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Emerging Threats to Petrodollar: A shift in Geopolitics of Oil

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By  Aishwarya Sanjukta Roy Proma

The politics of global oil are developing economic and political alliances. These are similar to those that existed during the Cold War. The Petro-bloc is highly political, and all countries involved in it are making continuous attempts to exert influence on each other. But in recent years, there has been a growing agreement that the dominance of the United States is diminishing to such a degree that the international system is transitioning from a unipolar global order to a multipolar order. The weakening of the petrodollar as a currency might perhaps be an indication that this shift is now taking place.

The term “petrodollar” refers to the preponderant position of the United States dollar. The US dollar serves as the reserve currency for international oil transactions. The fact that nations that export oil get compensated in US dollars for such exports has contributed to an increase in both the value of the currency and the demand for it around the globe. A worldwide Petro-bloc has been controlled by Russia, China, the United States of America, and the Middle East. Outside of the United States and Russia, oil companies such as Chevron, Shell, Exxon-Mobil, BP, Texaco, and Gulf Oil hold 88% of the world’s oil reserves. Due to multiple uncertainties in global politics, there has been a significant change in the geopolitical preferences of oil-exporting nations and oil-importing countries. But these geopolitical calculations would pose a danger to petrodollars in the short and long term. But this sudden shift in petropolitics has lately come to the forefront as a result of two key events. Firstly, the Russian war on Ukraine led to restrictions on imports of Russian oil. Secondly, the United States’ insistence on boosting oil output after the war was met with opposition from Saudi Arabia-dominated OPEC. This development is not unexpected given that the West, led by the United States, has imposed sanctions that have made it harder for Russia to export gas and oil. But the Middle Eastern countries did not comply with the demand of western nations, as it would further put OPEC’s own petrodollar business in danger. Also, Middle Eastern governments did not want to artificially drive down oil prices, so they kept production levels low and did not increase their output.

In global politics, China’s influence is expanding considerably among MENA nations. China has been making efforts to lessen its dependence on US dollars for importing commodities and to contest the dominance of the petrodollar. China has been in discussions with several OPEC members, including Saudi Arabia, Iran, and Venezuela, over the possibility of pricing some of those countries’ oil sales in yuan rather than in dollars. This may have repercussions for the international energy market as well as for ties between the United States and China. OPEC and its allies are moving in the opposite direction from the present American strategy, which is to advocate for a significant fall in oil prices. Additionally, Mohammed Al-Jadaan, the finance minister of Saudi Arabia, stated in January 2023 at the World Economic Forum in Davos that there were no issues settling trade arrangements, whether in the US dollar, the euro, or the Saudi riyal. Although they have not yet done so, the Saudis appear to be considering alternatives based on recent actions. In 2022, Saudi Arabia said that it was investigating the possibility of engaging in yuan-based oil trade with China. Further, other Asian nations, including India, Pakistan, Iraq, and the United Arab Emirates, have all reached agreements with China and Russia to pay for oil using the ruble. The BRICS countries of Brazil, India, China, and Russia had begun discussions on trading oil for their common currency. Several nations were doing research to determine the potential benefits and drawbacks of exchanging oil for other currencies. The most recent challenge to the petrodollar was NORD Stream 2, which Germany transacted in euros. This would have signaled the beginning of the Petro-Euro exchange even during the Russia-Ukraine war. Even when the war was ongoing, Russia demanded that the European Union pay for oil and gas in rubles. Other nations that were purchasing oil, including India and China, were also avoiding the use of the dollar for the time being and going with other currencies instead. Even OPEC nations had shown willingness for the euro to coexist alongside the petrodollar. The Saudis were in charge of this initiative, but the United States put an end to it. This change in strategic objectives for Saudi Arabia offered a possibly imminent challenge to the strategic interests of the United States. This transition would be amplified if Saudi Arabia decided to distance itself from the petrodollar. That alone will not be enough to bring the dollar to its lowest point, but it will be enough to further endanger the hierarchy of the US dollar in the global economy. In addition, ignoring the status of the petrodollar is particularly reckless due to the fact that the petrodollar’s position has ramifications for international politics. In such circumstances, Saudi Arabia is attempting to maintain equilibrium in its ties with both the United States and China. While the petrodollar is not going away, it is facing some stiff competition in 2023. After 40 years of American monopoly in Petrodollar, China is now a significant threat to the petrodollar’s dominance.

The petrodollar does not appear to be as stable as it once was in 2023, and the US may need to reaffirm its position in light of recent changes. It can be argued that there have been a number of noteworthy signs pointing to a potential shift away from the dollar and toward other currencies, especially in light of the apparent policy changes. On the other hand, if the petrodollar’s value were to fall, this might indicate a shift away from a monopolar financial system and toward a more multipolar one. However, a number of countries have agreed to trade oil instead of using the dollar in exchange for other currencies. The dollar’s value actually fell significantly as a result of a change in the way that it was used in international oil trade.

The sudden change in currency that would occur for the trade of oil commodities would not take place all at once. Because states are used to doing business in dollars, it is possible that they would not be eager to alter whole economic strategy in order to account for a new currency. This new currency may be a supplement or entirely replace their current trade systems. Despite the ongoing problems, it is possible that countries in the Middle East, and Saudi Arabia in particular, may not be interested in this currency change because it will not be beneficial to their economies. However, the possibility of using a different currency is undeniably there, and much will depend on the manner in which China intends to integrate Yuan into the international economy. It is conceivable that Saudi Arabia could play a significant role in the petrodollar system as well. A domino effect with the rest of OPEC may occur if Saudi Arabia starts trading oil for Yuan. So, this internal struggle is further helping China in the long run by enabling it to increase its influence in oil markets and perhaps establishing the yuan as a significant oil trading currency. Even if this pattern continues, there is no way that there will be less demand for the dollar. As long as there is a surplus of debt denominated in dollars in the world economy, there will be a need for dollars. At the very least, this will ensure that the demand for dollars will remain constant. In addition, the dollar continues to be one of the most secure currencies to have on hand, particularly in the central banks of China, Japan, the European Union, and the United Kingdom.

In conclusion it can be added that the weakening of the petrodollar may have important strategic repercussions, especially in regard to the overall distribution of power throughout the globe. The United States dollar’s status as the world’s reserve currency has given it a preeminent position within the global monetary system, which in turn has provided the United States with tremendous geopolitical power. In the longer run, oil production may not render the petrodollar system obsolete as a result of this sudden shift. It is possible that this will catalyze a move away from the dollar toward a global monetary system that is more decentralized.

Courtesy: Modern Diplomacy


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BUSINESS & ECONOMY

A Labour Government Should not Frighten the Horses

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The UK general election is likely to mean changes, but Gulf citizens need not be too worried.

By James Drummond

If the tension was killing you, now you know. If it wasn’t, then be aware that a general election in the United Kingdom will be held on July 4 – less than six weeks away.

For the hapless Rishi Sunak, it looks like a case of “If it were done when ’tis done, then ’twere well it were done quickly.” Polls indicate that after 14 years of conservatism, real or imagined, voters are likely to elect a new Labour government.

What does this mean for us here in the Gulf?

The six Gulf states are certainly exposed to Britain. The extent of GCC holdings in the UK is enormous, ranging from Qatari ownership of the Shard building in London, stakes in the Sainsburys supermarket chain and Barclays bank, to Sheikh Mohammed bin Rashid’s Godolphin stables in Suffolk.

Manchester City and Newcastle United football clubs are owned by Emirati and Saudi interests, respectively. Kuwait’s wealth is managed by the Kuwait Investment Office near St Pauls Cathedral.

Labour has been careful to detail very few policies (or hostages to fortune, as its strategists may see it), but last week, David Lammy, the likely new foreign secretary, outlined a further campaign against dirty money.

Britain is a “corruption services centre”, while London is a “hotbed of kleptocracy”, Mr Lammy said. He said that he wanted to reward whistleblowers and clamp down on “enablers” of financial crime.

Given the paucity of public announcements, Lammy’s speech is significant, because it implies that the incoming government is likely to act. Fighting financial crime is relatively uncontroversial and attracts cross-party support – although in the UK’s case with limited success.

British politicians have made similarly grandiose statements before. But after Russia’s invasion of Ukraine, London has moved particularly against Russian dirty money, and sanctioned individuals. It finally introduced an obligation mandating the disclosure of beneficial owners of property.

Overseas trusts are also now required to disclose their ultimate beneficial owners, and there is now greater transparency when registering entities at Companies House.

This seems to have had only limited effect, however. Last week Andrew Mitchell, the deputy foreign secretary, cited estimates that 40 percent of the world’s dirty money still passes through London.

Spotlight on Corruption, a non-governmental organisation, wrote in October last year that “major reform is needed to how lawyers and accountants, the property sector and company formation agents are regulated for money laundering.” Lammy may choose to take further action against these and other professionals.

Other so-called enablers include retired politicians, some of them in the House of Lords, who work as advisors to unsavoury actors. Labour could move to tighten disclosure, although several of its senior former members are likely to lobby against further transparency.

It is also possible that Labour will go further in taxing expatriates. In its limited public commitments, the party has promised to clamp down on “tax dodgers”.

Those with property in the UK already pay tax on rental income they receive, and worldwide assets are subject to Britain’s inheritance tax. Some Gulf Arab families with UK property have been caught by inheritance tax.

A government led by Sir Keir Starmer, the Labour leader, could go further, as the US does, in taxing worldwide income of its citizens, more than 200,000 of whom live in the UAE alone. The argument is that if you have the privilege of carrying the passport, you have an obligation to pay tax.

Another question surrounds nationalisation. Labour is committed to re-nationalising the railways for one, although the infrastructure is already under central government control.

But another target may – may – be England’s water supply network, which was privatised in 1989. Shareholders in various of the rump companies include the Qatar Investment Authority and Adia of the UAE.

The water companies have been the subject of a vociferous campaign, for allegedly paying their shareholders high dividends while neglecting maintenance and investment. It is possible that an incoming Labour government will nationalise the industry.

All that said, the primacy of the rule of law and respect for property rights remain strong in Britain.

Barratt, a mass housebuilder, reported earlier this week that London remains the top choice among world cities for UAE investors looking to buy overseas. The holdings of Gulf states and rights of Gulf citizens in the UK remain secure, even with a Labour government.

James Drummond is Editor-in-Chief of the AGBi

Courtesy: The AGBI.Com


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Kuwait’s Political Crisis Adds to Economic Uncertainty

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Kuwait’s latest standoff is deeply concerning for both the near and long term, writes Andrew Cunningham

The decision by Kuwaiti emir Sheikh Mishal Al-Ahmad to dissolve the country’s recently elected parliament just days before its inaugural session on May 14 presents overseas investors and Kuwaiti citizens with more uncertainty.

The situation raises concerns about the country’s economic prospects over both the short and long term.

Disputes and stand-offs between Kuwait’s emirs and its boisterous parliament are nothing new. Parliament has been dissolved, and the constitution suspended, numerous times over the past 40 years. The country has held four elections in the past four years.

Squabbling between the two sides is rooted in political disagreements and this most recent outbreak is no different.

A major factor behind the latest dissolution is believed to have been parliament’s objection to Sheikh Mishal’s choice of crown prince. Although the crown prince is nominated by the emir, the appointment has to be ratified by the parliament.

But these political, and sometimes personal, disputes have real consequences for Kuwait’s economy and financial system and, ultimately, for the long-term welfare of its citizens.

Kuwait is a prosperous country. If we take a snapshot today, we see it producing nearly 2.5 million barrels of oil per day (bpd), and there are plans under way to increase production capacity to 4 million bpd by 2035.

State foreign reserves are around $930 billion, according to National Bank of Kuwait, the country’s largest bank. With a population of a little over 4 million, its GDP per capita is one of the highest in the world.

Squabbling between the two sides is rooted in political disagreements and this most recent outbreak is no different.

A major factor behind the latest dissolution is believed to have been parliament’s objection to Sheikh Mishal’s choice of crown prince. Although the crown prince is nominated by the emir, the appointment has to be ratified by the parliament.

But these political, and sometimes personal, disputes have real consequences for Kuwait’s economy and financial system and, ultimately, for the long-term welfare of its citizens.

Kuwait is a prosperous country. If we take a snapshot today, we see it producing nearly 2.5 million barrels of oil per day (bpd), and there are plans under way to increase production capacity to 4 million bpd by 2035.

State foreign reserves are around $930 billion, according to National Bank of Kuwait, the country’s largest bank. With a population of a little over 4 million, its GDP per capita is one of the highest in the world.

In March this year, rating agency Fitch described Kuwait’s fiscal and external balance sheets as among the strongest of any of the governments it rates.

But when we look at long-term trends, the picture is more complex and less secure.

Kuwaiti government spending remains overwhelmingly dependent on oil and gas revenues. The government has made almost no progress, over many decades, in diversifying the economy away from oil, or in reducing the huge burden of government salaries and welfare payments.

Oil and gas revenues currently account for nearly 70 percent of total income and, according to IMF projections, will continue to do so for the rest of the decade.

These revenues have served the country well in the past, despite the volatility of oil prices, but such overwhelming dependence looks foolhardy when consumers worldwide are striving to reduce consumption of oil and gas and investors and energy firms have pivoted towards renewables.

Nearly all of the Kuwaiti government’s non-oil and gas revenue arises from overseas investments and from dividends from state-owned companies. Tax revenues account for less than 1 percent of total government income.

Looking beyond the fiscal imperative to diversify the economy is the need to provide employment opportunities for Kuwaiti citizens.

No less than 84 percent of the Kuwaiti workforce was employed by the government at the end of 2022. It is hardly surprising that nearly half of government expenditure is allocated to the salaries of public employees.

Pressure for social spending will increase in the years ahead. A World Bank report, published last year, showed that levels of obesity and Type 2 diabetes were higher in Kuwait than in any of the other GCC countries and nearly double the average in OECD countries.

Partly as a result of this, the World Bank estimated that Kuwait’s old age dependency ratio – the number of people over 65 years old in relation to those of working age – will be nearly double that of its neighbours by 2040.

Kuwait is also a country that is being significantly affected, even today, by climate change. Temperatures during the summer can exceed 50 degrees, making Kuwait one of the hottest places on earth.

These are difficult and complex challenges, both economic and social, but they are hardly unique to Kuwait. That they are, in some cases, more acute in Kuwait than elsewhere is due to decades’ long procrastination and political paralysis.

The government’s General Reserve Fund, which held most of its liquid assets, was entirely depleted in September 2020, according to Kuwait’s own ministry of finance. With AA ratings, the obvious solution was to borrow money – Kuwait’s debt-to-GDP ratio is less than 5 percent. Yet the parliament has still not passed a so-called ‘Liquidity Law‘ that would allow modest issuance of foreign currency debt.

The parliament also held up the introduction of Value Added Tax (VAT), making Kuwait one of two of the six GCC countries not to fulfil a joint commitment to implement a minimum VAT of 5 percent.

Over the past four years, all three of the big international credit rating agencies have downgraded the government of Kuwait.

In their rating reports, all agencies cited a dysfunctional and slow-moving political environment that was reducing the country’s financial flexibility and delaying much needed economic and financial reform.

Politics matters.

It is unrealistic to think that after decades of enmity the ruling family and the parliament will soon form a harmonious working relationship.

But they do need to find some common ground that will enable them to start addressing fundamental economic and social issues while the country still has large financial reserves and strong credit ratings.

Time is running out.

Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems


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ICD and JSC Ziraat Bank Collaborate to Boost Uzbekistan’s Private Sector

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At the 3rd Tashkent Investment Forum, the Islamic Corporation for the Development of the Private Sector (ICD) and JSC Ziraat Bank Uzbekistan took a significant step forward in their partnership to empower small and medium-sized enterprises (SMEs) and foster economic growth in Uzbekistan. The forum, held in the capital city of Uzbekistan, brought together key stakeholders from the public and private sectors to discuss investment opportunities and economic development strategies for the region. The collaboration between the Islamic Corporation for the Development of the Private Sector (ICD) and JSC Ziraat Bank Uzbekistan is aimed at boosting the private sector in Uzbekistan.

During the forum, ICD and JSC Ziraat Bank Uzbekistan formalized an expression of intent to collaborate on various initiatives aimed at supporting SMEs. One of the key elements of this collaboration is the provision of a Line of Financing (LoF) facility by ICD to JSC Ziraat Bank Uzbekistan. This LoF facility will enable the bank to fund private sector projects as an agent of ICD, thereby providing SMEs with access to the necessary capital to initiate and grow their businesses.

The partnership between ICD and JSC Ziraat Bank Uzbekistan is expected to have a significant impact on the SME landscape in Uzbekistan. By equipping entrepreneurs with the resources they need to succeed, this collaboration will not only support the growth of individual businesses but also contribute to the overall economic development of the country. SMEs play a crucial role in driving economic growth, creating jobs, and fostering innovation, and this partnership will help strengthen the SME ecosystem in Uzbekistan.

JSC Ziraat Bank Uzbekistan, as a strategic partner for ICD, brings a wealth of experience and expertise to the table. As a prominent commercial bank with foreign capital, JSC Ziraat Bank Uzbekistan has a strong track record of supporting SMEs and promoting economic development. The bank’s partnership with ICD further underscores its commitment to advancing the private sector in Uzbekistan and its dedication to supporting the country’s economic growth.

ICD, for its part, is a leading multilateral development financial institution that focuses on supporting the economic development of its member countries through the provision of finance and advisory services to private sector enterprises. By partnering with JSC Ziraat Bank Uzbekistan, ICD is furthering its mission of promoting economic development and fostering entrepreneurship in Uzbekistan and across the Islamic world.

The LoF facility provided by ICD to JSC Ziraat Bank Uzbekistan is just one example of the many initiatives that the two entities are undertaking to support SMEs in Uzbekistan. In addition to providing financial support, the partnership between ICD and JSC Ziraat Bank Uzbekistan will also include capacity-building initiatives and technical assistance programs to help SMEs succeed in today’s competitive business environment.

Overall, the partnership between ICD and JSC Ziraat Bank Uzbekistan represents a significant step forward in supporting SMEs and fostering economic growth in Uzbekistan. By working together, these two institutions are helping to create a more vibrant and dynamic private sector in Uzbekistan, which will ultimately benefit the country’s economy and its people. The collaboration between the Islamic Corporation for the Development of the Private Sector (ICD) and JSC Ziraat Bank Uzbekistan is expected to have a far-reaching impact on the private sector in Uzbekistan.


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