In a landmark decision, Saudi Arabia has opted not to renew its 50-year-old petro-dollar agreement with the United States, which expired on June 9, 2024. This move marks a pivotal change in the kingdom’s economic strategy and has significant implications for the global financial system.
The original deal, signed on June 8, 1974, was a cornerstone of U.S.-Saudi relations, establishing joint commissions on economic cooperation and Saudi military needs. American officials at the time believed this agreement would encourage Saudi Arabia to increase oil production and foster stronger economic ties between Washington and the Arab world.
Saudi Arabia’s decision not to renew the agreement allows it to sell oil and other products in multiple currencies, including the Chinese RMB, Euros, Yen, and Yuan, rather than exclusively in U.S. dollars. This shift could also see transactions in digital currencies such as Bitcoin.
This move is seen as a major departure from the petrodollar system that has been in place since 1972 when the U.S. decoupled the dollar from gold. Experts predict this could accelerate the global move away from the U.S. dollar as the dominant currency in international trade.
Advancements in Cross-Border CBDC Transactions
Concurrently, Saudi Arabia has joined Project mBridge, a pioneering initiative that 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 has attracted over 26 observing members, including the South African Reserve Bank, which recently joined. Other prominent observers 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.
The steering committee has developed a unique governance and legal framework tailored to the platform’s decentralized nature, including a comprehensive rulebook.
The Development of Project mBridge
The roots of Project mBridge can be traced back to extensive 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.
In 2022, the project conducted a pilot involving real-value transactions. Since then, the mBridge team has been refining the platform, reaching the stage of a Minimum Viable Product (MVP). As the project progresses, it invites private-sector firms to propose new solutions and use cases to further develop and showcase the platform’s potential.
Future Implications
Saudi Arabia’s strategic shift away from the petrodollar and its active participation in projects like mBridge reflect a significant transformation in the global economic order. This move challenges the long-standing dominance of the U.S. dollar and points towards a more multipolar financial system, highlighting the changing dynamics of international trade and finance.
