The US dollar, long the dominant currency in the Middle East, is facing increasing challenges as several countries in the region begin seeking alternatives. Iraq recently banned the use of US dollars in transactions, and major oil-producing nations like Saudi Arabia and the United Arab Emirates are considering selling oil without using the dollar. These moves reflect a broader trend toward reducing reliance on the US currency, a shift fueled in part by the ongoing war in Ukraine.
Iraq’s Dollar Ban and Its Impact
In Iraq, where citizens frequently use US dollars for significant purchases due to the devaluation of the Iraqi dinar, the government’s ban on dollar transactions has created shockwaves. This measure stems from restrictions imposed by US authorities to limit the flow of dollars into Iran, leading to a scarcity of US currency in Iraq and increased volatility in the value of the dinar. Earlier this year, Iraq signaled its intent to conduct trade with China using the yuan, marking a clear move away from the dollar.
Exploring Alternative Currencies
Across the Middle East, similar developments are underway. In Saudi Arabia, the finance minister has expressed openness to selling oil in currencies other than the dollar, including the euro and the Chinese yuan. The UAE has indicated its willingness to trade with India using the rupee, while Egypt has taken steps to issue bonds in currencies such as the Chinese yuan and Japanese yen.
Additionally, several countries in the region—including Egypt, Saudi Arabia, and the UAE—are looking to join BRICS, a geopolitical bloc comprising Brazil, Russia, India, China, and South Africa. BRICS nations are discussing the possibility of introducing a new currency for cross-border trade, further reducing reliance on the US dollar.
The Dollar’s Global Decline
Globally, the dominance of the US dollar appears to be waning. According to Bloomberg, the dollar currently accounts for about 58% of global foreign reserves, down from 73% in 2001 and 85% in the late 1970s. However, despite the alarm over this decline, experts maintain that the shift away from the dollar is progressing more slowly than many headlines suggest.
In the Gulf region, for example, most countries continue to peg their currencies to the dollar, underscoring the ongoing influence of the US currency. Hasan Alhasan, a Middle East policy expert at the International Institute for Strategic Studies, points out that a serious departure from the dollar would require Gulf nations to de-peg their currencies, a step that has yet to happen.
Geopolitical Pressures Behind the Shift
The move away from the US dollar is largely motivated by geopolitical factors, particularly the war in Ukraine and the resulting sanctions on Russia. Daniel McDowell, a political science professor at Syracuse University, argues that US financial sanctions have driven adversaries to explore alternative currencies. Countries like those in the Middle East are increasingly wary of potential future sanctions and are exploring ways to reduce their dependence on the dollar in response.
Another factor is concern over the US’s influence on global oil markets. Saudi Arabia, for instance, fears that the US could impose restrictions similar to those placed on Russia, such as price caps on oil exports. In March, Saudi Energy Minister Prince Abdulaziz bin Salman warned that the kingdom would stop trading with any country attempting to implement such caps. Algeria echoed these concerns, signaling a broader regional unease with US policies.
The Path Ahead for De-Dollarization
While the shift away from the dollar is becoming more pronounced, it won’t happen overnight. The global financial system is deeply intertwined with the US dollar, particularly when it comes to settlement infrastructure, which plays a crucial role in international trade. As Maria Demertzis, a professor of economic policy at the European University Institute, explains, countries still rely on the dollar’s established infrastructure for transactions, making it difficult to fully transition to alternative currencies.
In the Middle East, the freezing of Russian central bank assets by the US and EU has amplified concerns about the potential weaponization of international finance. As a result, countries in the region are preparing for a future where global trade is less centered around the dollar, exploring ways to position themselves in a multipolar world where they can operate both within and outside of dollar-based systems.
While the US dollar continues to play a dominant role in the Middle East’s financial landscape, these recent developments suggest a gradual but steady shift away from its hegemony.
