Key information
- The move towards a multipolar world is accelerating as Western sanctions against Russia provoke a global movement away from the US dollar.
- The use of a “petroyuan” for oil transactions by BRICS nations could significantly disrupt the existing world order, Saudi Arabia’s membership in the mBridge project and its openness to considering alternatives to the payment system of dollar-dominated oil being key factors in this potential development.
The move towards a multipolar world is accelerating as Western sanctions against Russia provoke a global movement away from the US dollar. A leading think tank suggests that BRICS nations are poised to significantly disrupt the existing world order by exploring the use of a “petroyuan” for oil transactions.
Herbert Poenisch, a lecturer at Zhejiang University and former senior economist at the Bank for International Settlements, highlights two key factors driving this potential shift. First, the recent enlargement of BRICS to include Saudi Arabia, the United Arab Emirates, Iran, Egypt and Ethiopia lends significant weight to the bloc’s aspirations. In particular, Saudi Arabia, a major oil supplier, joined the mBridge project, the BIS digital currency initiative, and expressed readiness to consider alternatives to the oil-dominated payment system by the dollar, including the petroyuan.
The practical implementation of a Petroyuan
While Mr. Poenisch recognizes the conceptual feasibility of establishing a petroyuan, he is concerned about its practical implementation. He emphasizes that a true currency must fulfill three essential functions: denomination, means of payment and store of value. He notes that while the petroyuan can indeed serve as a naming tool, achieving the other two functions presents considerable challenges.
Mr Poenisch draws attention to past attempts by BRICS countries to use an outdated system of correspondent accounts to circumvent the US-controlled SWIFT system, which has already encountered difficulties due to the scrutiny it faces. are subject to participating Chinese banks and the risk of American sanctions. Furthermore, he highlights imbalances in currency usage between BRICS countries, citing examples such as the accumulation of Indian rupees in Russian banks due to oil imports.
Recycling of surpluses and store of value function
Poenisch said the biggest obstacle facing the petroyuan is providing enough renminbi to major oil-importing countries, such as India, which do not have an account surplus. current with China and therefore have difficulty accumulating enough renminbi to buy oil. It suggests that the mBridge project, a modern payment system using central bank digital currencies to replace the outdated correspondent account system, could offer a viable solution by facilitating immediate settlement between partner central banks in China, Hong Kong , United Arab Emirates, Thailand and Saudi Arabia.
Regarding the third function of the currency – serving as a store of value – Poenisch observes that oil-exporting countries will accumulate substantial quantities of renminbis. He therefore insists on the need for a mechanism to effectively recycle these surpluses to countries that need them, like the effectiveness of the dollar-based system managed by global banks. However, he warns that recycling surplus renminbi into the petroyuan will be much more complex due to China’s tight control of the offshore renminbi market.
China as the first beneficiary
Ultimately, Poenisch believes that China will be the main beneficiary of the strengthening role of the renminbi and will reap significant economic benefits from the petroyuan system. He acknowledges that while China has laid the foundations for a renminbi-dominated oil market through platforms such as the Cross-Border Interbank Payment System and the Shanghai Oil and Natural Gas Exchange, they still remain underdeveloped.
Despite this, he predicts that Chinese banks will prosper thanks to the recycling process associated with renminbi surpluses. It concludes that while the introduction of a petroyuan promises significant financial opportunities for China and participating intermediaries, it will further fragment the global financial system.
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