By Matthew Neapole, June 27, 2022
Despite the surprise coming along with its jump into membership, Iran has been extremely active in the Shanghai Cooperation Organization (SCO), a Eurasian economic, political, and security bloc driven by Moscow and Beijing that covers much of the super-continent. The most recent, and perhaps consequential, of the SCO’s activities, brought forward by the Deputy Foreign Minister of Iran, is a proposal for a single “SCO currency” for use in the mega-bloc.
This newest push is only the latest in a long line of SCO economic initiatives, among broader efforts by Russia, China and other SCO members, to create alternatives to Western institutions. It is not simply national-currency popularization, but “full-spectrum” diversification away from western dominated economic or financial control. The SCO tends to advance in an evolutionary manner, therefore making a sudden decision unlikely, though the timing seems to be consequential.
For the SCO, a ready-made, non-Western sphere unto itself, this could be a natural and pragmatic step. For the West, and especially the United States, this could be a massive economic shake-up. For the world, and the post-war economic order, this could prove to be a pivotal moment.
There are several reasons why this SCO currency, or national currency popularization away from the US dollar, could be examined seriously by the SCO and, in time, implemented in some fashion. The first and most obvious reason would be that it allows SCO countries, particularly China, Russia, and Iran, to neatly circumvent western, and primarily American, sanctions – in fact, an Iranian MP recently suggested exactly this.
Importantly, since member states could find themselves on the receiving end of punitive, dollar focused sanctions, the SCO (and less reliance on the US dollar) could help shield their economies. For example, despite its newly minted membership, Iran has not shied away from confrontational rhetoric, and clearly sees the SCO as a vehicle to “end its isolation.”
Furthermore, the timing is right. Tehran’s theocratic leadership has been the target of numerous sanctions, whether for political or nuclear-security reasons. Russia, thanks to its war of aggression on Ukraine, has itself been the target of an almost unprecedented number of western sanctions. China, too, has garnered a great deal of trade restrictions from the United States. We therefore have a situation where three major SCO members see positives in breaking down the dominance of the US dollar.
In fact, this drive was highlighted as early as the Qingdao SCO Summit in 2018. The 2018 and 2019 SCO Declarations both urged the facilitation of payments in national currencies among member states. At the Moscow 2020 SCO Summit, there was a “Russian initiative to have the SCO Interbank Consortium draw up and approve a Roadmap on Overcoming the Consequences of the COVID-19 Pandemic for the SCO Economies, as well as Common Approaches to using national currencies in mutual settlements between SCO member states.” The SCO Interbank Consortium, spearheaded by Moscow, had an infusion of 30 billion renminbi in 2018. It is a working group of SCO Member Central Banks, which possibly could act to fashion a “SCO Central Bank.”
Such a move would line up neatly with SCO doctrine and, indeed, its raison d’etre. Since its creation in 2001, the SCO has had a belief in a “multipolar world,” as referenced throughout official documents, especially at their annual Summits. These tend to resemble Moscow-Beijing Declarations, such as the most recent Joint Statement in February 2022. The Moscow 2020 SCO Summit, followed by the Moscow Declaration, laid out multipolarity in international governance in the first substantive sentence. It is simply in the SCO’s make-up to pursue avenues such as the creation of a bloc currency or attempts to decrease the US dollar’s preponderance in order to flesh out this multipolar system.
Failing to reach the consensus necessary to create this SCO currency, the SCO could at least facilitate and accelerate already existing moves towards deals in national currencies. In fact, there has already been efforts to popularize national currencies between bloc members, whether under the auspices of the SCO or bilaterally, e.g., India-Russia, China-Russia, and others. While many, if not all, of the states are developing economies, they are nonetheless massive, and countries such as India are slated for dynamic future growth.
The impact of such moves – whether by creating an SCO currency or popularizing national currency payments within the SCO sphere – would be extremely potent. It would allow the states in the SCO to act with less apprehension of economic reprisals. This is important because, as far as the United States is concerned, sanctions are a central point of pressure on actors they deem hostile.
While it is debatable whether sanctions influence the actions of states, they unquestionably do inflict damage on economies. The removal of even some of the heft that dollar or euro currencies add to sanctions could mean a more volatile world. After all, the fear of economic reprisals is one of the only threats that some of these actors respect – this is arguably why Tehran is currently at the negotiation table for its nuclear ambitions.
Furthermore, American economic primacy would take a massive hit. For example, it would mean a drop in the need to hoard American dollars, a practice among states to shield themselves from currency fluctuations, to pay for dollar-denominated debt, etc. This would lead to a significant impact on the dollar’s value. In effect, it would amount to a massive sanction on the US economy, since roughly 70 percent of its economy is reliant on domestic spending. Aforementioned debt, once manageable and indeed regulated, could suddenly become a vast economic burden. Imports would become much more expensive; given how oil is priced to the US dollar, this could have a multiplying effect on domestic prices, from gasoline to goods delivered from abroad.
It would also have even broader institutional impacts. Bretton Woods structures, while western in creation, nevertheless helped to underpin the international rules-based order after the Second World War. A weakening of the institutions and economic clout of the main supporters of this system would mean less western support for developing countries writ large, and perhaps further open the door to Beijing or Moscow. It could also mean a distancing of states from the Western model, which is already underway in some respects.
While much of the attention in Western media was focused on the sheer number of countries voting against Russia at the UN General Assembly in March following the invasion of Ukraine, they overlooked the fact that roughly 50 percent of the world’s population did not vote against Russia’s invasion, and a similar percentage have declined to impose any sanctions. Said differently, half of the world’s people outside of the West, much of the “Global South,” have declined to take any real action, whether through fear, sympathy, or indifference. If western institutions and states decline in influence, it could lead to a further slide, and improve the attractiveness of alternative institutions such as the SCO. In effect, it would help shift to a multipolar world.
Still, the evolutionary nature of the SCO should be emphasized, given that it is governed by consensus. Furthermore, the SCO’s goals could possibly be best served by popularizing their own currencies, instead of the required integration necessary to create a SCO currency. In addition, the SCO is unlikely to be interested in replacing the US dollar, rather than simply breaking its dominance. While internal mistrust may not be so rampant as the West may believe, there is much work in trust to be done, as well. Therefore, while these currency moves, especially the national currency payment moves, will be taken seriously and discussed at the upcoming SCO Summit in Uzbekistan in the fall, the implementation has been and likely will continue to be gradual.
Given today’s current economic woes, western leaders would do well to pay attention to the slow-burn trend towards an economically multipolar world that is occurring under the auspices of the Shanghai Cooperation Organization. Slow-burns, after all, have a habit of not being noticed until they are already wildfires.
Matthew Neapole holds an MA in International Relations from the University of Groningen and is particularly drawn to the dynamic Indo-Pacific, the evolving Japanese security situation, as well as China’s strategic policy. He lived for nearly a decade in Japan, as well as in the Netherlands and Belgium.
