De-dollarization, Energy Security Crisis and Rise of a New World Order: an interview with Gal Luft

World Geostrategic Insights interview with Dr. Gal Luft on the end of dollar hegemony, the global energy security crisis, and the shaping of a new global power architecture.

Dr. Gal Luft is co-director of the Institute for the Analysis of Global Security (IAGS) and director of the Center for World Political Economy, Ostim Technical University. He is a senior adviser to the United States Energy Security Council, a cabinet level extra governmental advisory committee. He specializes in geopolitics, geo-economics, energy security, Middle East and US-China relations.

– In 2019 you published a book entitled “De-dollarization: The Revolt Against the Dollar and the Rise of a New Financial World Order.” We can observe that many of the events that are happening today were predicted in your book. In fact, as a response to the war in Ukraine, the United States, with its European allies, removed several Russian banks from the SWIFT, which is basically the backbone of the global banking system, and with more than 5,000 different targeted sanctions are striving to exclude Russia from international financial and trade markets. At the same time, several countries are considering the use of alternative currencies to the dollar in their international trade transactions. How is the global financial system created by the Western powers after World War II, at the Bretton Woods conference, being transformed? Are we witnessing the end of dollar hegemony and moving from an era of currency unipolarity to an era of currency multipolarity? 

Gal Luft – The dollar’s special status as global reserve currency is America’s main source of power on the international stage, even more so than its military. The reason the US can maintain a high debt level of $30 trillion, growing at a pace of $1 trillion a year, is because it is able to easily borrow unlimited amounts of money from foreign countries as well as from its own citizens. Until recently the world has had faith in America’s leadership, its values and the purity of its intentions and central banks have been eager and willing to hold dollar assets. This is now changing. Much of the world, particularly the Global South, has become skeptical of the US and its “rules-based international order.” 

Many countries are fed up with America’s long-arm jurisdiction and its wholesale use of sanctions. Today one in ten countries in the world is under US sanctions. What we are witnessing today is no less than a revolt against America’s leadership, and this sentiment will no doubt impact the status of the dollar. This does not mean that the dollar will collapse or be replaced by another currency any time soon. To be sure, today no single currency can enter the dollar’s big shoes. But what I can easily see is bifurcation of the global financial system and the emergence of a parallel Global South-based financial system which poses an alternative to the dollar system in trade, investments, finance and development. The contour lines of such a system are already being drawn by BRICS and others. Under the new system, countries, especially commodity exporting economies, will increasingly trade with each other in non-dollar currencies, engage in non-dollar currency swaps, provide non-dollar loans and share banking data through non-SWIFT clearing systems. Central banks will increasingly trim down the share of the dollar in their foreign exchange reserves. For the US this trend spells trouble, but most American policymakers, basking in America’s greatness, are completely oblivious of it, just as they dismissed the idea of the comeback of inflation.

In order to maintain its global posture, the US must be able to continue to borrow trillions from the rest of the world – and do so at low interest rates. Do you want to send billions to Ukraine or forgive student loans? The money must come from somewhere because it doesn’t seem to come from productivity gains or anemic growth. US national debt today is $30 trillion, and the debt per taxpayer is $244,000. This number is projected to rise to $40 trillion by 2026 with debt per taxpayer jumping to $300,000. These figures do not include state debt, mortgages, credit card debt, car loans and student loans. The numbers are mind boggling. This is the mother of all debt traps. It should therefore come as no surprise that many of the countries from which the US has been accustomed to borrow are no longer eager to dig themselves deeper into the American debt trap, especially China that knows that its own money could be frozen or used against it. We can already see several major economies including China, Saudi Arabia, and Brazil scaling back their purchases of US bonds. At the same time, interest rates are crawling upwards. In the next 4-5 years the cost of servicing US federal debt will reach 10% of the federal budget. This money will have to be repaid to lenders at the expense of other government outlays. 

To make the long story short: the US is technically bankrupt but continues to spend like there is no tomorrow. Unlike the past, its lenders are now more cautious and are walking, still not running, to the nearest exit. This means demand for the greenback will dwindle and so will its global status. Ultimately, the dollar will remain a key player in the global financial system but not much more than the British Pound, the previous reserve currency, plays today. For some readers this may be an outlandish assessment. But all we need to do is look at the historical record. Over the past 600 years there have been several reserve currencies of erstwhile empires each with a life cycle of roughly 80 years. Bretton Woods was the official coronation of the dollar. It was nearly 80 years ago. We may be due for succession.

– Igor Sechin, head of Russian oil company Rosneft, said in a speech at the St. Petersburg Forum, last June,  that “Europe is committing energy suicide …….we already see a decline in its economic potential, loss of competitiveness and direct losses for investors.” And indeed, against the backdrop of the outbreak of the Russian-Ukrainian crisis and beyond, energy prices have skyrocketed. European governments are pursuing their goal of disconnecting Europe from Russian energy, and replacing it with supplies from other countries, including the United States, priced significantly higher than Russian gas and oil.  Even taking into consideration the comprehensible solidarity of European countries to Ukraine, what do you think are the logics that drive their current energy choices? Is Europe’s energy supply security at risk?  Also, you are a senior advisor to the U.S. Energy Security Council, what are the U.S. strategic considerations and moves on energy security and global energy landscape? 

Gal Luft – The current global energy security crisis is the worst in history, even worse than the one in the 1970s. If in the 1970s the crisis was geopolitically driven by wars in the Middle East, today’s crisis is a result of a perfect storm of geopolitical, economic and climatic conditions compounding each other. You can’t move coal upstream Germany’s Ruhr River to your power-guzzling industrial zones to replace Russian gas if your rivers are drying up. And when rivers in China’s 80 million strong province of Sichuan are drying amidst the worst drought in 60 years, you can’t replace overnight hydropower which is the source of 80 percent of your electricity. Mother Nature has become a dominant player in the global energy security picture.

The energy crisis Europe is facing has its roots in years of environmental policies that effectively sacrificed energy security considerations on the altar of climate extremism. When you say no to fossil fuels and at the same time you say an equally emphatic no to nuclear power, you are left with very few options when a crisis hits. Sadly, Europe has only two options: resolve the crisis in Ukraine in a way that allows Russian energy back online or embark on economic hara-kiri. So far it seems it has chosen the latter, but this will change once the voice of the people begins to trump the will of their masters in Brussels. In the near term there is no middle way and no political posturing can change that. Unfortunately for Europe, political courage has turned into an even scarcer resource than energy.

The US is in a very different position. It owns most of the energy it needs, and its energy portfolio is quite diversified, with the exception of the transportation sector that is still heavily dependent on petroleum. It is easy for the US to toe a hawkish line on Russia when Europeans are the ones hosting the refugees, shortening their showers and shutting down factories. Furthermore, the current crisis in Europe allows the US to purge Russian energy from the European market and turn Europe into the primary export market for its energy commodities. Some draw comfort from the fact that European money will go to America instead of Russia. But they often forget that for Europe this means shifting from piped gas to LNG, which will always be more expensive and its prices will always be more volatile. 

To put it bluntly, Europe is imposing on itself a permanent tax by shifting to LNG. What is quite amazing to watch is the lack of strategic coherence of American policymakers, particularly those concerned about the rise of China. Purging Russian energy from the European market means that Russia will pivot to Asia and become the main energy source to the Indo-Pacific region. It will take a few years to adjust the infrastructure, but once this is done Russia will become Asia’s powerhouse. It will be the main source of oil, coal, and natural gas to China and India, together a third of humanity. If America wants to remain the tone-setter in the Indo-Pacific and if it wants to drive a wedge between Russia and China and Russia and India, how does pushing Russia eastward help? 

The reality is that the US has no energy policy – domestically and internationally. It switches every four years from a pro-energy mindset to an anti-energy mindset, from Trump’s “Energy Dominance” slogan to Biden’s “No more drilling” rhetoric. The capital-intensive energy industry cannot function optimally under such a schizophrenic policy landscape. It needs certainty, policy continuity and security of demand. If we do not begin to develop today the energy of tomorrow, we will not have energy tomorrow. Because the zero emissions mentality has become so pervasive, we are not investing enough in non-renewable energy development, which means that the current crisis Europe is experiencing may soon be a fond memory compared to a much bigger crisis that is in the making.   

– In some of your writings, you have stated that the world is divided into three groups of countries. The first group is the West plus some members such as Japan, Singapore and South Korea. The second are the so-called revisionists. led by China and Russia, who are pushing for an international system no longer under the leadership of the “West.” The third group, which includes most countries, are the so-called non-aligned, who benefit the most from the globalized system and want it to survive but without being subject to strong  pressure from the super powers. How are the boundaries between the three groups and the new architecture of global power shaping up, even with reference to the impact of the war in Ukraine?

Gal Luft – The geopolitical tectonic plates are indeed shifting in a head spinning pace with immense historical repercussions and all of this happening at a time terms like food shortages, hyper-inflation, depression, and societal collapse are barely familiar to young people who have never experienced them. The international system is rearranging itself in ways not seen since World War II with three groups of countries comprising it. Of the 193 UN members roughly 100 are non-aligned. The rest are more or less divided between the West and the Russia/China-led Revisionist bloc.  Non-aligned countries are facing pressure from both sides to make tough choices on matters critical to their national sovereignty such as their infrastructure providers, choice of technologies and energy suppliers, military acquisitions, vote in international organizations and even the currency with which they choose to conduct their trade. 

The war in Ukraine, especially western pressure on non-aligned countries to condemn Russia and to join the sanctions, has cemented the three blocs. With the exception of Singapore, non-aligned countries declined to side with the West. Washington’s “you’re either with us or with China/Russia” attitude and even worse its “democracies vs. autocracies” formulation has not gone down well at all with those countries, who essentially wish to stay on good terms with everyone and focus on their development. The last thing they want is to become pawns in great powers’ geopolitical rivalries. 

In other words, the Ukraine crisis has brought the non-aligned countries to the forefront of the international playing field. Small and largely insignificant countries that for decades have been neglected by the great powers are suddenly being courted by them. Take for example, Solomon Islands, an isolated South Pacific county, population 700,000 with no natural resources or innovation hubs, is now being coaxed by the US, Australia and New Zealand, who are showering it with high-level visits, flattery and aid, just to prevent it from drifting toward China. Similar examples can be seen in ASEAN, the Middle East, Latin America and Africa. Non-aligned countries are learning how to play the great powers against each other and in the process pocket maximum benefits. 

What we are seeing today is essentially a rerun of a zero-sum Great Game/Scramble for Africa style of diplomacy just on a global scale. The new global power architecture is shaping itself along the Cold War model in which the West and the Soviet blocs had to contend with independent-minded non-aligned movements which rejected the idea of picking sides. The Global South, which is already driven by strong anti-colonialist sensitivities, has strong aversion to anything that smacks of Western hypocrisy, sense of superiority or exceptionalism and I suspect that as time goes by if Western values and leadership continue to fail it will be even harder for the West to recruit followers. It is worth remembering that fewer than 100 of the next 1,000 babies born today will be westerners. By any measurable yardstick, the future is no longer with the West but with the Rest.

Dr. Gal Luft –  Co-director of the Institute for the Analysis of Global Security (IAGS) and director of the Center for World Political Economy, Ostim Technical University. He is a senior adviser to the United States Energy Security Council, a cabinet level extra governmental advisory committee. He specializes in geopolitics, geo-economics, energy security, Middle East and US-China relations. Newsweek Magazine called him a “tireless and independent advocate of energy security” and Esquire Magazine included him in its list of America’s Best and Brightest. Dr. Luft has published numerous studies and articles in various newspapers and publications. He is co-author of  Energy Security Challenges for the 21st Century (2009,)  Turning Oil into Salt: Energy Independence Through Fuel Choice (2009,)  Petropoly: The Collapse of America’s Energy Security Paradigm (2012) and  De-dollarization: The revolt against the dollar and the rise of a new financial world order (2019). He is author of  Beer, Bacon and Bullets: Culture in Coalition Warfare from Gallipoli to Iraq (2010), and  Silk Road 2.0: US Strategy toward China’s Belt and Road Initiative (2017). He appears frequently in the media and advises various think tanks and corporations worldwide. He holds a doctorate in strategic studies from the Paul H. Nitze School of Advanced International Studies (SAIS,) Johns Hopkins University.