China and Russia move to disrupt the dollar’s dominance in the oil markets

The long-discussed expectations of ending the dominance of the US dollar in global oil and gas markets took another step toward realization last week with the announcement of an agreement between Russian and Chinese hydrocarbon giants, Gazprom and China National Petroleum Corporation (CNPC) to switch over. Payments for gas supplies are in rubles (RUB) and renminbi (RMB) rather than dollars. In the first stage of the new payment system, this will apply to Russian gas supplies to China through the eastern pipeline “Power of Siberia” totaling at least 38 billion cubic meters of gas per year (bcm / y). After that, further expansion of the new payments system will be rolled out. It is pertinent to note at this point that although ongoing international sanctions against Russia over its invasion of Ukraine in February provided the ultimate impetus for this crucial change in payment methodology, it has been a key strategy for China since at least 2010 to challenge the US dollar’s place in the world de facto reserve currency. China has long viewed the position of its currency, the renminbi, in the global currency chart as a reflection of its geopolitical and economic importance on the world stage. It has also been deeply analyzed in My latest book on global oil markets, an early indication of China’s ambition for the renminbi was evident at the G-20 summit in London in April 2010, when Zhou Xiaochuan, governor of the People’s Bank of China (PBOC), pointed out the idea that the Chinese wanted a new global reserve. The currency to replace the US dollar at some point. He added that the inclusion of the yuan in the IMF’s Special Drawing Rights (SDR) reserve asset mix would be a major starting point in this context. At that time, at least 75 percent of the then US$4 trillion in daily turnover in the global foreign exchange (forex) markets, as defined by the Bank for International Settlements (BIS), was represented by the “Big Four” international currencies. : US Dollar (USD), Eurozone Euro (EUR), British Pound (GBP), and Japanese Yen (JPY). Apart from controlling the daily turnover of the foreign exchange markets, currencies in the SDR also dominate in the payment, reserve and investment functions of the global economy. Huge media frenzy in China followed the inclusion of the renminbi in the SDR mix in October 2016, when a 10.9 percent stake was set (the US dollar had a 41.9 percent stake, 37.4 percent in the euro, 11.3 percent, and 9.4 percent in yen). Japanese). As of 2022, the share of the Chinese yuan in the SDR mix has risen to 12.28 percent, which China still considers unworthy of its status as a rising superpower in the world.

China has always been well aware of the fact that, as the world’s largest annual importer of total crude oil Since 2017 (and the world’s largest net importer of total petroleum and other liquid fuels in 2013), it is subject to the fluctuations of US foreign policy causally through the US dollar oil pricing mechanism. This view of the US dollar as a weapon has been strongly reinforced since the Russian invasion of Ukraine and the accompanying US-led sanctions that followed, the most severe of which – as with sanctions imposed on Iran since 2018 – relate to exclusion from the use of the US dollar. The former executive vice president of the Bank of China, Zhang Yanling, said in a speech in April that the latest sanctions against Russia would “lose the United States’ credibility and undermine [U.S.] Dollar dominance in the long run.” She also suggested that China help the world “get rid of dollar dominance sooner rather than later.”

Russia has long held the same view on the merits of removing the dominance of the US dollar on global hydrocarbon prices, but while China was unwilling to openly challenge the US during the height of its trade war under the unpredictable former US president. Trump, he can’t do much about it alone. However, a sign of Russia’s intent came after the United States reimposed sanctions in 2018 on its main partner in the Middle East, Iran, when the CEO of Russia’s Novatek, Leonid Mikhelson, said in September of that year that Russia was discussing Shifting from trade centered around the US dollar With its largest trading partners such as India and China, and even Arab countries were thinking about it. “So they [the U.S.] We are creating difficulties for our Russian banks, all we have to do is replace the dollar.” Around the same time, China now launched the highly successful Shanghai Futures Exchange with oil contracts denominated in yuan (the trading unit of the renminbi currency). This strategy was also initially widely tested in 2014 when Gazpromneft tried to trade crude oil shipments in Chinese yuan and ruble with China and Europe.

Related: Zelensky calls for more weapons to aid Ukraine’s counterattack

This idea has re-emerged in the wake of the recent international sanctions imposed on Russia in the wake of its invasion of Ukraine. Once introduced, Russian President Vladimir Putin signed a decree requiring buyers of Russian gas in the European Union to pay in rubles via a new currency conversion mechanism or risk suspending supplies. This threat almost succeeded in exploiting existing fault lines running through the US-led NATO, as major consumers of Russian gas in the European Union scrambled to figure out how to do it. Appease Putin’s demands for a ruble paymentwithout explicit breach of any penalties. Since then, Russia has simply manipulated the EU over ongoing gas supplies, most recently last week with its statement that it had called off the restart on/off of supplies from the Nord Stream 1 pipeline – one of the main supply routes to Europe – after a “maintenance failure was discovered.” The scale and scope of this implied threat was again underlined last week when Putin said Russia could cut off all energy supplies to the European Union if price caps for Russian oil and gas exports were imposed.

Further expansion of other currencies – realistically only the renminbi – to undermine the dominance of US dollar pricing for oil and other hydrocarbons also depends on currency use in countries other than those already subject to US-led sanctions. Fortunately, for China, another leading country in the Middle East world (to add to Iran, which already uses the circulation of the renminbi and the Russian ruble) – Saudi Arabia – has shown great willingness to expand its renminbi-dominated business with China, including paying for oil supplies. . As long as August 2017, also deeply analyzed in My latest book on global oil markets“We will be fully prepared to consider financing in renminbi and other Chinese products,” said then-Saudi Deputy Minister of Economy and Planning, Muhammad al-Tuwaijri, at a Saudi-Chinese conference in Jeddah. “China is by far one of the largest markets” for financing diversification…[and] We will also access other technical markets in terms of unique financing opportunities, private placements, panda bonds and more.”

Given that the vast majority of Saudi government borrowing (including large bond facilities and syndications) in the past few years has been denominated in US dollars, a shift away from US dollar financing would allow Saudi Arabia more flexibility in its public financing structure, albeit after That’s a primary dislocation associated with it de facto The currency peg to the US currency. In the past few months, there has certainly been another notable turn on the part of Saudi Arabia towards China, as indexed exclusively by The most recent of which was the signing in August of an agreement multilateral memorandum of understanding (Memorandum of Understanding) between the Saudi Arabian Oil Company – the former Arab American Oil Company – (Aramco) and the China Petroleum and Chemical Corporation (Sinopec). As Sinopec President, Yu Baocai, said himself: “The signing of the MoU introduces a new chapter of our partnership in the Kingdom… The two companies will join hands in rejuvenating and making new progress in the Belt and Road Initiative. [BRI] And the [Saudi Arabia’s] Vision 2030.” The scale and scope of the MOU is enormous, covering deep and broad cooperation in refining and petrochemical integration, engineering, procurement and construction, oilfield services, upstream and downstream technologies, carbon capture and hydrogen operations. Crucially to China’s long-term plans in Saudi Arabia, It also covers the opportunities to build a huge manufacturing center in the King Salman Energy Complex which will include the continuous on-the-ground presence on Saudi soil for large numbers of Chinese employees. : not only those directly related to oil, gas, petrochemical and other hydrocarbon activities, but also a small army of security personnel. To ensure the safety of China’s investment.”

Written by Simon Watkins for

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