SIYABONGA HADEBE: The Ukraine conflict as economic war on the petrodollar

As economic historian and sociologist Karl Polanyi once put it, “The economic system is, by its nature, embedded in social and political institutions.” This statement has never been truer than in the current rapidly changing global landscape that pits the old Western powers against a political grouping of new powers under the leadership of China and Russia.  

Through the Brics (Brazil, Russia, India, China and SA) partnership SA has found itself more aligned with the latter, much to the chagrin of Western powers that have always considered Africa to be part of their political sphere of influence.

Critics question why SA supports Russia in global conflicts instead of aligning with its major trading partners, especially the US and Western Europe. Intellidex chair Stuart Theobald wrote in his Business Day column recently that SA’s loyalty to Russia is “an international political blunder of epic proportions” that is exposing the country to potentially serious negative consequences (“SA’s Russian friendship angers those who actually provide support”, April 3).

However, understanding the reasoning behind certain foreign policy choices by countries, necessitates a fundamental grasp of geopolitics. It is a mistake to prioritise economics ahead of politics without giving it some thought. Prominent economists argue that to understand the rationale behind economic decisions it is essential to examine them through a political lens. For instance, South Korean economist Ha-Joon Chang emphasises that “the biggest decisions about the economy are political, not technical”.

Since the beginning of the conflict in Ukraine politics has forcefully risen to take its place ahead of economics. This is because geopolitical power play in Ukraine could have long-term ramifications for the international economy, which is now dominated by the US and its greenback. With the military action in Ukraine, Russian President Vladimir Putin understood that his actions would inevitably be met with the US and other Western countries throwing it out of the international banking system.  

At stake is not only the dominance of the petrodollar but also its future as the main form of exchange. The petrodollar system, which remained unchallenged for decades until recently, refers to the exchange of oil for dollars between oil-consuming and producing nations. During the 1970s oil crisis US consumers faced fuel prices as high as $4 per gallon. To tackle this situation the US and Saudi Arabia forged an agreement, now known as the petrodollar system, stipulating that all oil transactions would be conducted in dollar, regardless of the purchasing country. 

Rehearsed in Syria before relocating to Ukraine, an attempted forceful realignment of the balance of world powers and the global economy is now in full swing. Putin is gunning for the petrodollar system, which has persisted for the past 50 years. It could be argued that Western countries fell into his trap by imposing economic sanctions to punish Russia for invading Ukraine, specifically by preventing Russian companies and banks from using the Society for Worldwide Interbank Financial Telecommunication (Swift) international payment system.  

The Swift system provides secure information transmission and allows for diverse financial transactions. It enables effective communication between banks and other financial entities, facilitating the exchange of payment instructions, confirmations and data associated with international transfers, trade finance and securities transactions.  

Significant disruptions

Economic sanctions that restrict the use of the Swift system are intended to exert economic pressure and isolate the targeted entities, making it more difficult for them to engage in international trade and financial transfers. Being cut off from Swift has undoubtedly hurt the Russian economy, yet despite Western insistence that these sanctions are working, the general view is that they have not been as effective as expected.  

By cutting off the supply of oil and gas to Europe, which before the war relied on Russia for 40% of its energy needs, and demanding transactions be settled in rouble, gold or other nondollar assets, Russia has managed to reduce the effect of being excluded from Swift and triggered significant disruptions in price and supply in Western markets. This development poses a threat to the established monetary system, the petrodollar.

Russia understood from the onset that it was getting involved in economic as much as military warfare. Over the years Russia and China have been exploring strategies to re-establish the value of gold and seek alternatives to the Swift system. The long-term goal was to prevent the further strengthening of the dollar and consequent empowerment of the US as the primary owner of the greenback. Most Swift transactions are settled in dollar, which helps solidify the dollar as the global reserve currency.  

Russia and China have been developing their own messaging system, System for Transfer of Financial Messages, since 2014, when the US first threatened to disconnect Russia from Swift. There are plans to integrate this payment system with China’s Cross-Border Interbank Payment System.  

Noticeable indifference

It is therefore worth considering the implications of excluding Russia from Swift and how this might affect the US and Europe over time. If Russia and China manage to establish an alternative system to Swift it would in effect create a competing currency system that would weaken the dollar. With Russia the world’s second-largest energy exporter and China the largest exporter of manufactured goods, they could gain support from partners in Africa and Latin America in particular, putting Europe and the US on the back foot.  

The petrodollar system enabled the rise of Middle Eastern countries such as Saudi Arabia, the United Arab Emirates and Qatar. If Russia and China are able to bypass the need for dollars in oil settlements it has the potential to undermine these oil-funded powers. This may explain why these countries have expressed interest in joining the Brics bloc, and have recently displayed a noticeable indifference towards their long-standing ally, the US. 

Despite the US being their primary supporter for the past five decades, the major oil producers of the Middle East declined to increase crude oil production to suppress prices in the wake of the Ukraine war. The UAE has gone as far as to abstain from a UN vote on Ukraine rather than automatically supporting the US position, as in the past. In addition, Beijing recently brokered a deal to restore relations between sworn enemies Saudi Arabia and Iran. This deal was promoted as facilitating the “reordering of the usual alliances and rivalries”, with the US left on the sidelines.  

SA has to contend with a global political landscape that is increasingly difficult to navigate. The motivation for inclining towards the new powers is not limited to historical events, as it is often argued. Current realities should determine a country’s foreign policy imperatives and economic desires. Alignment with China and Russia could mean a “second independence” from the clutches of Western powers that have mismanaged economic and political relations with their former colonies.

Whether the foreign policy choices it has made turn out to be right or wrong for SA, the West knows what it did last summer. 

• Hadebe is an independent commentator on socioeconomic, political and global matters based in Geneva, Switzerland.