The decline of the petrodollar and its implications, writes Ajit Ranade

India’s export performance this year will be very impressive. Exports of manufactured goods will exceed $400 billion, the highest on record. This is more than 40% more than last year and five times the growth of our GDP.

This was made possible thanks to a targeted approach by the Ministry of Commerce, which had given objectives by product and by country and these were closely monitored.

Even the various Export Promotion Councils (EPCs) for textiles, garments, engineering goods and chemicals have been given targets. The government has also launched the Production Linked Incentives (PLI) program which includes export incentives.

The main export products were gasoline and diesel, precious stones and jewellery, engineering goods and chemicals. Keep in mind that to export $100 of refined oil, you import $90 of crude oil. So, just as exports performed well, imports also increased.

Imports of products like crude oil and cell phones amount to nearly $600 billion. The import of gold also exceeded 1000 tons, which means an outflow of 70 billion dollars of foreign currency. The total trade deficit this fiscal year will likely reach $200 billion. This represents the shortage of dollars, that is; the excess of imports over exports of goods and merchandise.

Luckily, the country earns dollars even from service exports, mainly software, that is; Computer services and computer-based services. In addition, there is tourism (which has declined due to the pandemic) and consulting firms. India is also the largest recipient of inward remittances, which amount to around $80 billion (about as much as goes out for gold imports). Therefore, after counting the dollar revenue from services, we have a smaller deficit.

But there is still a deficit of dollars. How is this gap filled? That is, through the inflow of capital from investors who invest dollars in the stock market, private equity and loans. The international flow of dollars and the adjustment of the balance of payments are correct in times of peace. But the war in Ukraine put a brake on the work.

The tough US-led sanctions imposed on Russia mean that Russian exports cannot be paid for in dollars. Indeed, payment must go through New York customs clearance and the United States refuses to honor any claims from Russian exporters. Even the overseas dollar wealth of Russian oligarchs and the elite is frozen and not denied access. The United States will surely pressure Swiss banks to freeze Russian wealth there. Suddenly, to the Russians, their hefty $630 billion pile of foreign currency seems worthless.

This stock of currency is stored in the form of Treasury bonds issued by the US government or European Union bonds. These bonds can be cashed with these respective sovereign entities or by negotiation. But if the sovereign nations that issued these bonds refuse to honor the claim or reject the redemption request, then these bonds lose their value.

Of course, Russia does not take this down. Oil and gas are its main export earnings. And countries that import oil and gas from Russia are not suddenly going to turn to other suppliers, including countries like Germany, or even India.

Thus, the Russians offer significant discounts on the price of oil to their customers. India imports less than 1% of its crude oil needs from Russia. But if he gets oil at half price, at a time when the price of oil has crossed $100 a barrel and threatens to hurt the Indian economy, why not take advantage of the offer? Indeed, this is in India’s interest and will help control inflation and bring the trade and budget deficit under control. The Russians will be happy to see some of their oil evacuated.

But, India cannot pay the Russians in dollars since the dollar payment must have a leg in the New York clearing, which the Americans will obstruct. So, India and Russia have a rupee-ruble trade deal, where India pays for its oil imports in rupees to Russia, and the Russians, in turn, use these rupees to buy their Indian goods and imports . It will work perfectly if our imports and exports to Russia are balanced. Unfortunately, they are unbalanced.

So we have to find more goods to export to Russia to use the rupee payment we make to buy us more things. We also used a similar arrangement for trade with Iran when it was under sanctions. The Saudis made a deal with the Americans during the Nixon era that they would only charge for their oil exports in dollars.

This has been the source of the dollar’s global dominance. In the mid-1970s, after the first oil shock, the revenues of Saudi Arabia and other Middle Eastern oil producers were so large in dollar terms that they were unable to absorb all the gains exceptional, even after spending lavishly on weapons and ammunition. These dollars were therefore deposited on Wall Street and recycled into large loans in South America, which ultimately led to the debt crisis there. This is how petrodollars became dominant.

The Saudis, for the first time, agreed to sell oil to China in exchange for Chinese currency. This is similar to the ruble trade between India and Russia. If this sale of Saudi Yuan oil to China takes off, other countries could seek similar treatment. This will surely shake the ground under dollar hegemony. We don’t quite have a global currency, and there isn’t a viable alternative to the US dollar yet.

The world will collectively be worse off if we revert to a quasi-barter economy, exchanging each other’s currency. But given current trends, it seems that the undisputed status of the dollar as the “king” of the world of commerce and invoicing is in question.

(Dr. Ajit Ranade is a renowned economist)

Posted: Monday March 28th 2022, 08:22 IST