The financial world is on the brink of significant change following Saudi Arabia’s decision not to renew its 50-year petro-dollar deal with the United States, which expired on June 9, 2024. This decision marks the end of an era and could have far-reaching implications for global markets.
The End of a Historic Agreement (Petro-dollar)
The security agreement, initially signed on June 8, 1974, established two joint commissions focused on economic cooperation and Saudi Arabia’s military needs. This deal was pivotal in fostering closer ties between the two nations. At the time, American officials hoped it would encourage Saudi Arabia to increase its oil production and serve as a model for economic collaboration with other Arab countries.
Moving Beyond the Petrodollar
Saudi Arabia’s choice not to renew the agreement allows the country to trade oil and other goods in various currencies, including the Chinese RMB, Euros, Yen, and Yuan, rather than solely in U.S. dollars. There is also potential for transactions using digital currencies like Bitcoin.
This development marks a significant shift away from the petrodollar system established in 1972 when the U.S. decoupled its currency from gold. It is expected to accelerate the global movement away from the U.S. dollar as the dominant currency in international trade.
Saudi Arabia’s Involvement in Project mBridge
In a related move, Saudi Arabia has joined Project mBridge, which explores a multi-central bank digital currency (CBDC) platform. This platform, built on distributed ledger technology (DLT), aims to facilitate instant cross-border payment settlements and foreign exchange transactions.
Project mBridge includes over 26 observing members, such as the South African Reserve Bank, which recently joined. Other notable members include the Bank of Israel, Bank of Namibia, Bank of France, Central Bank of Bahrain, Central Bank of Egypt, Central Bank of Jordan, European Central Bank, International Monetary Fund, Federal Reserve Bank of New York, Reserve Bank of Australia, and the World Bank.
Governance and Legal Framework
The project’s steering committee has developed a bespoke governance and legal framework, including a rulebook tailored to the platform’s decentralized nature. This framework aims to ensure smooth operation and regulatory compliance across different jurisdictions.
The Evolution of Project mBridge
Project mBridge originated from a collaboration starting in 2021 between the BIS Innovation Hub, the Bank of Thailand, the Central Bank of the United Arab Emirates, the Digital Currency Institute of the People’s Bank of China, and the Hong Kong Monetary Authority. A pilot with real-value transactions was conducted in 2022, leading to the current stage where the project has reached a Minimum Viable Product (MVP).
As Project mBridge progresses, it is now inviting private-sector firms to propose new solutions and use cases to help develop the platform further and demonstrate its full potential.
Conclusion
Saudi Arabia’s decision to end the 50-year petro-dollar agreement with the United States and its involvement in Project mBridge highlights a significant shift in the global financial landscape. These developments signal a move towards a more diversified and multi-currency world, potentially diminishing the dominance of the U.S. dollar in international trade.
Stay tuned for more updates as this situation evolves and new opportunities emerge in the global financial markets.