Why de-dollarisation?

Geopolitically speaking, there are several aspects to the de-dollarisation question from an Indian perspective. But to get a more comprehensive understanding of the issue, let’s examine why there are de-dollarisation attempts to begin with. For one, it has been evident for some time that the US and its allies have been abusing dollar hegemony to impose non-UN-approved sanctions on countries they oppose or have problems with. Given the enormous power of the US dollar as the world’s reserve currency and its use for most international transactions, Washington has used dollar and the Belgium-based Swift system to punish their adversaries and the friends of their adversaries. Not only that it violates the spirit of multilateralism, but it forces non-Western states to search for alternatives.

The second reason behind the current drive towards de-dollarisation is the rising power of China and its structural revisionism. For a rising and increasingly assertive China keen to challenge the US hegemony in every aspect, diminishing the power of the US dollar is a key objective. The third, most proximate driver of the current dollarisation attempts is the sanctions on Russia in the wake of its invasion of Ukraine. Not only have non-UN mandated sanction been imposed on Russia but there are also secondary sanctions in place targeting those trading with Russia — measures widely regarded by many Global South states as unjustified.

Delhi’s predicament

If these indeed are the geopolitical triggers behind the attempt to de-dollarise, how should India approach the issue? India too has its own history with US sanctions (which were not authorised by the UN). However, New Delhi is looking at Chinese and Russian de-dollarisation attempts with mixed feelings. In a way, Indian responses to various de-dollarisation attempts – which could theoretically pave the way for a more multipolar world departing from the current US-led status quo – today also illustrate India’s careful approach to navigating the complexities of multipolarity even if the idea of a multipolar world is something New Delhi is keen on.

While in the short run, de-dollarisation would help India evade the impact of US-led sanctions on countries like Iran and Russia, it could in the long run lead to a chaotic global financial system (besides the fact that non-Western systems could eventually become more China-centric). Given its history as a target of unjustified US sanctions, New Delhi would have welcomed alternative payment forms as these would provide it with more options. But it realises that rushing into a non-dollar system would eventually hurt its interests given the China angle. This underlines how multipolarity comes with inherent complications.

Double dilemma for Delhi

India faces a double dilemma. First, because of the US/western sanctions on Russia, it will find it hard to trade with Russia (also if it continues its economic engagement with Russia, it could face second-order sanctions from the US). And second, if India uses SPFS to work with Russian firms, it would eventually expose India to a China-led monitory system that India wishes to categorically avoid. The last thing New Delhi would want is the Chinese Yuan emerging as a systemic challenger to the US dollar.

In other words, while it could be argued that the de-dollarisation of global trade is not necessarily a bad idea given how the US and its allies have weaponised globalisation, trade and the dollar to arm-twist other countries, India is careful not to jump on the de-dollarisation bandwagon even though India has suffered in the past due to US sanctions against Iran, and before those direct sanctions against India in 1998, it could suffer again due to sanctions against Russia.

For New Delhi, an imperfect global financial system led by the US is perhaps preferable to a “more egalitarian” and “multipolar” global financial system in which Chinese Yuan has more systemic leverage than it enjoys today. Multipolarity, for sure, is good for India, but not if it elevates China as a major or equal counter-pole to the US in India’s neighbourhood.