Interactive Forum of poli
China Is
About to Castrate the US Dollar.
When
China, Russia, and others trade oil for yuan, it’s a significant blow to the
petrodollar. But if Saudi Arabia switched to yuan, it would take out the
petrodollar… and cause an immediate financial panic in the US. By
Nick Giambruno for International Man (January 2, 2018).
The
prime directive of any organism—whether it’s an amoeba or a person or a
corporation or a government—is to survive. That’s
why the US government protects the petrodollar so zealously. It needs the
system to survive. World
leaders who have challenged the petrodollar recently have ended up dead…
why
Everyone Uses the US Dollar… for Now
In
the 1970s, the US government struck a series of deals with Saudi Arabia,
creating the petrodollar system. The US promised to coddle and protect the
Saudi kingdom. And, in exchange, Saudi Arabia would use its dominant position
in OPEC to ensure that all oil transactions happened in US dollars.Until
recently, virtually anyone who wanted to import oil from any country needed US
dollars to pay for it. The dollar is just a middleman here. But countries and
businesses use it in countless transactions amounting to trillions of dollars
that have nothing to do with US products or services. Plus, if foreign
countries are already using dollars for oil, it’s just easier to use the dollar
for other international trade. That’s why, in addition to oil sales, the US
dollar is used for about 80% of all international transactions.
Take Saddam Hussein and
Muammar Gaddafi, for example. Each led a large oil-producing country—Iraq and
Libya, respectively. And both tried to sell their oil for something other than
US dollars, before US military interventions led to their deaths. In October 2000,
Saddam had started to sell Iraqi oil for euros only. Iraq said it would no
longer accept dollars for oil because it did not want to deal “in the currency
of the enemy.” A
little over two years later, the US invaded. Immediately after Baghdad fell to
US forces, all Iraqi oil sales were switched back to dollars. Thanks to
WikiLeaks’ release of Hillary Clinton’s emails, we know that protecting the
petrodollar—not humanitarian concerns—was a primary reason for overthrowing
Libya’s Gaddafi. According
to her leaked emails, the US (and France) feared that Gaddafi would use Libya’s
vast gold reserves to back a pan-African currency. This gold-backed currency
would have been used to buy and sell oil in global markets. Also, it would have
likely displaced a version of the French franc that’s used in Central and
Western Africa. The
US and France backed a rebellion, both militarily and financially, that
overthrew Gaddafi in 2011. After Gaddafi’s death, plans for the gold-backed currency—along
with Libya’s 4.6 million ounces of gold—vanished. Of course there were other reasons the
US toppled Saddam and Gaddafi. But protecting the petrodollar was a serious
consideration, at the very least.
Putin Is a Tougher Adversary
The
dollar’s special status gives Uncle Sam tremendous leverage. So it’s no
surprise that Russia wants to undermine the petrodollar system. Russian President
Vladimir Putin summed it up this way: «Russia shares the BRICS countries’ concerns
over the unfairness of the global financial and economic architecture, which
does not give due regard to the growing weight of the emerging economies. We
are ready to work together with our partners to promote international financial
regulation reforms and to overcome the excessive domination of the limited
number of reserve currencies». Essentially, Putin is saying they all want to
ditch the dollar.That’s largely because the US uses the dollar as a political
weapon. For example, the US tried to sanction Russia for its actions in Crimea
and Ukraine. These sanctions made it harder for Russia to access the US
dollar–based financial system. So of course Russia is going to push for an
alternative. Shortly
after the sanctions, Russia struck a massive deal to sell oil and gas to China
for yuan. The deal totally bypassed the US financial system… and any sanctions.
China’s Permanent Bypass Around
the US Dollar
Russia
is the world’s largest energy producer. China is the world’s largest energy
importer. Normally, they would trade with each other exclusively in US dollars. But, as I’ve told
you in recent weeks, China is now introducing a more permanent way around
that.I call it China’s “Golden Alternative” to the petrodollar. It’s a
streamlined way for Russia and everyone else to sell oil to China for yuan—or
effectively gold.
China’s
«Golden Alternative» to the Petrodollar
China
is launching a practical and attractive alternative to the petrodollar system.
It will allow anyone in the world to trade oil for gold. It will also totally
bypass the US dollar. Here’s how it will work The Shanghai International Energy
Exchange (INE) is introducing a crude oil futures contract denominated in
Chinese yuan. It will allow oil producers to sell their oil for yuan. Of
course, China knows most oil producers don’t
want a large reserve of yuan. So producers will be able to efficiently convert
it into physical gold through gold exchanges in Shanghai and Hong Kong. Bottom line, two of the biggest players in
the global energy market are totally bypassing the petrodollar system. Informed
observers say Russia is already converting a large portion of its yuan earnings
to gold. Of
course, other countries are interested in sidestepping the US financial system
and US sanctions, too. China’s Golden Alternative will give anyone the option
to do just that. This
will make the US dollar a much less effective political weapon.
Other
countries on Washington’s naughty list are enthusiastically signing up. Iran,
another major oil producer, is accepting yuan as payment. So is Venezuela,
which has the world’s largest oil reserves. I think others will soon follow. From the
perspective of an oil producer, it’s a no-brainer. With China’s Golden Alternative, an oil
producer can participate in the world’s largest market and try to capture more
market share. It can also easily convert and repatriate its proceeds into gold,
an international form of money with no political risk. But this doesn’t apply to one critical
holdout… Saudi Arabia.
Twisting the Saudis’ Arm
Saudi
Arabia is the world’s largest oil exporter. A lot of that oil goes to China,
the world’s largest importer. Beijing still reluctantly pays for Saudi crude in US dollars.
The Saudis won’t have it any other way, at least for now. This bothers
China. It can only import Saudi crude by obtaining and then using US dollars. And
that, of course, means it has to stay in Washington’s good graces. Trump’s
Treasury secretary really drove this point home recently. He threatened to kick
China out of the US dollar system if it didn’t crack down on North Korea. China
would rather not depend on an adversary like this. This is one of the main
reasons it’s launching the Golden Alternative. Saudi
Arabia, however, refuses to participate. It won’t sell its oil in anything but
US dollars because that would break its longstanding petrodollar agreement with
the US. When
China, Russia, and others trade oil for yuan, it’s a significant blow to the
petrodollar. But if Saudi Arabia switched to yuan, it would take out the
petrodollar… and cause an immediate financial panic in the US.
The
truth is selling oil for yuan would cost Saudi Arabia a whole lot.
It
would immediately lose American diplomatic and military protection. Then the
media and think tanks would quickly start pounding the table for the US
military to force democracy on Riyadh. Last year Trump said, «If Saudi Arabia
was without the cloak of American protection, I don’t think it would be
around». He’s absolutely correct. Of course, the Saudis know all of this. So
they’ve been on a short leash… until recently. In a surprise move, Saudi King
Salman recently became the first sitting Saudi monarch to ever visit Russia. Until
recently, the visit would have been unthinkable. Saudi Arabia has been one of
the US’ closest allies since the petrodollar system started in the 1970s. Meanwhile,
Russia and Saudi Arabia have been enemies for decades. Most recently, the
Saudis and Russians have been on opposite sides of the Syrian Civil War. That’s
why King Salman’s historic visit to Moscow is so remarkable. The Saudis are
clearly hedging their bets against the US and the petrodollar system.
Saudi Arabia is now drifting
closer to Russia.
The
Saudis have committed to invest up to $10 billion in various Russian sectors.
But, even more significantly, they’ve agreed to buy the S-400 missile system,
Russia’s top line air defense system, as part of a $3 billion weapons purchase. This
deal signals a geopolitical earthquake. The Saudis have never bought Russian
military equipment before. Ever since the birth of the petrodollar, the Saudis
have depended on American military protection. After all, it’s what they get in
return for pricing their oil in dollars. The S-400 system deal suggests the
Saudis are hedging their bets. First, they’re not buying an American system.
Second, they’re buying a Russian system that’s capable of deterring an American
attack. Saudi Arabia is making significant moves to
give itself alternatives to American protection.
At the same time, China is
cutting back on Saudi crude.
A
few years ago, Saudi oil made up over 25% of Chinese oil imports. They were
Beijing’s No. 1 supplier. Today, the Saudis’ market share has dropped below 15%. In other words,
the Saudis are losing massive market share and getting pushed out of the
biggest oil market in the world. This is mainly because they refuse to sell oil
to China in yuan. China
has made itself clear. It’s willing to expand business with anyone who will
accept yuan as payment. Today, Russia has overtaken Saudi Arabia as China’s top
supplier. Its share of the lucrative Chinese market has grown from 5% to over
15%. Russia’s
enthusiastic acceptance of yuan as payment is the main reason for this shift. In the meantime,
Angola, an African oil producer, has also come on board. The country now
accepts yuan as payment for its oil exports to China. It even made the Chinese
yuan its second legal currency in 2015. Chinese imports from Angola have shot up since.
It’s now China’s No. 2 supplier, after Russia.
None of this bodes well for the
petrodollar system.
The
Saudis have two choices… rip up the petrodollar or get shut out of the world’s
most lucrative oil market. One way or another—and probably soon—the Chinese will find a way
to compel the Saudis to accept yuan. The sheer size of the Chinese market makes
it impossible for Saudi Arabia to ignore China’s demands indefinitely.
What to Watch For…
China
might not convince the Saudis to ditch the petrodollar system tomorrow. But
it’s making significant progress.
A
few months ago, Saudi Arabia announced it was willing to issue Panda bonds to
finance its government spending deficit. (Panda bonds are yuan-denominated
bonds from non-Chinese issuers that are sold in China.) This is remarkable. The
Saudis’ currency is pegged to the US dollar. Up until this point, they’ve
exclusively used US dollars for all of their major financial initiatives. Issuing
debt in yuan—instead of US dollars—is a significant move. It means Saudi Arabia
is drifting closer to China. Also, the Saudis recently inaugurated the massive
Yasref refinery in the Saudi city of Yanbu. The refinery is an $8.5 billion
joint venture between Saudi Aramco and China’s Sinopec. These are noticeable
steps. But the Saudis still haven’t given China what it really wants—oil for
yuan. However, it could happen soon…
The Largest IPO in History
In
the coming months, the Saudis plan to float a 5% stake in Saudi Aramco, the
state oil company. Saudi Aramco is the most valuable company in the world. It
will likely be the biggest equity offering ever. It could triple, or even
quadruple, Alibaba’s current record initial public offering (IPO) of $25
billion. The IPO’s success will depend on Saudi Arabia recruiting big cornerstone
investors. But so far, Western investors haven’t shown a lot of enthusiasm.
For China, however, it could be
the perfect opportunity to buy political influence in Saudi Arabia.
If
China bought a large stake in the Aramco IPO, it would help cement its
relationship with Saudi Arabia. It would also put more distance between the
Saudis and the Americans. And critically, it would give the Chinese more
leverage to compel the Saudis to accept yuan for oil. China is in the process
of negotiating not just a 5% stake, but potentially a larger one. Bottom
line…the Saudis haven’t made a clean break with the US yet. However, they are
drifting toward China financially and Russia militarily.
The Saudis are clearly setting
up the option to dump the petrodollar.
If
the Saudis sell oil to China in yuan, it would kill the petrodollar overnight.
However, short of that, things still look very dire for the petrodollar. The
petrodollar system is facing serious erosion, thanks in large part to China’s
Golden Alternative. That’s already baked into the cake. And with that, severe
inflation in the US is a certainty.
