Mar 18, 2022 - World

Saudi Arabia mull oil sales in Chinese yuan

Yuan and dollar
Illustration: Sarah Grillo/Axios

The crushing sanctions levied on Russia by the U.S. showed the power of the dollar — and that may drive efforts to avoid using the greenback.

Case in point: Saudi Arabia is in talks with China about accepting Chinese currency in exchange for oil, the WSJ reports.

Why it matters: Such a deal could signal that the dollar's pre-eminent status — already in flux as a result of China's rise — faces additional challenges during this moment of geopolitical change.

Threat level: Experts on the dollar — which is the world's dominant currency in terms of pricing, payments and reserves — say that a potential Saudi-China oil linkage is more a symbolic move than a serious threat to the dollar's top-dog "reserve currency" status.

  • "It could marginally dent the dollar's role as the reserve currency, but not that much," Eswar Prasad, an economics professor at Cornell University and the author of "The Dollar Trap," tells Axios.
  • "Ultimately, as a reserve currency, you still need a very liquid currency with deep financial markets and strong institutions," he adds.

The backstory: Saudi Arabia has sold its oil exclusively in dollars since late 1974 after it struck a deal with the Nixon administration that included key economic and security components.

  • At the time, Saudi Arabia had just led a devastating oil embargo against the U.S.
  • The 1974 agreement reset the relationship, deepening the military and economic ties between the two countries.
  • But since a U.S. intelligence report found that Saudi leaders approved the 2018 murder of journalist and U.S. resident Jamal Khashoggi, things are less friendly.

The bottom line: The dollar's strength stems in large part from its linkage to democracy. American laws, courts and democratic institutions exert a powerful pull that authoritarian economies have trouble competing with. At least for now.

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