Recent trade deals and high-level cooperation between Russia and China
have set off alarm bells in the West as policymakers and oil and gas
executives watch the balance of power in global energy markets shift to the
East.
The reasons for the cozier relationship between the two giant powers are,
of course, rooted in the Ukraine crisis and subsequent Western sanctions
against Russia, combined with China's need to secure long-term energy
supplies. However, a consequence of closer economic ties between Russia and
China could also mean the beginning of the end of dominance for the U.S.
dollar, and that could have a profound impact on energy markets.
Rein of the USD
Before the 20th century, the value of money was tied to gold. Banks that
lent money were constrained by the amount of their gold reserves. The Bretton
Woods Agreement of 1944 established a system of exchange rates that allowed
governments to sell their gold to the U.S. Treasury. But in 1971, U.S.
President Richard Nixon took the country off the gold standard, which
formally ended the linkage between the world's major currencies and gold.
Related: Should
Europe Be Concerned About Russia's Growing Energy Relationship with Asia
The U.S. dollar then went through a massive devaluation, and oil played a
crucial role in propping it back up. Nixon negotiated a deal with Saudi
Arabia whereby in exchange for arms and protection, the Saudis would
denominate all future sales of oil in U.S. dollars. Other OPEC members agreed
to similar deals, ensuring perpetual global demand for greenbacks. The
dominance of the U.S. "petrodollar" continues to this day.
Russia and China Cozy Up
Recent news coming out of Russia, however, suggests that the era of U.S.
dollar dominance could be coming to an end, due to increasing competition
from the world's second largest economy and primary consumer of commodities,
China.
China and Russia have been furiously signing energy deals that indicate
their mutual energy interests. The most obvious is the $456 billion gas deal
that Russian state-owned Gazprom signed with China in May, but that was just
the biggest in a string of energy agreements going back to 2009. That year,
Russian oil giant Rosneft secured a $25 billion oil swap agreement with
Beijing, and last year, Rosneft agreed to double oil supplies to China in a
deal valued at $270 billion.
Since Western sanctions against Russia took hold in reaction to the
Russian land grab in Crimea and the shooting down of a commercial airliner,
Moscow has increasingly looked to its former Cold War rival as a key buyer of
Russian crude -- its most important export. Liam Halligan, a columnist for
the Telegraph, says "the real danger" of closer Russian-Chinese
ties is not a bust-up between China and the U.S., which could threaten
crucial shipping routes for China-bound coal and LNG, but its impact on the
U.S. dollar.
"If Russia's 'pivot to Asia' results in Moscow and Beijing trading
oil between them in a currency other than the dollar, that will represent a
major change in how the global economy operates and a marked loss of power
for the U.S. and its allies," Halligan wrote
in May. "With China now the world's biggest oil importer and the
U.S. increasingly stressing domestic production, the days of dollar-priced
energy, and therefore dollar-dominance, look numbered."
While no one is arguing that could happen anytime soon, considering the
dollar remains the currency of choice for central banks, Halligan's
proposition is gathering strength. In June, China agreed with Brazil on a $29
billion currency swap in an effort to promote the Chinese yuan as a reserve
currency, and earlier this month, the Chinese and Russian central banks
signed an agreement on yuan-ruble swaps to double trade between the two
countries. Analysts says the $150 billion deal, one of 38 accords inked in
Moscow, is a way for Russia to move away from U.S. dollar-dominated
settlements.
"Taken alone, these actions do not mean the end of the dollar as the
leading global reserve currency," Jim Rickards, portfolio manager at
West Shore Group and partner at Tangent Capital Partners, told CNBC. "But taken in the
context of many other actions around the world including Saudi Arabia's
frustration with U.S. foreign policy toward Iran, and China's voracious
appetite for gold, these actions are meaningful steps away from the
dollar."
Rise of the Yuan
It is no secret that Beijing has been looking to promote the yuan as an
alternative reserve currency. Having that status would allow China cheap
access to world capital markets and cheaper transaction costs on
international trade, not to mention increased clout as an economic power
commensurate with its rising proportion of world commerce.
However, the Chinese have a problem in their plans for the yuan. The
government has not yet removed capital controls that would allow full
convertibility, for fear of unleashing a torrent of speculative flows that
could damage the Chinese economy.
However, "[It] is clear that China is laying foundations for wider
acceptance of the yuan," said Karl Schamotta, a senior market strategist
at Western Union Business Solutions," as quoted
in an International Business Times article. IBT pointed out that "more
than 10,000 financial institutions are doing business in Chinese yuan, up
from 900 in June 2011, while the pool of offshore yuan, non-existent three
years ago, is now near 900 billion ($143 billion). And the proportion of
China's exports and imports settled in yuan has increased nearly sixfold in
three years to nearly 12 percent."
Conspiracy Theory Spoiler Alert
Adding some vivid color to this story, Casey Research energy analyst Marin
Katusa speculated in a recent column
that the death of Total CEO Christophe de Margerie, whose private jet collided
with a snowplow in Moscow, may not have been an accident. Instead, Katusa
muses that the mysterious circumstances surrounding his death and the
unlikely odds of being hit by a snowplow at an airport, could have more to do
with de Margerie's business interests in Russia than being at the wrong place
at the wrong time.
According to Katusa, de Margerie was "a total liability" due to
Total's involvement in plans to build an LNG plant on the Yamal Peninsula
along with partner Novatek. The company was also seeking financing for a gas
project in Russia despite Western sanctions.
"It planned to finance its share in the $27-billion Yamal project
using euros, yuan, Russian rubles, and any other currency but U.S.
dollars," Katusa writes, then entices the reader with this: "Did
this direct threat to the petrodollar make this 'true friend of Russia' -- as
Putin called de Margerie - some very powerful and dangerous enemies amongst
the power that be, whether in the French government, the EU, or the
U.S.?"
That may be a stretch, but Katusa's U.S. dollar reference shows that any
developments that point to a move away from the dominance of the greenback
are not going un-noticed.
Source: http://oilprice.com/Energy/Oil-Prices/The-End...der-Threat.html
By Andrew Topf of target="_blank" Oilprice.com