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It’s common to complain that the US enjoys undue privileges through its control of the world’s reserve currency: the dollar.
Thanks to the dollar’s status, the US need not fear a foreign exchange crisis despite running up massive trade and budget deficits. The US can also maintain a high standard of living by taking out low-interest loans.
But the reserve currency bears the seeds of its own destruction.
A country whose currency has global reserve status cannot avoid currency appreciation as other countries’ demand for that currency increases, an issue known as the Triffin dilemma.
Currency appreciation makes a country’s exports less competitive and can bring on the excessive financialization of the economy. That’s demonstrated by the decline of the US manufacturing sector and the lopsided development of its financial sector since the dollar became the global reserve currency with the adoption of the Bretton Woods system in 1945.
Those are some of the factors that brought Donald Trump to the White House not once but twice and that have motivated the US to impose ruinous tariffs during its return to protectionism.
Another inherent danger of holding the global reserve currency is the temptation to spam sanctions through overconfidence in the currency’s power.
The US has long exploited the fact that most international trade and foreign currency transactions pass through the dollar payment system to freeze its adversaries out of the system.
Until the early 2010s, the targets of such actions tended to be weaker countries such as Libya, North Korea and Iraq. But since the mid-2010s, the US has sought bigger targets, including major powers such as Russia.
The problem is that these moves come in the middle of the US’ hegemonic struggle with China.
Countries facing US sanctions make active use of the Chinese yuan as a workaround, leading to the formation of a largely yuan-denominated shelter from US sanctions.
Such cracks in the system might have been trivial when US economic strength, military power and geopolitical influence were at their height. But things are different now that the US is undergoing a relative decline, as it is at present.
Russia and Iran deal in yuan
Russia’s 2022 invasion of Ukraine and the US’ assault on Iran earlier this year acted as catalysts in expanding this sanctions shelter.
In response to Russia’s actions, Washington froze Moscow’s foreign exchange reserves and booted it from the SWIFT international payment network. Then, this last February, the US and Israel began attacking Iran, prompting it to close the Strait of Hormuz and, thus, block international crude oil shipments.
As a result, Russia sold crude oil and natural gas to China at a discount of US$5 to US$7 per barrel. Bilateral trade had already more than doubled from US$107.8 billion in 2020 to US$244.8 billion in 2024. Such growth slowed last year, but the figure hit US$134.2 billion in the first half of this year, up 26% year on year, according to TASS.
In the process, most trade between the two countries was settled in each country’s respective currencies. The percentage of the yuan in Sino-Russian settlements skyrocketed from under 2% before 2022 to over 30% in 2024.
In crude oil, Saudi Arabia was China’s largest supplier through 2022, but Russia took over that spot starting in 2023. Data from the US Energy Information Administration found that Russian exports of crude oil to China in 2024 reached US$61.6 billion, accounting for 19.6% of the latter’s imports of the fuel and outpacing Saudi Arabia’s 14%. Over 90% of the transactions were settled in yuan.
According to official customs statistics, China's trade with Iran amounted to just US$10 billion in 2025. A US congressional report, however, said the combined value of Iranian crude oil imports exceeds at least US$41 billion if unofficial imports of US$31.2 billion are included. The belief is that 90% of Iran’s crude oil exports are bound for China and the share of yuan-based settlements also exceeds 90%.
The combined value of Russian and Iranian crude oil exports to China is approaching US$100 billion, with most of the transactions settled in yuan. This effectively marks the birth of the “petroyuan,” reminiscent of the rise of the petrodollar in the early 1970s.
Petrodollar and petroyuan: Similar but with different origins
The petroyuan greatly differs from the petrodollar in its origins and handling. The latter appeared in 1971 when the value of the greenback plunged and its status as the world’s major currency was shaken due to the Nixon shock, a series of economic measures that included suspension of the dollar’s convertibility into gold.
In a breakthrough, the US struck a deal with Saudi Arabia, the largest oil producer in the Middle East, to guarantee the Arab country’s security in exchange for all oil payments being made in dollars and the proceeds going to buy US Treasury bonds. The petrodollar system subsequently emerged after other oil-producing countries in the Organization of Petroleum Exporting Countries followed suit in standardizing payments in the greenback.
In contrast, the petroyuan’s rise stems from attempts to circumvent the American use of the dollar as a geopolitical weapon, relying on “shadow” fleets and financial networks.
A report by the US-China Economic and Security Review Commission in Washington said Chinese customs falsely declare most Iranian crude oil imports as originating from Malaysia, Oman and the United Arab Emirates. Shadow fleets turn off automatic identification systems, manipulate positions and cover their tracks via ship-to-ship transfers.
Most of the oil is processed by small refineries called “teapots” that run outside of the global financial network. Settlements are facilitated by a network of shell companies and small regional banks using fake invoices. Iran launders the funds received this way through domestic offices for currency exchange or shell companies abroad.
Ultimately, the cases of Russia and Iran show that US economic sanctions have had the unintended effect of uniting anti-American states into a single yuan-based payment bloc.
Hengli Petrochemical, a major Chinese oil refiner, epitomizes the extent to which greenback sanctions have been negated. After announcing a ban on Iranian oil imports in April, the US blacklisted Hengli for importing oil from Iran.
The oil company insisted that its imports were not from Iran, and the Chinese government invoked for the first time its 2021 Anti-Foreign Sanctions Law, which prohibits the acceptance of unjustified foreign sanctions. Hengli then announced that it would settle crude oil payments in yuan, not dollars.
Admittedly, the absolute share of the yuan in global trade and foreign exchange transactions remains negligible. The Cross-Border Interbank Payment System of China, launched in 2015, processed last month a daily average of 36,844 transactions worth 827.8 billion yuan (US$122.1 billion), or just about 6% of the volume of the New York Clearing House Interbank Payment System, which handles over US$2 trillion per day.
As of late last year, the greenback comprised 56.8% of the foreign currency reserves of central banks worldwide and the yuan only 1.95%, according to the IMF. The share of global foreign exchange transactions is 89.2% for the dollar and 8.5% for the yuan (BIS), and as of June, the greenback accounts for 82.5% of global trade finance and the yuan 7% (SWIFT).
Looking at its growth pace, however, the pro-yuan trend should by no means be underestimated.
The transaction volume of yuan-based international settlement systems doubled by 2025 with the start of the war in Ukraine in 2022, and is on the rise again since the conflict with Iran began in February this year. The Chinese currency’s share of foreign exchange transactions has doubled over the past decade from 4% in 2016, while its share of global trade finance skyrocketed an incredible 3.9 times from 1.8% that same year.
The yuan cannot completely replace the dollar over the short term, and China has no illusions about this. Instead, the immediate objective is simply to ensure the maintenance of an alternative payment system in times of crisis. As shown in the cases of Russia and Iran, this mission has apparently been accomplished.
Weakening of greenback as geopolitical weapon
There is a growing perception that the dollar's role as a tool of geopolitical coercion is weakening.
In his June 29 piece “The Humbling of the Once Almighty Dollar” on Substack, Nobel Prize-winning economist Paul Krugman, a research professor at City University of New York’s Graduate Center, said, “The supremacy of the dollar, the pre-eminent tool in America’s toolbox of global financial power, has been seriously damaged by the rise of alternative payment systems — a rise that was greatly hastened by the Iran war.”
While adding the caveat that he “[doesn’t] mean that the dollar is close to losing its dominant role in global business,” he called America’s ability to use its “non-military tool of coercion” against its opponents as “now greatly diminished.”
Barry Eichengreen, a professor at the University of California at Berkeley and a leading authority on international finance, wrote in his book “Money Beyond Borders,” released in March, that a reserve currency standard’s status is “not forever” and that history has shown the “lifecycle” of such currencies. He said the status depends on the issuing country’s ability to withstand large trade deficits, rule of law and separation of powers, as well as military strength and alliance networks.
But as evidenced by Trump’s tariff bombs, the US has reached a point at which it can no longer tolerate such massive deficits. Attempts to undermine the autonomy of the Federal Reserve, loss of control over the Strait of Hormuz and cracks in alliances must be seen as shaking the political, military and international foundations propping up dollar hegemony.
Innovation and productivity gains can offset the headwinds of currency appreciation, prudent financial regulation can curb excessive financialization and a consistent foreign policy can retrain the temptation to pursue overseas ventures. But the situation as it stands gives little hope for optimism.
“International currency status is akin to an endowment of natural resource wealth,” Eichengreen said. “It can be managed well, in which case it is an asset for current and future generations, or it can be managed poorly, in which case it becomes a curse. It can be managed like either Norway’s natural gas or Venezuela’s oil, in other words.”
By Park Hyun, editorial writer
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