This report argues that in the current global monetary system underpinned by fiat currencies, Gulf-based oil exporters with Saudi Arabia at its helm could become the architects of a new digital currency backed by oil and governed by a regional multilateral institution (hereafter termed as MCDC for Multilateral Collateralized Digital Currency). The MCDC would provide major benefits to its sponsors, including facilitating trade, reducing financial risk and crucially conferring them more influence on the global stage. It would also enable them to chart a politically independent path which would look after their self-interest rather than accommodate the one of the United States or China. The combination of real collateralization and robust institutional governance would provide much needed credibility to the concept, in an era where alleged fiat-collateralized “stablecoins” have proven anything but stable, as illustrated by the collapse of the Terra blockchain in June 2022.

The MCDC could eventually play a significant role in global oil-trade: any country – including oil exporting countries with national currencies pegged to the dollar – would be able to hold the MCDC in its national accounts. Participating oil exporting countries would be able to sell a growing share of their oil in that currency, avoiding the global financial infrastructure linked to the USD, while the multilateral institution governing the digital currency could provide financial support to countries in need by extending international loans in that currency. In turn this would enhance the influence of the countries behind the multilateral institution. Given the independence of the institution governing the MCDC, interest rates would not be tied to the interest rates of established global reserve currencies, enabling the institution to lend the MCDC at competitive rates compared to traditional international financing and lending institutions, with a potential use for development finance to other countries.

Like-minded oil exporters could we well served to design and test an end-to-end governance mechanism for the MCDC, including but not limited to robust mechanisms for collateralization, issuance and currency redemption.

Both countries should not, however, be considered through the same lens. India has a larger dependency on the Gulf and greater foreign policy proximity to the United States than China. India and the Gulf further have deeper cultural and historical ties that link their population together. While China does not have the same historic proximity to the Gulf, its larger financial clout, expertise in large-scale infrastructure deployment and growing technological edge make it an indispensable partner to the GCC countries. Yet China’s intensifying proximity to Iran may pose a conundrum to some GCC countries. Regional policymakers need to ensure that China’s and India’s antagonistic relationship is not projected in the Gulf. To achieve this, they should pursue a balanced relationship with each, avoid “picking sides”, and where possible, encourage them to cooperate rather than compete in the commercial and security realms.

From an optimistic perspective, while competition is inevitable in meeting economic, political and strategic objectives, there is nothing stopping the two countries from cooperating and avoiding confrontation to maximise not only mutual but also plurilateral benefits. The GCC countries, despite their differences on various issues, should exploit these openings by continuing their pragmatic and multi-aligned foreign policies.

However, the past few years have witnessed major developments which could upend the status quo: GCC hydrocarbon exports are increasingly concentrated in Asia; doubts are growing on the sustainability of US monetary policy and by extension the dollar; and more importantly, barriers to RMB internationalization are being gradually lifted, through a combination of structural reforms and a change in China’s economic landscape. As GCC policymakers are increasingly finding themselves caught in the middle of a tug of war between the two major superpowers, they must tread carefully. Yet China’s insistence to pay for oil in RMB is likely to grow and hence, they should prepare for this eventuality. While this would likely upset the United States and potentially undermine the dollar to some extent, we argue that the US would nevertheless maintain its role as the Gulf’s security guarantor, given this serves first and foremost its own interests. As such, in the context of a waning security rationale for the continued existence of the petrodollar and a declining faith in the US dollar, GCC States may not have much to lose from switching to renminbi-denominated oil trade, provided the right risk-mitigation mechanisms are in place.

To prepare for such a scenario, GCC policymakers should:

• Review their foreign reserve strategy in light of expected global trade flows, in particular against global hydrocarbon demand scenarios.
• Closely monitor the pace of China’s financial reforms and measures taken to stimulate RMB internationaliza-tion, in particular with regards to relaxing barriers to capital flows and the
  development of cross-border financial regulations
• Develop hedging strategies to minimize impact of a potential USD devaluation that could be triggered by RMB-denominated oil trade
• Assess implications on the dollar-peg and determine how Gulf currencies could be realigned towards a basket of currencies beyond the dollar