The End of the Petrodollar?
The petrodollar system is an exchange of oil for US dollars. Russia and China might have signalled the end to its supremacy
Twitter is an amazing platform. it is toxic, cruel and can ruin lives but it is also a fountain of information. Below we look at two accounts with complimenting takes on the Petrol Dollar and the Ukraine crisis.
Meet CulturalHusbandry, a small account with an interesting thread on the Russia and China’s move away from the US Dollar.
Let us see what they have to say:
(we have re-formatted the original which can be viewed here):
China-Russia will ditch dollar:
In 2015, 90% of their bilateral transactions were conducted in dollars.
By Q1 2020 46% of their bilateral transactions were conducted in dollars.
De-dollarization results in a Defacto Alliance.
They've been doing this since 2014.
WHEN not IF.
Traditionally the dollar has had three major advantages to other currencies:
The ability to maintain value in the form of limited inflation and depreciation
The sheer size of the American domestic economy
The US having financial markets that are deep, liquid and open.
We have lost 1. Limited Inflation is no longer limited. While it may not yet be astronomical, it is at +40yr highs and no longer considered transient. 2 has been sidestepped by China as their Domestic Economy is now massive by any metric. 3 still stands.
Economic sanctions are a powerful tool in general. However, when overused (and they have been) those on the receiving end start to look for solutions. And that is just what has happened. China has made sure our sanctions have limited effect and Russia has made efforts as well.
China and Russia have an economic agreement in place that allows them to gain access to the other's currency without having to purchase it on the foreign exchange market. This has been going on since 2014.
Fast-forward to June 2019 and Putin & Xi decide to settle all transactions between each other's nations in native currency and develop systems independent of SWIFT by conducting trade in Rubles and Yuan.
But here is what few seem to recognize. Russia has been rapidly accumulating yuan reserves at the expense of the dollar. In early 2019, Russia's central bank revealed that it had slashed its dollar holdings by $101 billion -- over half of its existing dollar assets.
One of the biggest beneficiaries of this move was the yuan, which saw its share of Russia's foreign exchange reserves jump from 5% to 15% after the central bank invested $44 billion into the Chinese currency. As a result, Russia acquired 1/4 of the entire world's yuan reserves.
Russia's sovereign wealth fund has also begun investing in yuan and Chinese state bonds. This blind to reality concept that Western leadership has of "The US dollar will always be the world's reserve currency" is based on old truths that are slipping as our head is in the sand.
Those who say "Show me where the dollar is not..." don't get it. You're watching the bomb fall through the sky saying "well no explosion has happened yet". By the time we have examples of the developing world primarily trading in something other than dollars it will be too late.
These 2 nations are working to get away from the dollar. They have agreements in place to this effect. Their economies and financial industries reflect this shifting reality. We can continue to ignore it, or we can recognize it & adjust certain practices to strengthen our nation.
WHEN not IF.
The Wealth Gap Take: The West regularly brandishes the sanctions stick when threatening to punish Russia and China so it should not be a surprise that they would take steps to negate our ability to hurt them (we would do the same). Will this be a significant economic shift? Maybe not on its own. While China is a big economic beast and the Russian economy is the worlds 11th largest, this deal may not be that much of an upset in isolation. If more countries agreed to settle transactions in Rubles or the Yuan we may see a reduction in the Dollars power.
Meet Clarkii Stomias, the fish with an interesting view on the Petrodollar and the SWIFT system. Definitions below for your convenience:
The Petrodollar is an exchange of oil for U.S. dollars between countries that buy oil and those that produce it. Its formation was the result of the oil crisis in the mid-1970s when prices spiked to record levels. It helped increase the stability of oil prices denominated in U.S. dollars.
The SWIFT System is a vast messaging network used by banks and other financial institutions to quickly, accurately, and securely send and receive information, such as money transfer instructions. It is controlled by the West.
Clarkii had the following thoughts on the Russian invasion of Ukraine:
Putin didn’t just invade the Ukraine on 2/24/2022, he officially ended the #petrodollar system. How? Remember, Russians don’t do anything without a plan. They and China have been prepping for this moment for years and are now ready:
Russia has stated NATO expansion into Ukraine was a red line. They knew their invasion of Ukraine would be inevitable and would have strategized that the US/West’s response would be SWIFT $ system exclusions/sanctions, sanctions which started today.
Reasonable to expect that Russia’s next step will be to shut off oil/gas pipelines to Europe, as Russia has built up huge Yuan, gold & commodity reserves. This will cause massive price and supply disruptions (war level) to the western markets & monetary system.
For years Russia & China have looked for ways to re-monetize gold & exit abuses of SWIFT system as a geo-political tool against them, but how to do it, how to exit, without West declaring it an act of aggression or war against West?
Well, this Ukraine invasion just accomplished that end for them. And the West is doing it themselves. -Now, freed to declare themselves SWIFT system outcasts by the western govt hands, Russia can now say “we will turn oil pipelines back on, but not for dollars.”
Russia then declares that Europe or anyone that wants Russian oil (as 3rd largest global producer) or Russian/Ukrainian wheat (1/4 of worlds production) must pay in gold, or use the ruble-yuan gold backed payment system.
Their leverage as an oil producer (who cuts off supply) will cause almost immediate price shocks to the western world. A good part of the population could immediately be unable to heat their homes.
Almost equal to the oil shock they’d cause is their ability (though not as immediate) to cause food shortages and price spikes through the disruption of wheat production.
Unmentioned in all of this is China. Who has been silent and not condemned Russia. That means silent approval & cooperation. China will act to soak up Russian production of oil and wheat to soften the blow to their “strategic partner”.
This will again be through the Yuan-Ruble facility and at some point overtly-stated gold backing of that system by Russia and a China. The West will of course declare those last two bullets as acts of global aggression and direct threats to the “world monetary system”.
At some point in all this, China’s aims on Taiwan will come into play and that will move hot-war as well. But these are just my best guesses at trying to work out the current play by Russia (and soon China).
But the upshot in all of this is that we seem very much to be exiting the unipolar monetary world we all grew up in and will now (like NOW, now) see two warring systems and global opponents.
George Orwell was just early, but here come Oceania, (Eurasia & Eastasia).
Ben Rickert (his character was played by Brad Pitt in ‘The Big Short’) responded to this thread with the following video:
The Wealth Gap View: We don’t know whether the whole world is dancing to Putin’s tune or whether he is simply insane. If you watched the video above (and trust the translation is true) then we can probably assume that Putin (and likely China) have a dim view of the US Dollar and the SWIFT financial system they are forced to use. Guess we will see in the coming weeks what the answer will be.
Meanwhile, Ukraine put this tweet out
They are asking for crypto, not US dollars. If that doesn’t tell you the direction of travel then we don’t know what will.
Until Next Time
The Wealth Gap