Financial Services News South Africa

US-Saudi Arabia 50-year petro-dollar deal expires, what are the potential implications?

The 50-year petro-dollar deal between the US and Saudi Arabia expired on 9 June.
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The lapsed security agreement - signed by the US and Saudi Arabia on 8 June 1974 - establishes two joint commissions, one on economic cooperation and the other on Saudi Arabia's military needs, and was said to have heralded an era of increasingly close co-operation between the two countries.

American officials at the time expressed optimism that the deal would motivate Saudi Arabia to ramp up its oil production. They also envisioned it as a blueprint for fostering economic collaboration between Washington and other Arab countries.

The implication, if the contract is not renewed, is that Saudi Arabia could sell oil and other goods in multiple currencies, including the Chinese RMB, Euros, Yen, and Yuan, instead of exclusively in US dollars.

Additionally, the potential use of digital currencies like Bitcoin may also be considered.

Cross-border CBDC transactions

In a more recent move, Saudi Arabia has announced its involvement in Project mBridge, a project which explores a multi-central bank digital currency (CBDC) platform shared among participating central banks and commercial banks. It is built on distributed ledger technology (DLT) to enable instant cross-border payments settlements and foreign-exchange transactions.

The project has more than 26 observing members including the South African Reserve Bank, which was greenlighted as a member this month.

The better-known observing members of mBridge are those of the Bank of Israel, Bank of Namibia, Bank of France, Central Bank of Bahrain, Central Bank of Egypt, Central Bank of Jordan, European Central Bank, the International Monetary Fund, the Federal Reserve Bank of New York, the Reserve Bank of Australia, and the World Bank.

In tandem, the project steering committee has created a bespoke governance and legal framework, including a rulebook, tailored to match the platform's unique decentralised nature.

Evolution of Project mBridge

Project mBridge is the result of extensive collaboration starting in 2021 between the BIS Innovation Hub, the Bank of Thailand, the Central Bank of the United Arab Emirates, the Digital Currency Institute of the People's Bank of China and the Hong Kong Monetary Authority.

In 2022, a pilot with real-value transactions was conducted. Since then, the mBridge project team has been exploring whether the prototype platform could evolve to become a Minimum Viable Product (MVP) – a stage now reached.

As it enters the MVP stage, Project mBridge is now inviting private-sector firms to propose new solutions and use cases that could help develop the platform and showcase all its potential.

NOTE: This article has been updated with progressed information.

About Katja Hamilton

Katja is the Finance, Property and Healthcare Editor at Bizcommunity.
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