May 12, 2022
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Will the petrodollar live to see its 50th anniversary?

Tomorrow, Russian oil trading for rubles will become uncontested

It will soon be half a century since the birth of the petrodollar. Its birth was preceded by the Arab-Israeli war of 1973, the introduction by the Arab OPEC member countries of an embargo on the supply of black gold to the United States and allied countries. As a result, at the turn of 1973-74. oil prices quadrupled. It was a global energy crisis.

Then the then US Secretary of State flew to Saudi Arabia and other Arab OPEC countries. Henry Kissingeragreements with these countries. The most important of these was the agreement between Washington and Riyadh (June 1974). Washington guaranteed Saudi Arabia military security; Riyadh took upon itself the obligation to sell black gold exclusively for US dollars, and place the resulting currency in the American banking system (dollar recycling). This agreement marked the birth of the petrodollar. Its 50th anniversary is due in June 2024.

However, events make some experts doubt that the petrodollar will survive to the round date. From my point of view, the crisis in Ukraine and around Ukraine does not yet give grounds for such a conclusion. However, there is no doubt that within the next two years it will lose its monopoly on the world black gold market.

The sanctions war against Russia that began in late February has greatly shaken the world’s confidence in the US dollar. Especially such a sanction as the freezing of Russia’s foreign exchange reserves in the amount of more than 300 billion dollars. And although, according to estimates, the share of the American currency in this amount was about a third, and the share of the euro is much larger, it was the US dollar that was particularly mistrusted. Everyone is well aware that the main initiator of the freezing of Russian reserves was Washington, which unceremoniously blocked not only its (dollar) share of Russian reserves of $100 billion, but also a share of more than $200 billion, for which others are formally responsible states.

Tomorrow, the Americans may do the same with the foreign exchange reserves of other countries, including countries exporting black gold. For example, Saudi Arabia’s gold and foreign exchange reserves at the end of March amounted to $451.3 billion, and the UAE – $129.4 billion. The risks for these countries are even higher. Unlike Russia, their international reserves consist almost exclusively of US dollars. It is noteworthy that Europe has long since switched to the euro as the main currency of payments for natural gas imports from Russia. But it purchases oil in Russia and other countries mainly in dollars. Washington jealously ensures that both exporters and importers of black gold adhere to the oil-dollar standard equally. Everyone remembers: when Washington did not like that Gaddafi agreed with European countries on the supply of oil for the euro, the Libyan leader was killed.

The ongoing sanctions war against Russia shows that there is no longer any obedience to Washington on the part of importers or exporters of black gold. Even before the start of the sanctions war, there were signs that Riyadh wanted to break away from Washington’s tutelage. Some time ago, reports began to appear in the media that one of the main importers of Saudi oil – China – began to convince Riyadh to switch at least partially in settlements from US dollars to Chinese yuan. Riyadh agreed with the expediency of such a currency maneuver, but was still afraid of Washington.

The flow of Saudi oil to China is growing year by year. Last year China purchased 128 million tons, or 938 million barrels. In monetary terms, this is more than 70 billion dollars, a quarter of all exports of Saudi Arabia’s black gold. China has already become Saudi Arabia’s main trading partner, and Riyadh is buying more and more not only civilian, but also military products from the Celestial Empire.

In the spring, the expediency of a currency maneuver in paying for oil became especially obvious for both Beijing and Riyadh. March 15th Wall Street Magazine reported: “Saudi Arabia is actively negotiating with Beijing to value part of its oil sales to China in yuan”. According to the publication, such a move would threaten the dominance of the petrodollar in the global black gold market. The publication contains a conclusion about the threat of the planned currency maneuver of Beijing and Riyadh not only for the petrodollar, but in general for the world currency system based on the US dollar: “It would also be a blow to the heart of the American financial system, which over the past decade has taken advantage of the dollar’s reserve currency status to print as many dollars as needed to fund government spending.”. The Biden administration is concerned about rumors that the Chinese President Xi Jinping plans to visit Saudi Arabia soon.

Long before the sanctions war, Russia was attempting to convert at least part of its oil exports into rubles. President of Russia Vladimir Putin in May 2006, in his Address to the Federal Assembly, he said: “The ruble should become a universal means for international payments and should gradually expand its zone of influence. For the same purposes, it is necessary to organize exchange trading in oil, gas and other goods on the territory of Russia. Trade – with the calculation of rubles. Our goods are traded on world markets. Why not with us?

In May 2008, CJSC St. Petersburg Commodity and Raw Materials Exchange was established, which quickly became the largest trading platform in the country. Alas, the real trade in oil for rubles did not work then. Despite continuous talk about the need to de-dollarize the Russian economy, oil was still traded on the stock exchange for dollars, sometimes euros, but not for rubles. True, there were two cases on the exchange: a large tanker sent by Rosneft, as well as two tankers of Gazprom Neft, sold for rubles. And that’s where it all ended.

Already after President Putin announced on March 23 that Russia would sell natural gas to Europe for rubles, another proposal was made to replace the US dollar with the ruble in the trade in Russian black gold. Speaker of the State Duma Viacheslav Volodin On March 30, he proposed expanding the list of export goods for which payment can be taken in rubles. He offered to sell other goods for rubles, primarily oil, as well as fertilizers, grain, oil, coal, metals, timber.

On April 26, Rosneft announced a tender for 6.5 million tons of oil requiring 100% advance payment in rubles. But, according to Reuters, no one was willing. It was a trial balloon. Experts say that in this way Moscow is psychologically preparing the world for the fact that tomorrow the trade in Russian oil for rubles will become uncontested.

America announced in March that it would stop importing Russian oil. The EU has announced an anti-Russian oil embargo as part of the sixth package of sanctions, which is launched in May. Russia is beginning to reorient its oil exports to the east. First of all, China and India. The latter has already concluded a number of contracts with Russia after the start of the sanctions war. The media have repeatedly reported that the parties are set to switch in mutual trade settlements to national currencies – the rupee and the ruble. It was assumed that the supply of Russian oil would be paid either in rubles or in rupees. Alas, recent reports indicate that Russian oil will continue to be paid for in US dollars, while national currencies will be used to pay for all other goods. Apparently, India is afraid to go too far. She has already refused to impose sanctions against Russia, despite strong pressure from Washington. And even increased purchases of Russian oil against the backdrop of an oil embargo announced by the collective West. Well, it is possible that India will refuse the dollar in oil payments later.

In conclusion, I would like to announce the news that a precedent for breaking away from the dollar’s monopoly in the oil trade has emerged. Russia in March signed several contracts for the supply of coal and oil to China with payment in yuan. Coal deliveries began in April, and the first batches of oil for yuan will be delivered in May.

With this in mind, I believe that the petrodollar will, of course, survive until its half-century anniversary, but in a weakened form. In the next two years, we can expect the appearance of contracts for the supply of oil, in which the payment currency will not be the US dollar, but other currencies. First of all, the Chinese yuan. But the petrodollar, most likely, will not live to see its next anniversaries.

Photo: REUTERS/Dado Ruvic

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