Dawn Of The New World Order
Iran war could be a transformative moment for the global political and economic order.
Steve Jobs once said, “You can't connect the dots looking forward; you can only connect them looking backwards.”
This doesn’t mean you can’t have any reasonable prediction about the future, but it means that you can only track the flow going backwards. Then, you can build a reasonable narrative of the future based on the flow you see in the past.
I have avoided writing about the Iran War exactly for this reason. Everybody was so focused on what would happen the next day. But to understand what is actually happening and what may be the implications, we needed a breather.
A breather without constant news flows, so we could look backwards and connect the dots. We got it with the ceasefire.
Connecting the dots and answering these questions isn’t easy. It requires going through the roots of modern power dynamics, economic order, the modern world order and its challenges, and finally, the changing power dynamics.
What the birdview makes me think is that the world might be on the edge of historical changes in the balance of power and the economic order. How could this order change, and what will be the implications are the two most important questions today. Will the US stay as the undisputed global hegemon? What does Europe’s and the Gulf’s drift away from the US mean? The roots of the world order and its transformation so far will be illustrative.
Let’s connect the dots and understand what’s happening and where we are headed.
The World Order
“World order”… This is a term that is literally everywhere today. Every news channel, every commentator, and basically everybody monitoring the situation in Iran is using this term, though most of them don’t have any idea what it means.
What’s the world order that everybody talks about?
It’s funny because no such thing as the world order actually exists.
Once asked, “How’s the world order?”, Henry Kissinger famously replied, “Who asks?”
The idea of the world order is an illusion, but it’s an ancient and powerful illusion. In terms of its objective, it isn’t much different from religions. Maybe one can even go as far as suggesting that religion is, in its essence, a search for an order.
We see this in the earliest sources that gave rise to the idea of a global order. The earliest trace of the idea is the Sumerians’ concept of “me” (pronounced as "may"), from their legend Inanna and Enki. “Me” referred to a set of divine decrees that governed everything, from spiritual to how beer should be made. That was the original “order of everything.”
The Egyptians had a similar concept of Ma’at, which basically meant truth, justice, and balance. Similar to the Sumerian concept, the order of Ma’at wasn’t a human construct; it was a divine obligation.
In the ancient world, these concepts could never converge because the contact and understanding among civilizations were very limited. Most Sumerian villagers didn’t even know that another civilization called Egypt existed. Thus, the early contact between civilizations was characterized by skepticism, not understanding.
In Ancient Sumerian texts, Amorites (western nomads) were described as people who “know no grain,” “know no house,” and “know no city”, essentially defined by what they lack relative to Sumerian civilization. The Gutians (mountain peoples from the Zagros) were described as barbarous agents of chaos.
One looking at these records today may not be sure whether Sumerians were objective or whether every other civilization that they couldn’t understand was barbaric to them. If you don’t understand, strange means the same thing as enemy.
It’s certainly the latter as we see the same pattern in other ancient texts as well. The ancient Chinese concept of Tianxia put China at the center of civilization, and the peripheries were occupied by barbaric states. The civilization was described in terms of familiarity.
This self-centric understanding of the world in ancient empires had a few important implications:
The perception of no order in other tribes turned them into security threats.
Disagreements in commerce or borders could quickly turn into wars.
They wanted to impose their order on everybody to feel secure.
They were naturally driven to extend the coverage of that order, as the lack of order in the neighbours meant a security threat to them. Thus, for the empires of pre-modern ages, the world order meant their order. When something was out of their control, it lacked order.
The term “Pax Romana” reflects this overarching sense of order.
When the Romans extended their control over the whole Mediterranean and the Levant, they called it Pax Romana, i.e., the Roman Peace. It isn’t a modern term. Seneca the Younger used it first around AD 55. For them, the Roman order was the equivalent of peace, security, and prosperity in the world. Tribes of Gaul wouldn’t agree.
This sense of an Empire-centric global order dominated until the modern age. Even 1,400 years after the height of the Roman Empire, Ottomans, when they conquered a substantial part of the historic Roman Territory, named it Pax Ottomana, reflecting the continuity of the imperial understanding of world order. The tradition lives.
Thus, when we are talking about the world order today, in the eyes of the imperial traditions, it still means their order because they are essentially governing over different people. They have to reflect their order on different subjects.
Think about Russia. It’s a modern empire. There is no ethnic unity. It rules over 190 ethnic groups in its territory. To govern Chechnya and St. Petersburg under the same authority, it needs to reflect a concept of a global order.
Iran is also an imperial state.
They have a long history of the Persian Empire, and today they are ruling over many different ethnicities. Only around 50% of the population can be considered as pure Persian today. Thus, they also have to radiate an imperial understanding of world order, one that their current regime finds in Shia Islam.
This understanding of the world order, i.e., an imperial peak secured by natural borders, has persisted in Asianic nations until today, as the abundance of land gave rise to great empires rivaling each other’s world vision, instead of smaller sovereign states.
This is why Russia and China, as centers of power, challenge the current order. They have deep imperial traditions that urge them to reflect their sense of world order over the globe and impose it on others. Until that happens, they don’t feel secure.
On the West, however, the concept of world order evolved differently post-Medieval.
Europe was especially well-suited for a different concept. There were many small states within a small continent; they shared the same religion, though with twists, and even languages were similar to some extent.
After the Thirty Years‘ War from 1618 to 1648, when they convened in Westphalia, they were torn and willing to negotiate an order rather than trying to impose it on each other. They were similar enough to negotiate and different enough not to merge and become another empire.
Westphalia Peace accepted states as the units of international relations and recognized the fundamental right to exist. Thus, self-interested sovereign states emerged as the recognized actors of global politics, and the world order meant the balance of power between them.
The problem of the Westphalian order was that it was fragile. It didn’t have a mechanism to protect the balance against an aggressor. After Napoleon’s imperial ambition was defeated by a coalition led by Britain, they addressed this fragility in the Congress of Vienna in 1815, where the Great Powers agreed to maintain the order together against an aggressor.
Though Austria, Prussia, Russia, Great Britain, and France were referred to as Great Powers, it was actually Britain that underwrote the whole system thanks to its naval and economic dominance. Thus, Britain ascended to the role of the world police as the hegemon of the time.
That position provides some privileges to the hegemon.
Some contradictions in the order are tolerated because of the sovereign-equality principle, but others defer to the hegemon on critical matters and align with it. Its pressing interests make up the red lines and take priority over others’ interests. This is like the tax others accept for the continuity of the order. It’s sort of the position the Romans called “Princeps”, i.e., the first in order among equals.
Britain played this role starting from 1815. When Russians tried to expand to the South in 1853 by invading the Danube and set their eyes on Constantinople and the Dardanelles straits, Britain fought alongside Ottomans in stopping Russia, not because it cared about a declining Muslim empire, but because Russia’s expansion would upset the order of the West.
For a hundred years, from 1815 to the start of World War I in 1914, Britain, as the hegemon, played a key role in maintaining the Western order. Pax Britannica.
At the end of the WWI, the British power had eroded substantially. They were unable to prevent WWII and were in an even weaker position at the end of it. The Western order needed a new police, a new hegemon.
The US rose to the role.
Since the end of WWII, this role requires more than internal policing, as China and Russia (first as the Soviet Union) have detached themselves from the Western order and are imagining different world orders rooted in their eastern imperial traditions, as explained above. They are joined by some other imperial traditions as well, notably Iran.
The rise of challenging visions of order required the US to go beyond policing and lead the Western order against the competing visions by projecting power, which it did through nuclear deterrence and economic dominance.
So far, it has worked, but the challenges are growing.
Pax Americana: The Post-Modern World Order
It was August 1945, almost three months after the Germans surrendered. Allied forces met in Potsdam to plan the post-war peace. This is a frequently told story from it.
During the conference, Truman casually walked over to Stalin and mentioned that the United States had developed “a new weapon of unusual destructive force.” He was basically letting Stalin know that America would be running the show from then on and that it would be the anchor of the new order. Stalin nodded, showed no surprise, and simply said he hoped America would make “good use of it against the Japanese.” Truman walked away thinking Stalin hadn't understood.
At the time, nobody knew, but today we know why Stalin was so calm. Because he knew. There were not just one, but several Soviet spies in the Manhattan Project; they had passed several important secrets to the Soviet Union, and the Soviet atomic bomb project was already underway.
By 1949, the Soviets had their own atomic bomb. This put the US in a strange position. It was a global superpower, but it was much more limited in its ability to resort to brute force compared to prior superpowers, because the rival was also equally destructive.
Imagine the 15th-16th century. Ottomans didn’t refrain from using their giant Basilic Cannon. They wouldn’t refrain even if their rivals also had it. The maximum extent of damage was not humanity-ending. But the possibility of a nuclear war threatens the very existence of humanity.
Thus, America’s ability to resort to brute force against its rivals was limited from almost the beginning. So, the US had to come up with new ways to defy the Soviet vision of World order.
It used two things—deterrence and economics.
Once the US understood that the Manhattan Project was compromised and the Soviets would eventually make the atomic bomb, it decided to build permanent bases overseas, as nuclear deterrence cut both ways. They couldn’t nuke the Soviets, but the Soviets couldn’t nuke the US either. So, deploying permanent bases overseas would mean that Soviet aggression against the respective land would mean aggression against the US, which the Soviets wouldn’t dare to do. It formalized this through the establishment of NATO in 1949.
The second tool of the US empire is its grip over the global economy.
Before World War I, global currencies were directly pegged to gold. The US exported massive amounts of weapons during the two world wars, and buyers paid in gold. As a result, the US had most of the world’s gold reserves by the end of WWII.
Between two wars, some countries had dropped the gold standard and devalued their currencies to escape deflation. This led to tariff wars and the collapse of global trade. A new economic order was needed to prevent this from happening again in post-WWII.
Countries convened in Bretton Woods in 1944 and adopted the gold standard again. The medium of exchange was also needed, as gold isn’t easily transferable. There wasn’t any real alternative other than the USD, since most of the gold reserves had already accumulated in the US. They made the USD the medium of exchange and pegged it to gold at at $35 an ounce. Thus, it became the official reserve currency.
This arrangement had two consequences:
The US would have to run a trade deficit as it had to send more dollars out to fund the allies and their recovery than it took in, so that they could develop, and the US could have long-term trade partners, which would in turn fuel the US growth.
Other countries would absorb the US’ trade deficit as the best way for them to make use of their USD reserves was recycling it back to US treasuries. Calling the gold was seen as an unfriendly act and was logistically hard.
This gave the US great legroom to ramp up spending.
It could print and spend more than it actually had without facing the catastrophic consequences any other country would face. The thinking was that the more it spent, the more the Soviets would have to spend, and this would eventually break their economy, as they didn’t have the reserve currency.
The idea was correct, but the Soviets saw the vulnerability of the system. If the US were running trade deficits, its increasing spending would distort the system at some point, as it would have more dollars out than gold at Fort Knox. Then, if other countries redeemed their gold at the same time, the system could break. Thus, they also provoked the US to spend more.
In the late 1960s, the US had substantially increased spending due to the Vietnam War and expansionary policies at home like Medicare and Medicaid. Other countries grew increasingly skeptical of the safety of the gold backing their dollar holdings and started to call in their gold. This forced Nixon to drop the gold standard.
America knew that the USD wouldn’t rapidly lose its reserve status, as it had become deeply embedded in the global financial system by then. But they also knew that this could change in the medium to long term without a mechanism that would push constant demand for the dollar. This would restrain the US’s spending in the long-term, and may lead to losing its edge against the Soviets.
Kissinger, the Secretary of State at the time, took the risk of losing reserve currency very seriously. As an avid student of history and international relations, he knew that a superpower without a reserve currency was simply naked.
The most striking example of this in post-medieval history is the Ottomans.
The empire was at the height of its military power in the mid-16th century. It controlled all of Anatolia, a significant portion of the Balkans, all populated areas in Northern Africa, the Eastern Mediterranean, and the Arabian Peninsula.
Yet, the reserve currency of the era was the Venetian Ducat, the currency of a small city-state, because it controlled the trade in the Mediterranean despite the Ottoman control over seaways, and avoided everything that would require them to devalue their currency.
As a result, Ottomans had to devalue their currency constantly to fund their endless military campaigns, and by the end of the 16th century, their economy was already breaking, which also undermined their military power over time.
This was exactly what was happening to the USD after it dropped the gold standard. It was devalued twice (1971 and 1973) and was losing value against every major currency. And then, in October 1973, the Yom Kippur War triggered the OPEC embargo, quadrupling oil prices overnight. The American economy was simultaneously experiencing inflation, recession, and an energy crisis.
When the US started negotiations with Saudi Arabia to lift the embargo, Kissinger saw an opening to use oil as the new anchor for the dollar. Saudi Arabia had sheer security concerns. The rulers were moderate about the Arab-Israeli conflict, but they were surrounded by hardline Arab states and people. The regime was vulnerable to these threats despite the massive wealth they were sitting on. America offered security guarantees to the regime in exchange for Saudi Arabia recycling its excess oil revenue to US treasuries, perpetuating the USD demand, and basically funding the US deficit.
This created what’s called the petrodollar.
The system expanded as other Gulf countries followed suit. By 1975, the rest of the Gulf states also agreed to price their oil in USD, and the US extended the security umbrella to cover them as well. The dollar found a new anchor and constant demand that allowed the US to ramp up spending basically indefinitely without facing the strict limitations of being pegged to a hard asset like gold.
The petrodollar played a pivotal role in the US winning the Cold War. Soviets could mobilize their economy for military purposes, but at enormous cost to civilian living standards. Every ruble spent on missiles was a ruble not spent on consumer goods. The Soviet public bore the full weight of military spending directly.
The US faced the same tradeoff, but the reserve currency softened it enormously. Reagan used this advantage as a strategy by increasing the buildout, because the US could finance it through deficits, the Soviets couldn’t. The Soviets tried to match, but they had to divert more resources from the public, which led to their economic disintegration in the late 1980s and ultimately the collapse of the Union.
This is the mechanism that built Pax Americana. Nuclear deterrence limited the direct conflict, shifting the fight to the economic domain. The reserve currency gave the US the upper hand in the economic race, and the petrodollar made the US's triumph inevitable, as it could ramp up the spending until it won, since the deficit would be funded by oil revenues of the Gulf, and nobody could stop needing oil.
Therefore, for other great empires with different visions of world order, mainly Russia and China, the way to challenge the system is to challenge the USD, which requires an attack and an alternative to the petrodollar.
This is why the current conflict with Iran is critical.
It’s an oil-producing country, and it controls a waterway that is indispensable to global oil flow. If this current conflict results in a way where Iran becomes more integrated into the world economy without adopting the petrodollar, it’ll likely be the greatest damage to the system since its beginning. Second order effecst can also unravel to further undermine the system.
Let’s find out how.
Iran: The Fault Line Of Pax Americana
It’s an axiom that Russia and China have long been trying to undermine the dominance of the USD, as it’s the anchor of American dominance.
Though the idea is obvious, de-dollarization is only recently observable. Challengers of Pax Americana, China and Russia, have only recently become powerful enough to press for de-dollarization. Russia had to complete its restoration after the collapse of the Soviet Union, and it took decades after Deng Xiaoping's reforms for China to become big enough to threaten the US dominance.
Thus, de-dollarization took off only after Russia invaded Crimea in 2014.
Europe and the US imposed heavy sanctions on Russia that included travel bans, asset freezes, and restrictions on key Russian state entities from raising long-term dollar debt on Western markets. That eroded the confidence in Russian stability, and investors moved their money from Ruble to USD, triggering a collapse in Ruble.
This was the wake-up call for the Kremlin.
They understood what could happen in further sanctions, like getting cut off from the SWIFT system, which ultimately happened after the Ukraine War. So, they started openly calling for de-dollarization.
China saw this as well and woke up to how its dollar exposure was making it a hostage.
This led to Russia and China partnering up to spearhead the de-dollarization. In 2014, they signed a three-year currency swap deal worth 150 billion yuan and committed to reducing the USD exposure of their reserves. Between 2013 and 2020, the Russian central bank halved its dollar-denominated reserves, and China cut its US treasury holdings by 50% from its highs in 2013:
Their efforts for de-dollarization accelerated after Russia invaded Ukraine in 2022. Major Russian banks were cut off from the SWIFT system, and Russian oil was sanctioned. But they were prepared. They extended the currency swap agreements multiple times, and the Bank of Russia established a standing swap facility in January 2023 for CNY/RUB swaps, limiting volatility and ensuring ample yuan supply for trade settlements.
Thus, Yuan quickly became the dominant trade currency between Russia and China. The trade between the two countries was now de-dollarized.
China expanded this model by establishing direct swap facilities with 40 of its big trade partners. As a result, more than half of China’s cross-border trade was in Yuan in 2025. Also, you see the jump in Yuan-denominated trade financing in 2022? That’s ramped up de-dollarization after Russia invaded Ukraine in 2022.
Against these challenges, the petrodollar system is something like a Great Wall that protects the reserve status of the USD. You can de-dollarize your bilateral trade lines, but the global oil trade runs on USD. This is why the Iran conflict is so important.
Iran has long been restricted from the US banking system and hasn’t used USD in its oil trade at least since 2012. This means that if you include Russia as well, around 14% of global oil trade is off the dollar rails now. This is a significant challenge to the petrodollar, and it could become a bigger challenge depending on the outcome of the war.
Since the conflict started, China has done its best to help Iran keep the Hormuz closed, even though that directly hits China itself in the short-term as the largest oil exporter in the world. It did this because the stakes are larger.
Iran gained significant leverage by keeping the Hormuz closed, and they ask for three things in exchange for opening the strait and giving up their nuclear programme:
Release our assets
Unsanction our oil and economy
Recognize our control over Hormuz
The first one is immaterial in its long-term effects, but the second and third ones are worth dwelling on.
If Iranian oil is unsanctioned, it will almost certainly sell its oil in a currency other than the USD. It’ll generally be yuan, but can also be another currency depending on the other party of the trade. It can certainly accept euros from the EU, etc. This will make the de-dollarization of the oil trade official, though to a limited extent.
It also wants to charge $2 million worth of service fees to the tankers going through Hormuz. It wants the payment in yuan or cryptocurrency, but the former is more convenient for all. This won’t have a direct structural effect on the oil trade, but it’ll have substantial psychological effects since the yuan becomes normalized as a currency you must hold for energy logistics, and the leap to pricing oil itself in yuan becomes smaller.
There are also second-order effects that are beyond Iran but equally threatening to the petrodollar system.
The most notable one is America’s failure to defend the Gulf countries when Iran targeted them in retaliation. This created in them the perception that their security comes after Israel for the US. Accurate or not, this is the perception they have now, and thus they are increasingly willing to hedge their bets. As WSJ reported, Gulf Countries are now rethinking their security ties with the US.
Saudi Arabia has already created the infrastructure to sell oil in Yuan. They signed $7 billion currency swap agreement in 2023. In 2024, they agreed that the Shanghai Gold Exchange would create a physical vault in Saudi Arabia. This way, they could turn their Yuan revenues into gold in Shanghai and store it in their own land, mimicking the petrodollar’s recycling system. As of early this year, this trade started to take place.
It wouldn’t be surprising to see other exporters in the Gulf follow the same suit to hedge against the weaponization of the USD and the US’s preference for Israel when it comes to regional interests.
Oil exports from the Gulf countries, excluding Iran, to China make up around 8% of the global oil trade. If you add it to 14% of the oil trade that is already off the dollar rails, we may see +22% of global oil trade off the dollar rails in the next few years.
This is already an unprecedented challenge to the petrodollar and thus to the USD’s reserve currency status. If exporters expand the direct currency swap and gold recycling system for other buyers as well, like Europe, we can see an unprecedented de-dollarization of the global oil trade over the next 5 years.
The end of the petrodollar could bring the end of the USD as the reserve currency of the world, endangering American global dominance and the post-modern world order.
This is why the current conflict in Iran is the fault line of Pax Americana, and challengers are rooting for the dawn of a new order.
Technodollar: The New Anchor
Pax Americana has many shortcomings, or even shitty parts, but it’s impossible to imagine a better world dominated by Russian and Chinese imperial visions, as they don’t face the internal limitations on power that the US government faces for being a liberal democracy, however imperfect it is.
So, can Pax Americana survive or perhaps modify itself even if the challengers succeed in breaking the petrodollar?
It will need to keep the USD as the reserve currency. How can it do that? There is a path, and the name of that path is Technodollar.
When you look at the corporate profits, it’s already here:
If Kissinger asked today what could be the next anchor for the USD, something everybody wants and needs, his answer could be technology.
And the US is the world’s #1 technology producer. What’s even better for the US is that this is an internal consequence of the US system, and it can’t be taken away from it. The American system has proved to be exceptional in creating entrepreneurs who, in turn, produce groundbreaking technologies.
Other imperial dreamers of this time, Russia and China, lack this.
They lack this because innovation requires the protection of personal property and freedom of ideas. However imperfect it is, the US’s liberal-democratic capitalism provides this way better than the authoritarian regimes of China and Russia, and the idyllic but inert welfare states of Europe.
Authoritarian regimes can mobilize resources very fast, so they can copy and follow innovations rapidly, but they are very bad at natural innovation. Look at China. It’s a very strong challenger in everything. They have been catching up even in AI. But how many groundbreaking technologies of the last 50 years came first from China? None.
This systematic advantage is supported by the biggest, unrivaled venture capital industry in the world, almost guaranteeing that the US will have an upper hand in the next big thing.
This is the US’s inalienable advantage.
Does the world want Nvidia chips? Pay in dollars. Foundational models? Priced in dollars. You want robots? Bring in dollars. And whatever the next thing is, it’ll be in dollars.
Imagine oil disappears tomorrow, and we bring in a stranger from a different planet to rationally pick the reserve currency of the world. He’ll look and see that the US has more of the things that everybody wants and will naturally pick the USD again.
This is the way Pax Americana survives, and perhaps further thrives even if the petrodollar breaks. It’s a narrow path, but it’s a path nonetheless.
Closing
There is one objective reality—the current world order is being challenged.
It’s being challenged by China and Russia as Great Powers, and other traditions that align themselves with these actors for their disturbance of the current order, like Iran.
They know that the USD is the linchpin of the Pax Americana, and they have been attacking it for more than a decade now, eroding its power.
However, the USD is guarded by the petrodollar system, and challengers lacked a transformational event that could deeply shake this system.
Iran could be that event.
It’s unimaginable that the US may face some kind of military defeat in Iran. The asymmetry of power is just immense. But this doesn’t mean the US will be the winner in all these.
There is a path where the war ends with Iran’s reintegration into the global trade while pricing its oil in Yuan. Second-order effects may lead Gulf countries to trade oil in domestic currency first with China and then with other buyers, as they have witnessed the limits of the US security guarantees and are looking to diversify their bets now.
Will the world enter this path? Impossible to know.
But, even if the petrodollar breaks at some point, I don’t think this will directly mean the end of the USD and thus US dominance. The US produces technologies and innovations that can match neither the authoritarian regimes of Russia and China nor the aging populations of Europe. Technodollar is capable of replacing petrodollar as the perpetuator of global USD demand.
In short, we are going to see a significant evolution of the world order, in one way or another, post-Iran War. It could be one where the challengers raise their influence; or one where the petrodollar declines and the technodollar rises, transforming the US from a bittersweet world police to a more benign dominant power; or one where the US behaves less restrictively in using force to maintain the current system as it is, in which case the system will look similar but the order will be wildly different.
In many senses, we are witnessing the dawn of a new world order.
The petrodollar survived because everybody needed oil and oil only priced in one currency. The technodollar thesis works for the same reason stated differently: everybody needs the chips, the models, the infrastructure, and right now those only price in one currency too. What Iran actually broke is the assumption that the system was permanent. Systems that feel permanent stop being defended until the moment they aren't.
The problem that I have with most discussions regarding the dollar losing its reserve currency status is this question. What will take its place? China is on the road to demographic collapse. The population in China will decline by half over the next 50 years. I am not sure that China as the country we understand to today will be around in 50 years. Russia has even a worse demographic problem. The capital markets in Japan are not deep enough. Europe has the same problem. While there is a single currency, there is no single capital markets. I would frame the issue this way. There is a 10 to maybe 20 year period where the dollar as a percentage of world trade will likely decline. After that, the US (and maybe India) will be the only game in town.