¥uan and Waterloo of Petro$ (I)

Ongoing western sanctions due Ukraine are pushing China and Russia to close cooperation – the great Eurasian axis is already in motion. Despite the headlines in mainstream western media related to civil war in Ukraine the primary war is being fought monetarily. The Russia-China Strategic Partnership (RCSP) is truly global in scope, having come to encompass the entire world to varying degrees. The Ukraine War might be the U.S. Dollar Waterloo event.

As the Americans and their allies are trying to squeeze Russia and Iran with a combination of economic sanctions and political isolation, alternative poles of power are emerging that soon may present a serious challenge to the U.S.-dominated world that emerged from the end of the Cold War.

The Russian response to ongoing western sanctions has been launching a counter-strategy that could bring the cost boomeranging right back to Washington. Namely, the formation of a potential non-dollar trading block among major players in the global energy markets including Iran and China.

The end of the Petrodollar 

(In 1971 Richard Nixon was forced to close the gold window taking the U.S. off the gold standard and setting into motion a massive devaluation of the U.S. dollar. In an effort to prop up the value of the dollar Nixon negotiated a deal with Saudi Arabia that in exchange for arms and protection they would denominate all future oil sales in U.S. dollars.)

For decades, virtually all oil and natural gas around the world has been bought and sold for U.S. dollars. Since World War II, America’s geopolitical supremacy has rested not only on military might, but also on the dollar’s standing as the world’s leading transactional and reserve currency.

Last year Russia produced about 10.5 million bbls. of oil per day and exported 70% of it. That amounts to nearly 2.6 billion barrels with a value of nearly $250 billion at world market prices. It also exported the equivalent of nearly 1 million barrels per day of natural gas with a market value of upwards of US$50 billion. The truth is that Russia is the largest exporter of natural gas and the second largest exporter of oil in the world. If Russia starts asking for payment in currencies other than the U.S. dollar, that will essentially end the monopoly of the petrodollar. 

China just overtook the US as the world’s largest economy. The US national debt is now past €17 trillion. China – their biggest creditor – has been cutting on US debt holdings and hoarding gold on the side to be prepared for the possible collapse of the dollar. The US federal government ran an estimated budget deficit of $486 billion, or 2.8 per cent of GDP, in fiscal year 2014. By contrast, Russia just posted a federal budget surplus of 2 per cent of GDP.

Russia recorded a trade surplus of 15700 USD Million in September of 2014. Balance of Trade in Russia averaged 8925.26 USD Million from 1997 until 2014, reaching an all time high of 20356 USD Million in January of 2012 and a record low of -185 USD Million in February of 1998. (Source: Trading Economics )

When U.S. politicians started plan economic sanctions on Russia, they probably never even imagined that there might be serious consequences for the United States. But now the Russian media is reporting that the Russian Ministry of Finance is getting ready to pull the trigger on a “de-dollarization” plan. For decades, virtually all oil and natural gas around the world has been bought and sold for U.S. dollars. As I will explain below, this has been a massive advantage for the U.S. economy. In recent years, there have been rumblings by nations such as Russia and China about the need to change to a new system, but nobody has really had a big reason to upset the status quo. However, that has now changed. The struggle over Ukraine has caused Russia to completely reevaluate the financial relationship that it has with the United States.

The largest natural gas producer on the planet, Gazprom, has signed agreements with some of their biggest customers to switch payments for natural gas from U.S. dollars to euros. If other nations start following suit – start trading a lot of oil and natural gas for currencies other than the U.S.$ – that will be a massive blow for the petrodollar, and it could end up dramatically changing the global economic landscape.

Moscow, allied with the BRICS, is actively working to bypass the US dollar. The core point is that Russia is not alone. Besides the BRICS also the G-77, the Non-Aligned Movement (NAM), the whole Global South is critical to U.S. led bullying and would like to have other alternative in international relations. This past summer, the BRICS countries created an alternative to the largely U.S.-controlled World Bank and International Monetary Fund (IMF), and the Shanghai Cooperation Organization (SCO) added 1.6 billion people to its rolls.

Back in 1971, it was necessary to assure that the dollar would retain its position in world trade as the world’s premiere currency, in spite of the fact that it was no longer backed by anything. The U.S. reached an agreement with Saudi Arabia that, in trade for arms and protection, the Saudis would denominate all future oil sales, worldwide, in dollars. The other OPEC countries fell into line, and the “petrodollar” was assured.

Now the Sino-Russian cooperation is challenging the Americans, and there are many countries that would be happy to join them in dethroning the US dollar as the world’s reserve currency. The historic gas deal between Russia and China is very bad news for the petrodollar – it might be start of the “de-Americanised” world.  

¥uan replacing the Petrodollar

On April 24^th 2014 the Russian government organized a special “de-dollarization meeting” dedicated to finding a solution for getting rid of the US dollar in Russian export operations. Top level experts from the energy sector, banks and governmental agencies were summoned and a number of measures were proposed as a response for American sanctions against Russia.

“Over the last few weeks there has been a significant interest in the market from large Russian corporations to start using various products in renminbi and other Asian currencies, and to set up accounts in Asian locations,” Pavel Teplukhin, head of Deutsche Bank in Russia, told the Financial Times, The renminbi, literally means “people’s currency”, is the official currency of the People’s Republic of China. The yuan is the basic unit of the renminbi, but is also used to refer to the Chinese currency generally, especially in international contexts.

Moving the yuan towards internationalisation involves three distinct phases: turning the Chinese currency into a) a trading currency, b) an investment currency, and c) a reserve currency. 

Some recent developments:

• Chinese credit rating agency Dagong has downgraded U.S. debt from A to A- and has indicated that further downgrades are possible.
• China has just entered into a very large currency swap agreement with the eurozone that is considered a huge step toward establishing the yuan as a major world currency.
• Back in June 2014, China signed a major currency swap agreement with the United Kingdom. This was another very important step toward internationalizing the yuan.
• China currently owns about 1.3 trillion dollars of U.S. debt, and this enormous exposure to U.S. debt is starting to become a major political issue within China.
• Mei Xinyu, Commerce Minister adviser to the Chinese government, warned (on Oct 2014) China may decide to completely stop buying U.S. Treasury bonds.

China is the largest producer of gold in the world, and it has also been importing an absolutely massive amount of gold from other nations and in addition China plans to buy another 5,000 tons of gold. There are many that are convinced that China eventually plans to back the yuan with gold and try to make it the number one alternative to the U.S. dollar.

If China does decide to back the yuan with gold and no longer use the U.S. dollar in international trade, it will have devastating effects on the U.S. economy. If other nations stopped using the dollar to trade with one another, the value of the dollar would plummet dramatically. One could claim that the entire way of life in U.S. depends on the U.S.$ being the primary reserve currency of the world. (Source: The Economic Collapse )

The dollar does not just predominate in China’s trade with the United States, but with other countries as well. The first steps towards the internationalisation of the yuan emerged in 2008-2009. At that time, businesses and companies were allowed to use the yuan in trade with Hong Kong (Xianggang), Macau, and ASEAN countries. In 2012, every Chinese company with a licence for export and import transactions was able to use the yuan. An active transition to foreign trade settlements in yuan is happening alongside an increase in the use of the national currencies of China’s trading partners. This is being facilitated by the signing of bilateral currency swaps between the People’s Bank of China (PBC) and the central banks of China’s trading partners. To date, the PBC has signed more than 20 currency swap agreements. At the end of 2013-beginning of 2014, the yuan overtook the euro in terms of the amount of payments used for international trade, and took second place after the US dollar. According to the People’s Bank of China (PBC) , there was more than 1.3 trillion yuan overseas at the end of 2013, which is equivalent to approximately US $250 billion. In fact, this money is forming an offshore yuan market. At present, the yuan can be directly converted with the US dollar, the Japanese yen, the Australian dollar, the Russian rouble, the Malaysian ringgit, and the New Zealand dollar. The latest such agreement was signed between China and New Zealand in March 2014. (Source: Strategic Culture Foundation )

Bypassing the U.S. dollar system is a spear-head of Russia’s counter-offensive. Besides monetary war the emerging cooperation between different pro-Russian fields and energy policy are linked to ongoing geopolitical turmoil. The wider picture includes the Sino-Russian cooperation, the BRICS, the SCO, the EEU, the energy war and other bilateral operations.

The Sino-Russian cooperation

The Russia-China strategic partnership will keep evolving very fast – with Beijing in symbiosis with Moscow’s immense natural and military-technological resources. Not to mention the strategic benefits. Faced with an increasingly hostile West, Russia is visibly turning East. In particular, China and Russia have become closer, signing a historic gas deal, conducting joint naval exercises, and increasing trade.

Gazprom signed a thirty-year gas contract worth $400 billion. The deal’s importance can be compared with a similar accord concluded in the 1960s that brought Russian gas to West Germany for the first time. Moscow and Beijing vow to more than double their bilateral trade to $200 billion by 2020, that is, roughly half of their current turnover with the EU.

It is clear that Moscow seeks an acceleration of its business ties with China. On Nov. 09, 2014 President Vladimir Putin and Chinese leader Xi Jinping signed a memorandum of understanding on the so-called “western” gas supplies route to China. Russia’s so-called “western” or “Altay” route would supply 30 billion cubic meters (bcm) of gas a year to China. The new supply line comes in addition to the “eastern” route, through the “Power of Siberia” pipeline, which will annually deliver 38 bcm of gas to China. Work on that pipeline route has already begun after a $400 billion deal was clinched in May. Among the business issues discussed by Putin and Xi at their fifth meeting this year was the possibility of payment in Chinese yuan, including for defense deals military, Russian presidential spokesman Dmitry Peskov was cited as saying by RIA Novosti. (Source: RT )

In addition China and Russia have agreed to jointly build a seaport on the coast of the sea of Japan, which are projected to become one of the largest on the coast in North-East Asia. The facility will be located in our territory and will serve up to 60 million tons of cargo per year.

Also, China has decided to invest 400 billion rubles in the construction of high-speed highway Moscow-Kazan, which is part of transport corridor Moscow-Beijing.

Russia and China are determined to reduce U.S. and North Atlantic Treaty Organization (NATO) presence in Central Asia to what it was before the 2001 invasion of Afghanistan. The SCO has consistently rebuffed U.S. requests for observer status, and has pressured countries in the region to end U.S. basing rights. The United States was forced out of Karshi-Khanabad in Uzbekistan in 2005, and from Manas in Kyrgyzstan in 2014.

“At present, the SCO has started to counterbalance NATO’s role in Asia,” says Aleksey Maslov, chair of the Department of Asian Studies of the Higher School of Economics in Moscow. And the new members, he says, want in to safeguard their interests. (Source: VoR)

China overtook Germany as Russia’s largest trading partner in 2011, Last year, China acquired 12.5 percent of Russia’s Uralkali (URKA:RM), the biggest producer of potash in the world, and China National Petroleum agreed to prepay Rosneft (ROSN:RM), run by Putin associate Igor Sechin, about $70 billion as part of a $270 billion, 25-year supply deal. That was followed by Rosneft’s $85 billion, 10-year accord with China Sinopec and China National Petroleum’s purchase of 20 percent of an Arctic gas project from Novatek for an undisclosed sum. (Source: Bloomberg Businessweek  )

To be continued…

Source Themes of Ari Rusila