THE HEGEMON FALTERS
China And Russia Look To Challenge The Petrodollar
- The U.S. dollar, which has been the currency of choice in oil trade since the 1970s, is still the dominant currency in the market.
- While the Chinese currency has made inroads in global trade, the yuan accounts for just 2.7% of the market.
- Several deals and summits in recent weeks signaled that China and Russia are moving to try to sideline the U.S. dollar.
The increasingly closer relations between China and Russia and the Chinese push to make its currency more relevant on the global markets are challenging the dominance of the petrodollar.
The U.S. dollar, which has been the currency of choice in oil trade since the 1970s, is still the dominant currency in the market and global currency reserves. But several recent deals and highest-level summits have sought to undermine the dollar’s dominance.
The new geopolitical alliances, where China and Russia are working to oppose a U.S.-led global order, could undermine the petrodollar.
China has been looking for years to establish more trade deals in yuan to increase the relevance of its currency on the global markets and challenge the U.S. dollar’s dominance in international trade, including in energy trade.
During a landmark visit to Saudi Arabia’s capital Riyadh in December, Chinese President Xi Jinping said that China and the Arab Gulf nations should use the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trades.
“China will continue to import large quantities of crude oil from GCC countries, expand imports of liquefied natural gas, strengthen cooperation in upstream oil and gas development, engineering services, storage, transportation and refining, and make full use of the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trade,” Xi said in December, as carried by Reuters.
While the Chinese currency has made inroads in global trade, the yuan accounts for just 2.7% of the market, compared to the U.S. dollar’s share of 41%.
Moreover, the U.S. dollar accounted for more than 58% of the global currency reserves as of the end of 2022, compared to a 2.7% share for the Chinese yuan, per data from the International Monetary Fund (IMF).
Several deals and summits in recent weeks signaled that China and Russia are moving to try to sideline the U.S. dollar.
Last month, China’s Xi met with Putin in Moscow, and the Russian president not only endorsed trade in yuan with China but also with other countries.
“We support the use of Chinese yuan in payments between Russia and countries of Asia, Africa, and Latin America,” Putin was quoted as saying by Russian media.
According to Putin, two-thirds of the bilateral trade between China and Russia is already being done in the two national currencies—the yuan and the ruble, respectively.
Over the past year, Russia has turned to trade in yuan in the wake of the Western sanctions on its exports, imports, and energy trade, as the Chinese currency has become Putin’s only alternative to reducing exposure to the U.S. dollar and the euro, and limiting the fallout of the sanctions that have seen Russian state assets seized in Western countries.
Last week, China and Brazil agreed to carry out bilateral trade settlements in their own currencies and dump the U.S. dollar as the intermediary currency, in another move seen as China’s increased efforts to undermine the dollar dominance.
Brazil and China are part of the so-called BRICS alliance of five major emerging economies—Brazil, Russia, India, China, and South Africa.
Also last week, China reportedly completed its first trade of liquefied natural gas (LNG) settled in yuan on the Shanghai Petroleum and Natural Gas Exchange.
Chinese state oil and gas giant CNOOC and TotalEnergies completed the first LNG trade on the exchange with settlement in the Chinese currency, the exchange said in a statement carried by Reuters.
The U.S. dollar hasn’t lost its power in global trade, especially in energy trade, but the growing divide between the U.S. and the West on the one hand, and the China/Russia axis on the other hand, could embolden China to look to further boost the relevance of the yuan in the new world order.
By Tsvetana Paraskova for Oilprice.com
U.S. Losing Influence As Saudi Arabia Joins Shanghai Cooperation Organization
- Saudi Arabia is set to join the Shanghai Cooperation Organisation as a ‘dialogue partner’.
- The SCO is the world’s biggest regional political, economic and defence organisation both in terms of geographic scope and population.
- This latest step by Saudi Arabia away from the U.S. and towards the China-Russia axis should come as no surprise to anyone.
Saudi Arabia’s very public announcement last week that its cabinet had approved a plan to join the Shanghai Cooperation Organisation (SCO) as a ‘dialogue partner’ is the surest sign yet that any U.S. efforts to keep it out of the China-Russia sphere of influence may now be futile. The Kingdom had already signed a memorandum of understanding on 16 September 2022 granting it the status of SCO dialogue partner, as was exclusively reported by OilPrice.com at the time. However, Saudi Arabia did nothing to encourage the release of the news at that point, unlike now - just after it resumed relations with Iran, in a deal brokered by China.
The SCO is the world’s biggest regional political, economic and defence organisation both in terms of geographic scope and population. It covers 60 percent of the Eurasian continent (by far the biggest single landmass on Earth), 40 percent of the world’s population, and more than 20 percent of global GDP. It was formed in 2001 on the foundation of the ‘Shanghai Five’ that was set up in 1996 by China, Russia, and three states of the former USSR (Kazakhstan, Kyrgyzstan and Tajikistan). Aside from its vast scale and scope, the SCO believes in the idea and practice of the ‘multi-polar world’, which China anticipates will be dominated by it by 2030. In this context, the end of December 2021/beginning of January 2022 saw meetings in Beijing between senior officials from the Chinese government and foreign ministers from Saudi Arabia, Kuwait, Oman, Bahrain, plus the secretary-general of the Gulf Cooperation Council (GCC). At these meetings, the principal topics of conversation were to finally seal a China-GCC Free Trade Agreement and to forge “a deeper strategic cooperation in a region where U.S. dominance is showing signs of retreat”.
This idea was the centrepiece of the declaration signed in 1997 between then-Russian President, Boris Yeltsin, and his then-China counterpart, Jiang Zemin. Veteran Russian Foreign Minister, Sergey Lavrov, has since stated that: “The Shanghai Cooperation Organisation is working to establish a rational and just world order and […] it provides us with a unique opportunity to take part in the process of forming a fundamentally new model of geopolitical integration”. Aside from these geopolitical redesigns, the SCO works to provide intra-organisation financing and banking networks, plus increased military cooperation, intelligence sharing and counterterrorism activities, among other things. The U.S. itself applied for ‘observer status’ of the SCO in the early 2000s but was rejected in 2005.
This latest step by Saudi Arabia away from the U.S. and towards the China-Russia axis should come as no surprise to anyone who has been watching developments in the Kingdom since the rise of Crown Prince Mohammed bin Salman (MbS) from around 2015. At that point, he was not Crown Prince (the heir designate position) – that role was held by Muhammad bin Nayef (MbN) – but rather Deputy Crown Prince with burning ambition to take the number one succession spot upon the death of King Salman. His stint as Defense Minister was disastrous, with the dramatic escalation of the war against the Houthis in Yemen – including indiscriminate bombing of civilian targets – roundly condemned by the West. This led the German intelligence service, the Bundesnachrichtendienst (BND), to leak an abridged internal-only assessment report of MbS to various trusted members of the press that stated: ‘Saudi Arabia [under MbS] has adopted an impulsive policy of intervention.’ It went on to describe MbS in terms of being a political gambler who was destabilising the Arab world through proxy wars in Yemen and Syria.
In order to rebuild his reputation with a view to usurping MbN as Crown Prince, MbS came up with an idea that he thought would win over senior Saudis who supported his rival. That idea was to float a stake in the Kingdom’s flagship company, Saudi Aramco, through an initial public offering (IPO), as analysed in depth in my latest book on the global oil markets. In theory, the idea had several positive factors going for it that would benefit MbS. First, it would raise a lot of money, which Saudi Arabia needed to offset the economically disastrous effect of the 2014-2016 Oil Price War that it had instigated. Second, it would likely be the biggest ever IPO, thus boosting Saudi Arabia’s reputation and the breadth and depth of its capital markets. And third, the new money from the sale could be used as part of Saudi Arabia’s ‘Vision 2030’ development plan aimed at diversifying the Kingdom’s economy away from a reliance on oil and gas exports.
MbS pitched the idea to the senior Saudis based on very specific benchmark targets. First, the flotation would be for 5% of the company. Second, this would raise at least USD100 billion, which would value the whole company at US$2 trillion. Third, it would be listed not just on the domestic Tadawul stock market but also on at least one of the world’s biggest and most prestigious stock markets – the New York Stock Exchange and the London Stock Exchange were the exchanges MbS had in mind. None of these targets was hit, of course, as the more information was made known about Saudi Aramco to international investors the more they regarded it as an omni-toxic liability, including financially and politically.
At that point, China stepped in with an offer to save MbS’s face, an offer that he has apparently never forgotten. The offer was that China would buy the entire 5% stake for the required US$100 million, and it would be done in a private placement, meaning no possibly embarrassing details about anything surrounding the deal would ever be made public, including to those senior Saudis who opposed MbS. Although the offer was declined as King Salman did not at that point want to alienate the U.S. any further than had already been done by launching the 2014-2016 Oil Price War with the intention of destroying or disabling the then-nascent U.S. shale oil sector, the relationship between Saudi Arabia and China blossomed from that point onwards. A little under a year before the Russian invasion of Ukraine in February 2022, Saudi Arabia was already so aligned to China that Saudi Aramco’s chief executive officer, Amin Nasser, spent several days at the annual China Development Forum hosted in Beijing, during which time he said: “Ensuring the continuing security of China’s energy needs remains our highest priority - not just for the next five years but for the next 50 and beyond.” One year later, and just a few months after the Russian invasion of Ukraine, Aramco’s senior vice president downstream, Mohammed Al Qahtani, announced the creation of a ‘one stop shop’ provided by his company in China’s Shandong. He said: “The ongoing energy crisis, for example, is a direct result of fragile international transition plans which have arbitrarily ignored energy security and affordability for all.” He added: “The world needs clear-eyed thinking on such issues. That’s why we highly admire China’s 14th Five Year Plan for prioritising energy security and stability, acknowledging its crucial role in economic development.”
At the same time as this relationship was moving up several gears, so was the relationship between Saudi Arabia and Russia. By the end of the 2014-2016 Oil Price War, as also analysed in depth in my latest book on the global oil markets, the U.S. shale oil sector had reorganised itself into an oil-producing machine that could survive on prices as low as US$35 per barrel (pb) of Brent if necessary. Saudi Arabia’s budget breakeven price then was over US$84 pb and there was no way it could compete with the U.S. Saudi Arabia desperately needed to push oil prices back up to repair its budget but was unable to do so because its disastrous Second Oil Price War (the first being the 1973/74 Oil Crisis) had critically undermined its credibility with other OPEC members and with the global oil market. At that point, Russia had stepped in to support the OPEC oil production cuts in late 2016 aimed at bringing oil prices back to levels that allowed OPEC members to begin to repair their decimated finances. This support has continued ever since and has formalised into the ‘OPEC+’ grouping.
Both Russia and China know how to leverage such relationships, as they have been doing in the Middle East ever since the U.S. withdrew from the Joint Comprehensive Plan of Action with Iran in 2018, Syria in 2019, and Afghanistan and Iraq in 2021. These combination of factors put China in the position of being able to broker the relationship normalisation deal between Saudi Arabia and Iran – the leaders of the Sunni Islam world and the Shia Islam world, respectively. Although White House national security spokesperson, John Kirby, did observe tersely at the time that the deal between Iran and Saudi Arabia “is not about China”, it absolutely was about China. What it absolutely was not about was the U.S.
By Simon Watkins for Oilprice.com
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