s role as a partner in the American regional counter-terrorism efforts and pivot to the Indo-Pacific. Furthermore, debates about the nature of liberalism, Russian and Chinese efforts to de-dollarise the global economy and the viability of the bilateral ties between Saudi Arabia and the US and Iran as a counterweight to Russian and Chinese influence were some of the other issues discussed. The speaker gave insightful responses to comments and questions from the participants. 

This report was prepared by Ms. Saman Ayesha Kidwai, Research Analyst, Counter-Terrorism Centre, MP-IDSA.