India has taken its first step towards liberating itself from dependence on the US dollar by buying oil from Russia in Indian rupees
We have seen the continuous rise of the dollar since the First World War. After World War I, in exchange for supplies, the Allies began paying in gold to the United States, due to which America became the world's largest gold reserve. After the end of the war, various countries linked their currencies with the dollar and with this, the 'Gold Standard' ended in the world and thus the dollar became the world's most preferred currency. All countries started keeping more and more of their foreign exchange reserves in the form of dollars. By 1999, up to 70 per cent of the total foreign exchange reserves of the countries of the world, were kept in dollars.
The European common currency ‘Euro’, emerged in 1999, and in most European countries, Euro replaced their currencies. This also affected the dollar too; and in place of some European currencies, the euro was now preferred for foreign exchange reserves and by the beginning of the year 2021, the dollar's share in foreign exchange reserves was reduced to only 59 per cent. But this share is further reduced to nearly 55 per cent by the third quarter of the year 2022. Despite reduced attraction towards the US dollar, interestingly, the dollar has still not weakened in value; rather it has been getting stronger and stronger year after year, compared to almost all other currencies in the world, barring a few.
Due to the attraction of countries around the world towards the dollar throughout history, the dollar has become increasingly strong against other currencies of the world, especially the currencies of developing countries. Where in 1964 one dollar was only equal to rupees 4.66 and now it has reached nearly rupees 82. Compared to the currencies of many other countries, it has become even more strong. Perhaps that's why all the countries of the world have been interested in keeping the dollar as a reserve currency and making all their international payments in dollars only. Due to this increasing demand for the dollar, the dollar has become stronger year after year.
But for some time, the demand for the dollar as a reserve currency has started declining. Those in the know are calling this trend ‘de-dollarization’. In the past, the whole world was dollarized, but now de-dollarization is happening around the world. There is a need to understand why the US dollar as the reserve currency of the world is waning even when the US dollar is at its strongest position in history.
One important reason is the ongoing Russia-Ukraine war since February 2022. It is believed that due to the dominance of the US and European countries in the payment system, Russia is barred from withdrawing its own foreign exchange reserves in dollars. That is, the payment system is being weaponised by the US and European countries to weaken Russia economically. Naturally, Russia and its friendly countries are no longer interested in keeping their foreign exchange reserves in dollars under any circumstances.
Due to the sanctions of the USA and European countries, pressure is also being put on the countries of the world not to buy crude oil from Russia. In such a situation, India has started buying more and more oil from Russia, defying the sanctions of the Western world. Where the share of Russian oil was only 1 per cent in India's oil imports, it has now increased to 35 per cent. Russia has even said that it is ready to make a settlement of its oil exports in rupees. Not only this but due to the sanctions imposed on Russia, now other countries are barred from using the shipping and insurance services of the US and European countries. In such a situation, India and many other countries have now started using the services of Russian and other non-US and non-European shipping and insurance companies. That is, due to the economic sanctions imposed on Russia by the US and Europe, now western countries are themselves suffering huge losses due to their bullying of economic sanctions. The role of Indian banks is also increasing in international payments.
Rupee now allowed for payment by 19 countries
While there is a decline in the dominance of the US dollar at the international level, India has also started making efforts to reduce its dependence on the dollar. Significantly, after the US and European countries used the payment system as a weapon, during the post-Russia-Ukraine war, India started moving towards paying in rupees for oil imports from Russia. In July last year, the Reserve Bank of India through a circular allowed international payment settlements for imports and exports to be made in rupees. This is believed to be the first step towards making the Indian rupee an international currency.
Due to the efforts of the Government of India, so far banks of 19 countries including the UK, New Zealand, Germany, Malaysia, Israel, Russia and the United Arab Emirates have been permitted to make settlements in rupees by opening 'Special Vostro Rupee Accounts' (SVRAs). Significantly, there are many countries in this list of 19 countries with which India has significant trade relations. If the payment settlements are now made in rupees, with these countries, then the demand for dollars in the country will definitely go down. This effort of India towards de-dollarization in the world may be small, but can surely prove to be a milestone for India, showing the path to other countries as well.
(Writer is professor, PGDAV college, university of Delhi, New Delhi)