Recent developments in Saudi Arabia’s foreign policy have caught global attention, particularly the meeting between Crown Prince Mohammed bin Salman Al Saud and Ukrainian President Volodymyr Zelenskyy in Jeddah. This meeting, alongside the Crown Prince’s decision to abstain from the G7 summit in Italy citing “religious reasons” and his commitment to attend the BRICS summit in Russia, suggests a significant shift in Saudi Arabia’s geopolitical strategy.
These moves, occurring as Saudi Arabia’s 50-year-old petrodollar agreement with the United States expires without renewal, could have profound implications for the dollar and international finance.
The Saudi-Ukrainian Meeting
The meeting between Mohammed bin Salman and Volodymyr Zelenskyy underscores Saudi Arabia’s active diplomatic role in the ongoing Russia-Ukraine conflict. Both leaders emphasized their countries’ historical ties and cooperation. Saudi Arabia has notably provided aid to Ukraine, mediated prisoner exchanges, and pledged support for reconstruction efforts, showcasing a balanced approach despite its traditionally strong ties with Russia.
This balanced diplomacy is indicative of Saudi Arabia’s broader strategy to diversify its international alliances and assert its influence as a mediator in global conflicts. By maintaining good relations with both Ukraine and Russia, Saudi Arabia positions itself as a key player capable of bridging divides and facilitating dialogue.
The BRICS Commitment and G7 Snub
The Crown Prince’s decision to skip the G7 summit in favor of the BRICS summit hosted by Russia is particularly telling. The BRICS (Brazil, Russia, India, China, and South Africa) represent a bloc that seeks to challenge Western dominance in global financial and political affairs. Saudi Arabia’s engagement with BRICS could signal a shift towards a multipolar world where power is more evenly distributed across various regions.
This move comes at a critical time as Saudi Arabia’s longstanding petrodollar agreement with the United States has expired. The petrodollar system, established in the 1970s, required oil transactions to be conducted in US dollars, thereby reinforcing the dollar’s global dominance. Without a new agreement in place, Saudi Arabia’s participation in BRICS could pave the way for oil transactions in alternative currencies, such as the Chinese yuan or the euro. This shift could undermine the dollar’s hegemony in global trade.
Implications for the Dollar and International Finance
The potential decline of the petrodollar system poses significant risks to the dollar’s status as the world’s primary reserve currency. If Saudi Arabia and other major oil producers begin accepting payments in other currencies, the demand for dollars could decrease, leading to a depreciation of its value. This could trigger inflationary pressures in the United States as the cost of imports rises.
Moreover, the diversification of currencies used in global trade could lead to increased volatility in foreign exchange markets. Countries and corporations may need to hold larger reserves of multiple currencies to hedge against exchange rate risks, complicating international financial management and increasing transaction costs.
Geopolitical Realignments
Saudi Arabia’s realignment towards BRICS and its balanced diplomacy between Russia and Ukraine highlight a broader trend of geopolitical shifts. As emerging economies like China and India gain more influence, the traditional Western-centric global order is being challenged. Saudi Arabia’s moves reflect a strategic adaptation to this evolving landscape.
For the international financial system, this means a potential shift towards a more fragmented and multipolar currency regime. The dominance of the dollar and the euro may be contested by currencies like the yuan, especially if major economies continue to seek alternatives to Western financial systems. This shift could lead to the creation of regional financial blocs with distinct economic policies and currency preferences, adding complexity to global financial governance.
The Role of International Organizations
As Saudi Arabia engages more with BRICS and other non-Western alliances, the role of international organizations like the International Monetary Fund (IMF) and the World Bank may need to adapt. These institutions, traditionally dominated by Western powers, could face pressure to reform their governance structures to reflect the interests of a more diverse group of member countries. This could involve changes in voting rights, funding mechanisms, and policy priorities to ensure that the voices of emerging economies are adequately represented.
Dow Jones FXCM Dollar Index
The USDOLLAR Index serves as an indicator of the overall health of the US economy. A rising index suggests a strengthening dollar, which can be attributed to positive economic data, higher interest rates, or increased demand for US assets. Conversely, a declining index indicates a weakening dollar, which can result from negative economic developments, lower interest rates, or reduced demand for US assets.
Each currency in the index is assigned a specific weight based on its relative importance in global trade and finance. The index is calculated using these weights, ensuring a balanced and representative measure of the US dollar’s performance against these major currencies.
Uncertain Future
Saudi Arabia’s recent diplomatic maneuvers, including its strategic meetings with Ukraine and Russia, and its pivot towards BRICS, mark a significant shift in its foreign policy. These actions, combined with the expiration of the petrodollar agreement, have profound implications for the dollar and the international financial system.
As the world moves towards a more multipolar order, the dominance of traditional Western financial structures may be challenged, leading to increased complexity and volatility in global markets. The evolving role of Saudi Arabia as a mediator and strategic player will be crucial in shaping the future dynamics of international finance.
Author Profile
- Lucy Walker covers finance, health and beauty since 2014. She has been writing for various online publications.
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