Good Friends, Greater Enemies!

“The kingdom will face its consequences…” said Joe Biden, as the tensions between the United States and the gulf petro-giant seem to have escalated. In a move that stunned the entire world, the Kingdom of Saudi Arabia expressed its willingness to join the BRICS alliance, jeopardising the 77-year relationship with the US.

In this week’s article, we at Xavier’s Finance Community delve deep into how Saudi Arabia can bring about the doom of the dollar and the events cascading to a new world order.

To understand the whole scenario, we first need to understand

What is BRICS?

To counter the increasing western influence over major political and economic issues,  major emerging economies came together to form the  BRICS, an acronym for Brazil, Russia, India, China, and South Africa. Even though considered the underdogs in contrast to the G7, these economies together account for 41 per cent of the world’s population, amassing a combined GDP of 24.4 trillion dollars and commanding substantial military power and a prospect of economic elevation.  In its upcoming annual summit, scheduled in South Africa in 2023, the issue of member expansion will be raised, with countries like Turkey, Afghanistan, the UAE, and Saudi Arabia showing great interest in joining. 

Here the question arises as to why Saudi Arabia, a country with significant ties to the US, would want to join an alliance that is seen as opposed to American domination? 

It has always been oil, and it will always be oil.

The year is 1973, and the United States is leading the revolution, and with its pompous growth comes the need for a crucial elixir: crude oil. Then President Franklin D. Roosevelt convinced the Saudis that a mutual relationship could come in handy for their defence and prosperity. This marked the beginning of an official diplomatic relationship between the two countries. The US offered its best product—peace and protection from the hostile Iranians in return for the elixir, further leading to the formation of Aramco.

The two countries could meet at a common ground the-United States was willing to bet on the future dominance of this liquid gold and found that the gulf was the epicentre and the only way to counter soviet influence. The monarchy wanted to assert its superiority and protect its territorial integrity over other oil-producing neighbours. It was a match made in heaven.

What Went Wrong?                                                                                 

Bow when you see a king and present your gifts.

The US tried its best to keep the relations anew with Riyadh by ushering in three presents: inviting the pariah states (nations with radical ideologies often considered outcasts to the globe) to the international commune. Secondly, protecting the prosecution of the Kingdom’s then-ruler by its offensive methods of war, not just by keeping the US troops vigilant in support of the war in Yemen but also by providing the kingdom with all the necessary logistical and intelligence support and strategy.

Jamal Khashoggi’s brutal murder even worsened the case.

The 60 year old journalist working for a highly influential newspaper, the Washington post, was assassinated in Turkey by the Saudis because he wrote against Prince Mohammed bin Salman (MbS) and his hypocritical ideology. This triggered the Americans as Khashoggi was a US resident, people wanted strict actions to be taken followed by boycotting high profile Saudi gatherings by American Businessmen. Even after such an incident the states remained the ally of the Saudis by supporting MbS both directly and indirectly.

Despite all this support, the Kingdom was adamant about revising its foreign policies and thus taking a nationalistic route, allegedly aiding the Russians by cutting oil supplies by 2 million barrels a day and partnering with China at the Shanghai Cooperation Organization. During a visit on December 9, Chinese President Xi Jinping ratified the developing synergy between the countries, which is critical for future visions such as the China Belt and Road Initiative and the Neom Line.

Such actions dealt a blow to the US, prompting calls for an immediate halt to all weapon sales, citing that “the sale of such susceptible technology to a country that is aligned with the States’ adversary and guilty of terrorist war crimes is not only a moral imperative but also a major security imperative.”

A new World Order?                                                              

“The kingdom’s strategy is to keep the world hooked on oil”

Saudi’s plan is simply to reduce consumption of fossil fuel in the kingdom by initiating green measures, the goal is to rapidly build more solar panels and expand electric car usage so that burning of oil is reduced drastically. 

But how would this help the kingdom manipulate the oil supply?

Answer to this question lies in the strategy of the nation itself, reducing oil consumption in the homeland would increase the exports of the kingdom which would in turn place it in a dominating position as its rivals would slip away.

The Petro-giant is firm on its stand for a formal proposal to join BRICS with the UAE and Turkey. It will not only shift the power centres from the west to the east but also opens a new plethora of opportunities for the member nations. The instant results would range from BRICS dominating oil production with a staggering 31 per cent global share to dramatic developments in the trade and international relations of all the member countries. Further, the presence of pivotal commercial and logistical centres within the organisation would result in greater control over world trade. The BRICS nations have announced the establishment of a parallel bank worth $100 billion to compete with the IMF, anticipating their future needs. This accession would also open the doors to bilateral trade agreements for India, making it less reliant on the dollar for trade-offs. The induction would reduce the potency of the dollar in international markets as both China and India would like to cut short on their US forex reserves, which they previously would have used to buy the same oil from Riyadh. Thus further weakening the western sphere of influence. In the 14th summit of the same, a proposal for a dollar rival, BRICS reserve currency, was put to talks about being a basket of currencies of all its member nations. The reserve currency is to be gold-backed, facilitating direct trade and financial requirements of the members. The mechanism, though in its ideation phase, will prove to reduce the reliance on the dollar and euro and could even make the IMF’s Special Drawing Rights(SDRs) redundant(BRICS reserve currency: BRICS explores creating new reserve currency – The Economic Times (www.archive.is). 

The darker side of the picture….

The alliance is experiencing a roller-coaster ride with the alliance falling apart both their kryptonites are exposed.

If the kingdom decides to secede from the states, then as Mr. President said, “there will be consequences”. Looking at a deeper picture we should not forget that The Saudi-U.S. relationship was founded on the  principle of energy for security. Thus one of the “consequences” can be that the states may cut off its military support to the kingdom, leading to a havoc in the gulf. Beyond the security consequences, the states may also pursue legal channels. If the NOPEC bill is signed and brought into the books of laws, it could expose OPEC countries to lawsuits for coordinating supply cuts leading to increased crude prices globally but thereafter protecting American consumers and businesses from the artificial oil spikes.   

What to expect, going forward?

If everything goes as planned, the energy politics of the world will change dramatically. Even if the superiority of the dollar might not be totally eroded, the US influence on global politics definitely stands to be reduced. If all goes well, the BRICS nations would collectively sit atop a chunk of the oil and natural gas reserves while boasting a combined GDP double that of the European Union’s $14.5 trillion. The collective economic, political, and social gains from this would still be too immaterial to count. Another aspect would be the power vacuum generated in the absence of a dollar reign, waiting for an Asian superpower to claim the throne this time. Times call for India to buckle up for a turbulent ride; with economic booms and prosperity at bay, we keep our fingers crossed.