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

Covid-19 has taken centre-stage as the defining global event of 2020, and in the process has tested the resilience of Gulf economies to an external shock that has been unprecedented in scale. While it is impossible to predict what the economic aftermath of the pandemic will look like, it has undeniably given a sense of renewed urgency to the imperative for economic diversification among petro-dependent states if they are to achieve economic prosperity while ensuring fiscal sustainability.
The crisis has also contributed to a greater realization of what climate change can entail and the need to mitigate its effects – of particular relevance to the Gulf not only due to the direct effect of temperature increases (estimated by the World Bank at 2°C to 3°C by 2050 for the Arabian Peninsula) but also for what it means in terms of the trade dynamics between the Gulf and the rest of the globe: reduced demand for fossil-fuels following an energy-mix that will increasingly favour renewables; reduced supply of food from countries that have been exporting to the Gulf on the back of the climate-driven depletion of their own resources, in particular water; and private capital that is more selective and increasingly conditional on climate action by those seeking to access it. The looming US presidential election is a more
near-term concern for the Gulf. Many plausible scenarios can unfold with different policy implications notably in terms of security. But whether it is a continuation of the current unpredictable and transactional US administration or the onset of an administration that is expected to practice selective multilateralism, a significant re-engagement in Gulf security by the US will be unlikely. This will place the onus on GCC States and on a politically reinvigorated GCC characterized by mutual trust and pragmatism to enable effective cooperation. GCC States will also need to balance their relationship with China in order to hedge their bets against the ongoing and
likely irreversible decoupling between China and the United States.

This report provides initial considerations on some of the above topics and others. While there is no silver bullet to address the region’s challenges, we believe that diversified expert viewpoints are critical given the inter-linkages between the economic, environmental, societal and security realms.

Contributions by Steffen Hertog; Jean Francois Seznec; Giacomo Luciani; Kate Dourian; Bernard Haykel; Mohammed Turki Al-Sudairi; Eckart Woertz; Martin Keulertz;