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Challenging the Dollar: China and Russia’s Plan from Petroyuan to Gold
Challenging the Dollar: China and Russia’s Plan from Petroyuan to Gold
As seen in my previous article, US military power is on the decline, and the effects are palpable. In a world full of conflicts brought on by Washington, the economic and financial shifts that are occurring are for many countries a long-awaited and welcome development.
If we were to identify what uniquely fuels American imperialism and its aspirations for global hegemony, the role of the US dollar would figure prominently. An exploration of the depth of the dollar’s effects on the world economy is therefore necessary in order to understand the consequential geopolitical developments that have occurred over the last few decades.
The reason the dollar plays such an important role in the world economy is due to the following three major factors: the petrodollar; the dollar as world reserve currency; and Nixon’s decision in 1971 to no longer make the dollar convertible into gold. As is easy to guess, the petrodollar strongly influenced the composition of the SDR basket, making the dollar the world reserve currency, spelling grave implications for the global economy due to Nixon’s decision to eliminate the dollar’s convertibility into gold. Most of the problems for the rest of the world began from a combination of these three factors.
Dollar-Petrodollar-Gold
The largest geo-economic change in the last fifty years was arguably implemented in 1973 with the agreement between OPEC, Saudi Arabia and the United States to sell oil exclusively in dollars.
Specifically, Nixon arranged with Saudi King Faisal for Saudis to only accept dollars as a payment for oil and related investments, recycling billions of excess dollars into US treasury bills and other dollar-based financial resources. In exchange, Saudi Arabia and other OPEC countries came under American military protection.
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The Petroyuan Cometh: Launch Of Renminbi-Denominated Oil Futures Contract Imminent
The Petroyuan Cometh: Launch Of Renminbi-Denominated Oil Futures Contract Imminent
Whenever one talks about the death of the petrodollar, the unspoken question lurking just beneath the surface is this: is the rise of the petroyuan just around the corner?
This year, we’ve gotten quite a bit of evidence to suggest that the answer to that question may indeed be a resounding “yes.” In May for instance, Russia surpassed Saudi Arabia as the largest oil supplier to China and what’s especially notable there is that beginning in 2015, Gazprom began settling all of its crude sales to China in yuan meaning that, at least partly, the petrodollar was supplanted just as soon as its death became inevitable.
Now, just as China has moved to play a greater role in determining the price of gold by participating in the LBMA auction and by establishing a yuan-denominated fix, it’s moving quickly to create a yuan-denominated oil futures contract. Here’s Reuters:
China’s push to establish a crude derivatives contract has been met with early scepticism, but oil executives say the country’s growing economic influence means a third global crude benchmark is inevitable.A derivatives contract would give the Shanghai International Energy Exchange, known as INE, a slice of an oil futures market worth trillions of dollars, offering a rival to London’s Brent and U.S. West Texas Intermediate (WTI).
And while others have tried and failed, China brings its might as the world’s biggest oil buyer, a strong dose of political will and the alignment of its financial and banking system for a yuan-denominated contract.
“The energy industry is still manned, literally, by people from the West. But the world moves on, and there’s a change of guard,” said a senior market executive, speaking on the sidelines of a major industry gathering in Singapore this week, at which delegates spoke on condition of anonymity.
“China has become the world’s biggest oil trader, and that means that an oil price will be set there, like it or not.”
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PetroYuan Proliferation: Russia, China To Settle “Holy Grail” Pipeline Sales In Renminbi
PetroYuan Proliferation: Russia, China To Settle “Holy Grail” Pipeline Sales In Renminbi
Last week, in “The PetroYuan Is Born: Gazprom Now Settling All Crude Sales To China In Renminbi,” we discussed the intersection of two critically important themes which have far-reaching geopolitical and economic consequences. The first is the death of petrodollar mercantilism, the USD recycling system that has helped to buttress decades of dollar dominance and the second is the idea of yuan hegemony, a new, post-Bretton Woods world economic order characterized by the ascendancy of China-led supranational institutions.
These themes came together recently when it became apparent that Gazprom has begun settling all crude sales to China in yuan. Here’s a summary of the prevailing dynamics: Western economic sanctions on Russia have pushed domestic oil producers to settle crude exports to China in yuan just as Russian oil is rising as a percentage of total Chinese crude imports. Meanwhile, the collapse in crude prices led to the first net outflow of petrodollars from financial markets in 18 years, and if Goldman’s projections prove correct, the net supply of petrodollars could fall by nearly $900 billion over the next three years. All of this comes as China is making a concerted push to settle loans from its newly-created infrastructure funds in renminbi.
Now, it appears Russia and China will de-dollarize natural gas settlements as well.
First, a bit of history is in order.
Last month, Chinese President Xi Jinping visited Moscow, where Gazprom Chief Executive Alexei Miller and China National Petroleum Corp Vice President Wang Dongjin signed a gas export deal which paves the way for 30 bcm/y to China via a new “Western Route.”
(the Altai line)
As a reminder, the two countries ratified a “Holy Grail” gas deal last May for the delivery of up to 38 bcm/y over 30 years via an “Eastern Route.” Also known as the “Power of Siberia” pipeline, the Eastern route was billed as the largest fuel network in the world with a total contract value of around $400 billion.
(mapping the Western and Eastern routes)
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