Give me that!!
It belongs to the Chinese now!
h/t @FedPorn
As we previously detailed, two topics we’ve deemed critically important to a thorough understanding of both global finance and the shifting geopolitical landscape are the death of the petrodollar and the idea of yuan hegemony.
In November 2014, in “How The Petrodollar Quietly Died And No One Noticed,” we said the following about the slow motion demise of the system that has served to perpetuate decades of dollar dominance:
Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company – the end of the system that according to many has framed and facilitated the US Dollar’s reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.
The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, “developed world” status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements.
Falling crude prices served to accelerate the petrodollar’s demise and in 2014, OPEC nations drained liquidity from financial markets for the first time in nearly two decades:
By Goldman’s estimates, a new oil price “equilibrium” (i.e. a sustained downturn) could result in a net petrodollar drain of $24 billion per month on the way to nearly $900 billion in total by 2018. The implications, BofAML notes, are far reaching: “…the end of the Petrodollar recycling chain is said to impact everything from Russian geopolitics, to global capital market liquidity, to safe-haven demand for Treasurys, to social tensions in developing nations, to the Fed’s exit strategy.”
Shifting to the idea of yuan hegemony, China is aggressively pushing its Silk Road Fund and Asian Infrastructure Investment Bank.
The $40 billion Silk Road Fund is backed by China’s FX reserves, the Export-Import Bank of China, and China Development Bank and seeks to increase ROIC for Chinese SOEs by investing in infrastructure projects across the developing world, while the $50 billion AIIB is funded by 57 founding member countries (the US and Japan have not joined) and will serve to upend traditionally dominant multilateral institutions which have failed to respond to the rising influence and economic clout of their EM membership. China will push for the yuan to play a prominent role in the settlement of AIIB transactions and may look to establish special reserves in both the AIIB and Silk Road fund to issue yuan-denominated loans.
Back in early November, SWIFT data showed that 15 new countries had joined a list of nations settling more than 10% of their trade deals with China in yuan. “This is a good sign for [yuan] adoption rates and internationalisation. In particular, Canada’s [yuan] usage for payments, which has increased greatly over this period, is very interesting since we have not seen strong adoption of the [yuan] from North America to date,” Astrid Thorsen, Swift’s head of business intelligence said.
Earlier that month, China and Russia indicated that going forward, more trade between the two countries would be settled in yuan. From Reuters, last November:
Russia and China intend to increase the amount of trade settled in the yuan, President Vladimir Putin said in remarks that would be welcomed by Chinese authorities who want the currency to be used more widely around the world.Spurred on by their often testy relations with the United States, Russia and China have long advocated reducing the role of the dollar in international trade.
Curtailing the dollar’s influence fits well with China’s ambitions to increase the influence of the yuan and eventually turn it into a global reserve currency. With 32 percent of its $4 trillion foreign exchange reserves invested in U.S. government debt, China wants to curb investment risks in dollar.
The quest to limit the dollar’s dominance became more urgent for Moscow this year when U.S. and European governments imposed sanctions on Russia over its support for separatist rebels in Ukraine.
“As part of our cooperation with this country (China), we intend to use national currencies in mutual transactions.The initial deals for rouble and yuan are taking place. I want to note that we are ready to expand these opportunities in (our) energy resources trade,” Putin said at the time, suggesting that going forward, Russia may look to settle sales of oil in yuan.
Sure enough, Gazprom has confirmed that since the beginning of the year, all oil sales to China have been settled in renminbi. From FT:
Russia’s third-largest oil producer, is now settling all of its crude sales to China in renminbi, in the most clear sign yet that western sanctions have driven an increase in the use of the Chinese currency by Russian companies.
Russian executives have talked up the possibility of a shift from the US dollar to renminbi as the Kremlin launched a “pivot to Asia” foreign policy partly in response to the western sanctions against Moscow over its intervention in Ukraine, but until now there has been little clarity over how much trade is being settled in the Chinese currency.
Gazprom Neft, the oil arm of state gas giant Gazprom, said on Friday that since the start of 2015 it had been selling in renminbi all of its oil for export down the East Siberia Pacific Ocean pipeline to China.
Russian companies’ crude exports were largely settled in dollars until the summer of last year, when the US and Europe imposed sanctions on the Russian energy sector over the Ukraine crisis…
Gazprom Neft responded more rapidly than most, with Alexander Dyukov, chief executive, announcing in April last year that the company had secured agreement from 95 per cent of its customers to settle transactions in euros rather than dollars, should the need to do so arise.
Mr Dyukov later said the company had started selling oil for export in roubles and renminbi, but he did not specify whether the sales were significant in scale.
According to Gazprom Neft’s first-quarter results issued last month, the East Siberian Pacific Ocean pipeline accounted for 37.2 per cent of the company’s crude oil exports of 1.6m tonnes in the three months to March 31.
With that, the “PetroYuan” has officially been born and while FT notes that “other Russian energy groups have been more reluctant to drop the dollar for settlement of oil sales,” the fact that Russian producers are now openly considering a shift at the same time that officials in the US and Europe are openly discussing stepped up economic sanctions suggests renminbi settlements may become more commonplace going forward.
To understand why and to what extent this is significant in the current environment, consider the following from WSJ:
Officials of the Organization of the Petroleum Exporting Countries, which declined to cut oil production last year, reasoned that maintaining high production levels would protect market share in crucial importing nations.;
But Chinese customs data released Friday show that China’s crude imports from some big OPEC nations have plummeted, while imports from Russia surged 36% in 2014. Meanwhile, imports from Saudi Arabia fell 8% and those from Venezuela dropped 11%.
To summarize: Western economic sanctions on Russia have pushed domestic oil producers to settle crude exports to China in yuan just as Russian oil is rising as a percentage of total Chinese crude imports. Meanwhile, the collapse in crude prices led to the first net outflow of petrodollars from financial markets in 18 years, and if Goldman’s projections prove correct, the net supply of petrodollars could fall by nearly $900 billion over the next three years. All of this comes as China is making a concerted push to settle loans from its newly-created infrastructure funds in renminbi.
Putting it all together, the PetroYuan represents the intersection of a dying petrodollar and an ascendant renminbi.
Davy on Thu, 21st Jan 2016 7:47 pm
How about that petroYuan in action!
“Venezuela Hits “Point of No Return” – 2016 Bankruptcy Is “Difficult To Avoid” According To Barclays”
http://www.zerohedge.com/news/2016-01-21/venezuela-hits-point-no-return-2016-bankruptcy-difficult-avoid-according-barclays
“As Barclays’ Alejandro Arreaza notes, Venezuela has officially reached the “point of no return” and writes that “the economic emergency decree and any measures that the government could take at this point may be too late. After two years of inaction and the recent decline in oil prices, a credit event in 2016 is becoming increasingly difficult to avoid, in our view.”
“Considering current oil prices, any reasonable additional import cuts may be insufficient to cover the financing gap, in our view. At the oil price that the futures curve is pricing in (USD/b32), the government would need to use more than 90% of oil exports to make debt payments if we include market, bilateral, commercial, and Chinese Fund obligations.”
“Inflation had reached 141.5% by the end of Q3 2015, but is likely to have continued to accelerate in Q4, possibly exceeding 200% as we expected, showing the effects of monetization of the fiscal deficit.”
makati1 on Thu, 21st Jan 2016 8:35 pm
As the USD melts down, the rest of the world will send it all back to the states to crush the dollar system of repression and bleed the Empire dry.
Rick Bronson on Thu, 21st Jan 2016 9:15 pm
China’s dependence on Saudi Arabia is only temporary.
They know that Saudi’s will raise the price of Oil when they get a chance.
So they are increasing the use of Electric vehicles and also investing in Hydro, Nuclear, Renewable energy to reduce the fossil fuels especially Oil.
Meanwhile OPEC has shifted their benchmark from Brent to Argus which is a medium crude. They may even switch partly to Yuan to appease the Chinese.
makati1 on Thu, 21st Jan 2016 9:26 pm
Rick, even “partly” will end the petrodollar and the US economy. The Us cannot allow even a scratch on the petrodollar or, like glass, it will shatter. That is what is driving them crazy as the nuclear powers are out to knock the petrodollar from it’s power perch and wound it deeply.
But, the Federal Reserve is also destroying it from within to allow the world currency to emerge. Which will happen first? Does it matter which way the dollar falls as long as it falls? I don’t think so. The sooner the better.
Boat on Thu, 21st Jan 2016 10:33 pm
Rick
Oil is traded on the world market. China would buy from anybody if the price was right.
Boat on Thu, 21st Jan 2016 10:36 pm
mak,
I don’t think with recent events that the US has anything to fear from China or Russia. Their economies have been a little rocky to say the least eh?
GregT on Thu, 21st Jan 2016 11:14 pm
“Their economies have been a little rocky to say the least eh?”
Their economies have been doing far better than yours Boat.
makati1 on Fri, 22nd Jan 2016 1:06 am
Boat doesn’t live in the real world, GregT. I’m not sure which one, but he seems to share it with a few others here. Maybe it is called Uranus? You know, the one where a lot of shit is pulled out of.
makati1 on Fri, 22nd Jan 2016 1:41 am
Boat: Today’s news in the land of the free and exceptional…
“Balance of Asia-Pacific military power shifting against U.S.: report”
“Teacher ‘Sickout’ Shuts Down Almost All Detroit Schools”
“US Oil Sector Bankruptcies To Rise In 2016 As ‘Panic And Fear’ Grip Industry”
“Except For Permian, Texan Oil Production Falling Fast”
“A Glimpse Of Things To Come: Bankrupt Shale Producers “Can’t Give Their Assets Away”
“Nationwide food shortage hitting local shoppers in the wallet”
“Brain-tangling algae lurks in our waters”
“What Is Zika Virus? Outbreak Linked To Brain Defects Spreads In Brazil, United States”
“Atlantic, Caribbean storms more destructive as temperatures rise: study”
“Flint Water Crisis Isn’t The First — and Won’t Be the Last: Activists”
“The US Military Wants a Chip to Translate Your Brain Activity Into Binary Code”
“DEA So Forfeiture-Focused It Hired A TSA Screener To Check Travelers And Baggage For ‘Guilty’ Cash”
“The Story You Aren’t Being Told About Iran Capturing Two American Vessels”
“Ron Paul: U.S. polls are rigged, strictly for entertainment”
“US Army Struggling To Keep Up With Needed Flying Hours”
“Another Reason Why the Middle Class and the Velocity of Money Are in Terminal Decline”
“Electric vehicle sales fall far short of Obama goal”
“Tesla In Wonderland—-What Happens When A Hobby Farm Parades As A Car Company”
“‘More Realistic’ Modelling Of TPP’s Effects Predicts 450,000 US Jobs Lost, Contraction Of Economy”
“More Recessionary Signals——Inventory Keeps Piling Up At All Levels”
“Crashing oil prices hit former Texas boomtowns”
“Chart Of The Day: Budget Red Ink Rising Again, Trillion $ Deficits Just Around The Corner”
“Union Pacific 4Q profit falls 22 pct as freight volume slows”
“”B” Word Hits Chicago: Illinois Governor Proposes Bankruptcy for Chicago Public School System”
” Aging Infrastructure, Fracking Eyed in Massive Porter Ranch, California Methane Leak”
“Big banks brace for oil loans to implode”
“N.J. Transit Trains Break Down at Rate Four Times U.S. Average”
“More National Guard Troops Move into Flint as Water Crisis Widens”
“Navy SEALs Carry Out Domestic War Games, U.S. Citizens Normalized As ‘The Enemy'”
“Bomb threats target over 30 schools in U.S. Northeast, Midwest”
http://ricefarmer.blogspot.fr/
Happy reading! LMAO
twocats on Fri, 22nd Jan 2016 2:01 am
one of the best takedowns of a techno-dreamer I’ve seen in a while, this writer, Kreps, is sharp!
http://www.resilience.org/stories/2016-01-21/can-we-afford-the-energy-demands-of-the-fourth-industrial-revolution-don-t-ask
Davy on Fri, 22nd Jan 2016 4:01 am
What currency would you rather have and trade in? I love how the Bricophiles still cling to their dream of the death of the dollar and the rise of the Yuan along with a glorious Putin leadership era. Both have been discredited at the levels of a year ago when the hype was, well, Hype. I told you so boys.
“Hedge Fund That Called Subprime Crisis Urges 50% Yuan Drop”
http://www.bloomberg.com/news/articles/2016-01-19/hedge-fund-that-called-subprime-crisis-says-yuan-should-fall-50-
“Russia’s financial crisis may bury Putin’s Eurasian dream”
http://www.reuters.com/article/us-russia-crisis-cis-idUSKBN0KN16720150114
The dollar is dying we know this. The currency crisis today is a zero sum game with everyone losing eventually and some marginally more than others. This is the economic end game playing out but please your agenda stinks if you are putting hope in Russia and China for economic leadership. Both countries are turds.
JuanP on Fri, 22nd Jan 2016 9:27 am
There goes Davy again! His irrational rants of USA! USA! And the US dollar is great! BRICS suck and the USA is the best country in the world!
Another classic example of a delusional American exceptionalist living in denial of how his country is turning into a toilet and his money into toilet paper. Dream on, Davy, you are nothing more than a pathetic American fool. Don’t forget to wash your hands!
GregT on Fri, 22nd Jan 2016 9:39 am
“What currency would you rather have and trade in?”
The end of the days of a one world reserve currency are drawing nearer. There is one country in particular that will suffer the most when this occurs. There will no longer be “economic leadership” by any one nation. Industrialism, globalism, and the failed ideology of the modern school of economics are at the root of our problems. They are not the solutions. As energy available per capita continues to decline, individual societies will need to become smaller and more self sufficient, standards of living will be greatly reduced, and our ways of life will change dramatically. The drive, shop, consume lifestyle is going to come to an end. Westernized countries that have relied the most on this lifestyle for the last five or more decades, and who take it for granted daily, are in for a entire world of hurt. The parts of the world that never lived this lifestyle to begin with, not so much. Political systems will crumble, and entire nations will split up and fall apart. Capitalism has nearly run it’s course, and democracy is unlikely to survive in the aftermath.
This is not going to be an issue of national pride, it will become a matter of local survival. Whether one believes that other countries are “turds” or not, has no bearing what-so-ever on our collective, global, human predicament.
This isn’t a competition.
geopressure on Fri, 22nd Jan 2016 10:46 am
It would not be a good thing if the Dollar fell from grace, but it will sooner or later… Whenever it does come down though, all hell will break loose her in the US…
The U.S. has been a HORRIBLE Steward of the power that they have derived from the Petrodollar & the ‘exorbitant privilege’ of the dollar being the world reserve currency…
We have spent decades raping 3rd world counties of their resources in order maintain a excess supply of crude oil & starve Russia of all prosperity… The U.S.’s goal has been for Americans to thrive while practically all other countries are suppressed to living in 3rd world conditions so that we can dominate them…
The United States IS an EVIL EMPIRE… If this was a Star Wars Movie, the U.S. would be the Empire (but everyone knows that we are in the Matrix, not Star Wars)… But seriously, the U.S. does some really, really shitty stuff to everyone else…
makati1 on Fri, 22nd Jan 2016 6:20 pm
GregT, well said. Well said.
makati1 on Fri, 22nd Jan 2016 6:23 pm
geopressure, it would be good thing if the dollar fell from grace, and soon. Yes, it will change the way that Westerners live, but only to bring them down to how the rest of the world has been living for decades. Those who can adapt will survive. Those that cannot, will not. So be it.