De-dollarization

On February 26, 2022—two days after Russia’s full-scale invasion of Ukraine—the united-states, European Union, and allied nations imposed the most sweeping financial sanctions in modern history. They froze approximately $300 billion in Russian central bank reserves held in Western financial institutions, expelled major Russian banks from the SWIFT messaging system, and effectively severed Russia’s connections to the dollar-based global financial architecture. The message was unambiguous: the dollar system that facilitates international commerce could be weaponized instantly against any state that crosses Western red lines.

The response from non-Western capitals was not what Washington intended. Rather than deterring future aggression, the sanctions accelerated a trend that had been building for years: the active pursuit of alternatives to dollar dependence. If reserves held in Western banks could be frozen overnight, then holding reserves in Western banks was a strategic vulnerability. If SWIFT access could be revoked, then alternative payment systems became a national security priority. The weaponization of the dollar, while effective against Russia in the short term, catalyzed a global conversation about whether the dollar’s dominance serves the interests of nations that might one day find themselves on the wrong side of American policy.

De-dollarization—the process of reducing the role of the US dollar in international trade, reserves, and financial transactions—has become one of the most consequential economic trends of the 2020s, with implications that extend far beyond finance into the heart of great power competition and global order.

The Dollar’s Dominance¶

Understanding de-dollarization requires understanding what is being challenged. The US dollar’s role in the global economy is without historical parallel—no previous currency has achieved such comprehensive dominance across so many dimensions simultaneously.

Reserve currency: Central banks worldwide hold approximately 58% of their foreign exchange reserves in dollars, down from 71% in 1999 but still far exceeding the euro (20%), yen (5.5%), and pound sterling (4.8%). China’s renminbi accounts for roughly 2.3% of global reserves—a number that, while small, has grown from essentially zero a decade ago.

Trade invoicing: The dollar denominates approximately 40-50% of global trade, far exceeding America’s 10-11% share of world trade. Oil, natural gas, most metals, and agricultural commodities are priced and traded primarily in dollars. A shipment of Saudi oil to Japan, involving no American party, is typically priced in dollars, paid in dollars, and cleared through the American banking system.

Financial transactions: Roughly 88% of foreign exchange transactions involve the dollar on one side. The dollar dominates international debt markets, cross-border lending, and interbank settlements. The SWIFT messaging system, which facilitates approximately $5 trillion in daily transactions, operates predominantly in dollars.

Safe haven: In times of crisis, capital flows to dollar-denominated assets—particularly US Treasury securities. Foreign entities hold approximately $7.6 trillion in Treasuries. This demand allows the United States to borrow at lower interest rates than its fiscal position might otherwise warrant—what French Finance Minister Valéry Giscard d’Estaing famously called America’s “exorbitant privilege” in the 1960s.

This dominance creates a self-reinforcing cycle. Countries hold dollar reserves because trade is conducted in dollars; trade is conducted in dollars because commodities are priced in dollars; commodities are priced in dollars because financial markets and institutions operate in dollars; and financial markets operate in dollars because countries hold dollar reserves. Breaking this cycle requires coordinated action across multiple domains simultaneously—a formidable challenge.

Why De-dollarization Is Accelerating¶

Sanctions as Catalyst¶

The weaponization of dollar-based financial infrastructure has been the single most powerful accelerant of de-dollarization. American sanctions policy has expanded dramatically since 2001:

The number of entities on the U.S. Treasury’s sanctions list grew from approximately 900 in 2000 to over 12,000 by 2024
Iran, Russia, Venezuela, North Korea, Syria, and dozens of other countries face varying degrees of financial exclusion
Secondary sanctions threaten punishment for third parties—banks, companies, and countries—that transact with sanctioned entities
The freezing of Afghanistan’s $7 billion in central bank reserves in 2021 and Russia’s $300 billion in 2022 demonstrated that even sovereign reserves are not safe

For countries that might one day face sanctions—or that trade with sanctioned states—these actions create powerful incentives to reduce dollar exposure. As Indian External Affairs Minister S. Jaishankar observed, the sanctions regime has prompted “a desire across many countries to reduce their exposure” to dollar-dependent systems.

China’s Strategic Interest¶

China has the strongest strategic motivation for de-dollarization and the greatest capacity to pursue it. China’s dollar dependence creates vulnerability at every level:

China holds approximately $770 billion in US Treasury securities (down from $1.3 trillion in 2013)—assets that could theoretically be frozen in a severe confrontation
Chinese banks rely on dollar clearing through New York correspondent banks—access that could be restricted
China’s energy imports (approximately 70% of its oil is imported) are priced and settled primarily in dollars, flowing through potentially vulnerable chokepoints both physical (strait-of-malacca) and financial (the dollar system)
Chinese technology companies have experienced the impact of American financial leverage through sanctions and entity list restrictions

Beijing’s response has been systematic. The Cross-Border Interbank Payment System (CIPS), launched in 2015, provides a yuan-based alternative to dollar clearing. By 2024, CIPS processed approximately $14.7 trillion in transactions annually, with over 1,400 direct and indirect participant institutions across 113 countries. China has signed bilateral currency swap agreements with over 40 central banks, totaling approximately $500 billion equivalent—creating networks of yuan liquidity outside the dollar system.

The internationalization of the renminbi (RMB) is central to China’s strategy. China has established offshore yuan clearing centers in London, Frankfurt, Singapore, Hong Kong, and other financial hubs. Yuan-denominated bonds (“dim sum bonds”) trade in global markets. The Shanghai International Energy Exchange launched yuan-denominated oil futures in 2018—the first non-dollar oil benchmark to gain meaningful trading volume. And the digital yuan (e-CNY), tested domestically with over 260 million wallets, offers potential for cross-border settlement that bypasses traditional banking infrastructure entirely.

Russia’s Forced Transition¶

Russia’s de-dollarization has been less strategic choice than forced adaptation. Before 2022, Russia had already begun reducing dollar exposure in response to sanctions imposed after the 2014 Crimea annexation—shifting reserves toward gold (which reached 23% of total reserves by 2022), euros, and yuan. The 2022 sanctions accelerated this process dramatically:

Bilateral trade with China shifted overwhelmingly to yuan and rubles—over 90% by 2024, compared to negligible levels in 2021
Russia redirected energy exports to Asian buyers willing to transact in non-dollar currencies; oil sales to India increasingly settle in rupees and dirhams
Russia’s domestic payment system, Mir, replaced Visa and Mastercard for domestic transactions
Russia’s SPFS messaging system processed domestic transactions previously routed through SWIFT

Russia’s experience demonstrates both the possibilities and limits of forced de-dollarization. Moscow has maintained economic functionality despite unprecedented financial isolation—but at significant cost. Russian importers face difficulties sourcing goods and making international payments. The yuan’s centrality in Russian trade creates new dependence on Beijing. And the loss of access to Western capital markets constrains long-term investment and growth.

BRICS and the Global South¶

The BRICS bloc has made de-dollarization a central agenda item. Each summit since 2023 has produced declarations on alternative payment mechanisms, local currency trade settlement, and the development of financial infrastructure independent of Western control. The Contingent Reserve Arrangement (CRA), a $100 billion pool for emergency liquidity, provides insurance against dollar-denominated financial crises.

The interest of over 40 countries in BRICS membership reflects, in part, demand for alternatives to the dollar system. For countries in the Global South, dollar dependence creates specific vulnerabilities:

Currency volatility: When the Federal Reserve raises interest rates, capital flows out of emerging markets, depreciating their currencies, increasing the cost of dollar-denominated debt, and triggering financial crises. The “taper tantrum” of 2013, when the Fed signaled reduced bond purchases, caused emerging market currencies to plunge by 5-15%.
Debt burden: Many developing countries borrow in dollars because their own currencies lack international credibility. When the dollar strengthens, the real cost of these debts increases—a dynamic that has contributed to multiple debt crises, from Latin America in the 1980s to Zambia and Sri Lanka in the 2020s.
Sanctions risk: Countries that trade with sanctioned states—purchasing Russian oil, maintaining ties with Iran—risk secondary sanctions that could disrupt their own financial systems. This creates pressure to develop non-dollar channels.
Surveillance concerns: Dollar transactions flowing through American banks are subject to U.S. Treasury monitoring, which concerns governments seeking financial privacy.

The Gold Revival¶

Central bank gold purchases have surged as part of the de-dollarization trend. Global central banks bought approximately 1,037 tonnes of gold in 2023 and a record 1,136 tonnes in 2024—more than double the annual average of the previous decade. China’s central bank added over 300 tonnes in the two years following the Russian reserve freeze. Turkey, India, Poland, and several emerging market central banks have similarly increased holdings.

Gold offers what dollar reserves increasingly do not: freedom from counterparty risk. Gold held in domestic vaults cannot be frozen by a foreign government. It cannot be devalued by another country’s monetary policy. And it retains value across centuries, civilizations, and political systems. The gold revival reflects a fundamental reassessment of reserve management in a world where the dollar’s role as a neutral medium of exchange can no longer be assumed.

The Architecture of Alternatives¶

Bilateral Currency Arrangements¶

The most common de-dollarization mechanism is bilateral agreements between trading partners to settle transactions in their own currencies. These arrangements have proliferated rapidly:

China-Saudi Arabia: Saudi Arabia accepted yuan payment for oil shipments beginning in 2023, breaking the exclusive dollar pricing that had prevailed since the 1974 petrodollar agreement. While dollar-denominated sales still dominate, the precedent is significant.
China-Brazil: The two countries agreed in 2023 to settle trade in yuan and reais, bypassing the dollar entirely. Brazil-China trade exceeds $150 billion annually.
India-Russia: Energy trade settlement in rupees and rubles, though complicated by India’s trade deficit with Russia (India exports far less to Russia than it imports, creating a rupee surplus that Russia struggles to spend).
India-UAE: The two countries launched a rupee-dirham settlement mechanism in 2023, facilitating bilateral trade exceeding $80 billion.
ASEAN members: Several Southeast Asian countries have established local currency settlement frameworks—Indonesia and Malaysia, for instance, promote rupiah-ringgit direct trading.

These arrangements remain small relative to total dollar-denominated trade, but their proliferation creates an expanding network of non-dollar channels that did not exist a decade ago.

Alternative Payment Systems¶

CIPS (China’s Cross-Border Interbank Payment System) has grown steadily since its 2015 launch. With over 1,400 participants across 113 countries and annual transaction volumes exceeding $14 trillion, CIPS provides a functional yuan-denominated alternative to dollar clearing. However, it remains heavily concentrated in China-related transactions and lacks the network density and institutional depth of dollar-based systems.

Russia’s SPFS (System for Transfer of Financial Messages) processes domestic transactions and some international trade. It is limited in reach and capacity compared to SWIFT but has proven that financial messaging can function outside Western infrastructure.

India’s UPI (Unified Payments Interface), while primarily domestic, has been extended to Singapore, UAE, and other countries for cross-border payments. Its success demonstrates that sophisticated digital payment infrastructure need not be dollar-denominated.

mBridge: The Bank for International Settlements’ Project mBridge, involving the central banks of China, Thailand, UAE, Saudi Arabia, and Hong Kong, is developing a multi-central bank digital currency platform for cross-border payments. This project, though experimental, could eventually enable real-time settlement between participating currencies without dollar intermediation—a potentially transformative development.

Digital Currencies¶

Central bank digital currencies (CBDCs) represent perhaps the most significant long-term challenge to dollar dominance. Over 130 countries, representing 98% of global GDP, are exploring or developing CBDCs as of 2025. China’s digital yuan (e-CNY) is the most advanced major-economy CBDC, with over 260 million wallets and cumulative transactions exceeding $250 billion as of mid-2024.

CBDCs could facilitate de-dollarization by enabling direct, instantaneous cross-border payments between currencies—eliminating the need for dollar intermediation. A Chinese manufacturer selling goods to a Brazilian buyer could settle instantly in digital yuan and digital real, without either party touching dollars. The technology to enable this exists; the institutional and political infrastructure to deploy it at scale is developing.

Limits and Obstacles¶

Despite the momentum behind de-dollarization, the dollar’s displacement faces formidable obstacles that will delay and potentially prevent any fundamental shift in the global monetary order:

Network Effects¶

The dollar’s dominance is self-reinforcing because of network effects—the more people use dollars, the more useful dollars become for everyone. Deep, liquid dollar markets enable instant conversion at minimal cost. Dollar-denominated contracts are enforceable in well-established legal frameworks. Dollar assets (particularly US Treasuries) offer unmatched liquidity and safety. No alternative currency offers anything comparable.

The euro, the only plausible near-term competitor, is constrained by the eurozone’s political fragmentation, the absence of a unified fiscal authority, and limited supply of euro-denominated safe assets. The yuan faces far greater barriers: China maintains capital controls that restrict the free flow of yuan across borders, its financial markets lack transparency, and its legal system does not provide the investor protections that dollar markets offer.

Capital Controls and Trust¶

For a currency to serve as a global reserve, holders must be confident they can move capital freely and that their assets will be protected by the rule of law. The dollar benefits from America’s deep capital markets, independent judiciary, and (despite occasional political pressures) a Federal Reserve whose independence is institutionally protected.

China’s capital controls—which restrict the movement of yuan across borders to prevent destabilizing capital flight—fundamentally contradict the requirements of reserve currency status. Beijing faces a dilemma: opening capital markets risks financial instability; maintaining controls limits yuan internationalization. The Chinese government has shown no willingness to accept the financial volatility that accompanies a fully open capital account—a necessary precondition for the yuan to rival the dollar.

American Advantages¶

The United States retains structural advantages that sustain dollar dominance:

Military guarantees: American military power protects the global commons—sea lanes, airspace, cyberspace—on which international trade depends. Countries hold dollars partly because the nation issuing them also guarantees the security of the system in which those dollars circulate.
Innovation ecosystem: America’s technology sector, research universities, and venture capital markets attract global talent and investment, reinforcing the dollar’s attractiveness.
Treasury market depth: No other asset class offers the liquidity and safety of US Treasury securities. Foreign central banks hold Treasuries not out of affection for America but because no alternative can absorb the same volumes without price disruption.
Inertia: The costs of switching reserve currencies are enormous—requiring renegotiation of contracts, restructuring of portfolios, and development of new institutional infrastructure. Reserve currency transitions historically take decades, not years.

Fragmentation, Not Replacement¶

The most likely outcome is not the replacement of the dollar by a single alternative but the fragmentation of the global monetary system into multiple currency zones. Regional trade may increasingly settle in regional currencies—yuan in East Asia, rupees in South Asia, rubles in the former Soviet space—while the dollar retains dominance in global capital markets, commodity pricing, and as the primary reserve currency.

This fragmentation would reduce American financial leverage without eliminating it—a world of multiple currency zones rather than a new hegemon. The euro’s experience is instructive: despite representing the world’s second-largest economy, the euro has captured only 20% of global reserves after a quarter century.

Geopolitical Implications¶

Reduced American Leverage¶

The primary geopolitical consequence of de-dollarization is the erosion of American financial power. Sanctions—America’s most effective tool of coercion short of military force—lose potency as alternatives develop. If a sanctioned country can trade in yuan, settle energy purchases in rubles, and hold reserves in gold, the impact of dollar exclusion diminishes. This does not render sanctions worthless but reduces their comprehensive, system-crushing character.

The ability to freeze sovereign reserves—the most dramatic financial weapon deployed against Russia—requires that those reserves be held in Western institutions. Countries that shift reserves to gold, yuan, or domestic holdings become less vulnerable. The very effectiveness of the Russia sanctions may have undermined the weapon’s future utility.

Currency Blocs and Political Alignment¶

De-dollarization may accelerate the formation of economic and political blocs. A yuan-centered financial zone encompassing much of Asia and the developing world would deepen Chinese influence while reducing American leverage. Trade relationships increasingly carry political implications: settling trade in yuan ties a country more closely to Beijing’s economic orbit, just as dollar dependence created alignment with Washington.

This dynamic could fragment the global economy into competing currency spheres reminiscent of the 1930s—when the dollar zone, sterling bloc, and yen zone divided international commerce along political lines. Such fragmentation would reduce the efficiency of global trade while increasing transaction costs and geopolitical friction.

Energy Market Transformation¶

The intersection of de-dollarization with energy markets carries particular significance. The “petrodollar” system—under which oil-exporting states price crude in dollars and recycle revenues into dollar-denominated assets—has been a pillar of dollar dominance since the 1974 US-Saudi agreement. Saudi Arabia’s willingness to accept yuan for oil, Russia’s shift to non-dollar energy settlement, and the growth of yuan-denominated oil futures on the Shanghai Exchange all erode this pillar.

The energy transition adds another dimension. As renewable energy displaces fossil fuels, the strategic importance of oil—and the petrodollar system it supports—will diminish. Countries that import solar panels and batteries (predominantly manufactured in China) rather than oil (priced in dollars) may naturally shift toward yuan-denominated trade without any deliberate policy choice.

The Dollar Paradox¶

De-dollarization creates a paradox for the United States. The aggressive use of financial power through sanctions is the primary driver of de-dollarization—yet the United States cannot easily refrain from using these tools without appearing to accept behavior it opposes. Every new sanctions regime incentivizes targets and observers to develop alternatives; yet failing to sanction aggression or nuclear proliferation carries its own costs.

This paradox suggests that de-dollarization may be partly irreversible. Even if the United States adopted a less aggressive sanctions policy, the awareness that the dollar system can be weaponized will continue to motivate diversification. The 2022 precedent cannot be unlearned.

Conclusion¶

De-dollarization is neither imminent revolution nor hollow rhetoric—it is a gradual, structural shift that will reshape international finance and geopolitics over decades rather than years. The dollar will remain the world’s dominant currency for the foreseeable future, but its dominance will erode at the margins as bilateral currency arrangements multiply, alternative payment systems mature, and central banks diversify reserves toward gold and non-dollar currencies.

The significance lies not in the dollar’s replacement—no credible alternative exists—but in the reduction of American financial leverage that dollar dominance provides. A world in which sanctioned countries can trade through non-dollar channels, hold reserves beyond Western reach, and settle energy purchases in local currencies is a world in which the United States must rely more on diplomacy, military capability, and alliance management and less on the unique power that financial dominance confers.

Whether this shift enhances global stability—by reducing one country’s outsized influence over the financial system—or undermines it—by fragmenting the monetary order that has facilitated trade and growth since 1945—depends on how both the United States and its competitors manage the transition. What is certain is that the dollar system that has structured the global economy for eighty years is entering a period of contestation that will define the financial landscape for decades to come.

Sources & Further Reading¶

Currency Wars: The Making of the Next Global Crisis by James Rickards — Examines the history and contemporary dynamics of currency competition, providing essential context for understanding de-dollarization within broader monetary rivalries.
The Dollar Trap: How the US Dollar Tightened Its Grip on Global Finance by Eswar Prasad — Paradoxically argues that American fiscal dysfunction strengthens dollar dependence, offering an important counterpoint to de-dollarization narratives.
Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System by Barry Eichengreen — The definitive history of how the dollar achieved global dominance and an assessment of whether that dominance can endure.
Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze — Places the weaponization of financial infrastructure within the broader context of post-2008 global financial transformation.
The Cashless Revolution: China’s Reinvention of Money and the End of America’s Domination of Finance and Technology by Martin Chorzempa — Analyzes China’s digital payment revolution and its implications for international monetary competition.