Saudi Switch to Yuan Seen as Symbolic, Not True Threat to Dollar

(Bloomberg) -- Saudi Arabia appears to be sending a political message to the U.S. with reports that it will consider accepting yuan payments for oil sold to China, currency strategists say.  

The world’s largest crude exporter, which has been in talks with China over yuan-priced contracts for six years, has sped up the negotiations, the Wall Street Journal reported Tuesday. The offshore yuan erased earlier losses after the report, yet investors from Nordea Investment Management to Generali Insurance Asset Management said it changes little for the dollar’s status as the world’s reserve currency.

Read: Paying Yuan for Oil Is a Nice Story, But an Old One

“I don’t know if it is really real,” said Guillaume Tresca, a senior emerging-market strategist at Generali in Paris. “It happens at a moment when the geopolitical order is moving. The Saudis are trying to play with what they can. It is just a signal sent to the U.S. they want more consideration.”

The dollar has long been the default currency for pricing energy contracts around the world, elevating the importance of the greenback and bolstering Washington’s geopolitical influence. Yet with U.S. and allied sanctions on Russia restricting payments in dollars and cutting that nation off from half of its foreign reserves, other nations are reconsidering their relationships with the currency.

“Throughout the last few years, there have been many failed attempts to call the demise of the dollar,” said Witold Bahrke, a Copenhagen-based senior macro strategist at Nordea. “We think this is just another of such failed attempts.”

Saudi Arabia’s relations with the U.S. have been strained since Joe Biden was elected president with a promise to turn the kingdom into a “pariah” over the 2018 murder of Jamal Khashoggi, a Washington Post columnist who was critical of the regime. Other areas of stress include the Saudis’ intervention in the Yemen civil war and the Biden administration’s attempts to revive the Iran nuclear deal.

However, there’s another reason to think the Saudis may be bluffing: The riyal is pegged to the dollar, so any potential weakness in the U.S. currency would ricochet back to the kingdom. The peg has shielded the nation from price volatility and allowed its central bank to accumulate reserves. Some investors are skeptical the country will pivot away from that tool as a result.

Still, China has made the internationalization of the yuan a top priority. And countries including Russia, India and Saudi Arabia have sought to include non-dollar payments in their financial systems to reduce their dependence on the U.S. This year’s sanctions on Russia, and the potential economic devastation stemming from its isolation, have brought a new sense of urgency among those countries, according to some strategists.

“It is possible that those that trade with Russia are looking for some contingency plans should the sanctions extend to all payments, especially as India or Saudi Arabia won’t have the same level of coordination with the U.S. that the European Union or the U.K. would have,” said Kaan Nazli, a money manager at Neuberger Berman in The Hague, Netherlands.

Most investors expect such attempts to abandon the dollar will be minor. Over time, however, they could lead to an alternative financial system that captures a limited market share, while still leaving the dollar as the world’s dominant currency.

“Several years down the road, we might see two parallel financial systems globally, but this move by Saudi Arabia alone is not the watershed moment to get there,” said Matthew Weller, global head of research at Forex.com. “This is not the game changer.”

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