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Page added on June 10, 2015
Gazprom Now Settling All Crude Sales To China In Renminbi
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.
Last November, 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.
28 Comments on "Gazprom Now Settling All Crude Sales To China In Renminbi"
GregT on Wed, 10th Jun 2015 7:26 am
China and Russia have already made it very clear that they are willing to work with the DC oligarchs in framing a new ‘multipolar’ world order. DC wants a NWO with USD global hegemony. They want total and complete control. They aren’t going to give up their plan without a fight. Expect war.
Davy on Wed, 10th Jun 2015 10:20 am
Not a game changer and nothing more than a niche financial network that is still unproven. If this type of arrangement had been allowed more time in a different economic environment it may have been a game changer situation. The dollar will be diminished but not eliminated especially from countries just as a messed up politically and economically as the US IMA with corrupt and power mongering leadership.
Perk Earl on Wed, 10th Jun 2015 12:19 pm
Still Davy, it seems the sands of time are changing. A wedge in the doorway can lead to it opening much wider.
HARM on Wed, 10th Jun 2015 1:33 pm
First the Asian Infrastructure Bank (bypassing the IMF, World Bank and other post-WWII US dominated institutions), and now this. Add to that America’s shredded reputation and declining military/political influence, largely thanks to Iraq. Looks like the “new American Century” is already over before it began.
Davy on Wed, 10th Jun 2015 1:49 pm
I agree Perk I just don’t think there is the time for it to happen. I see an economic collapse before the Chinese bank gains the momentum needed to be a game changer.
Outcast_Searcher on Wed, 10th Jun 2015 2:10 pm
In the real world (where “economic collapse doesn’t occur weekly or monthly), this seems to me to be lots of hand waving over little of substance.
We currently have a robust currency futures market where roughly $5 TRILLION of currency bets/hedges/exchanges happens on average, 6 days a week.
If country X needs to buy oil, but wants to hold their own currency or the currency of any major currency ex-US, all they have to do is make a currency futures trade a second or so before they buy their crude oil in US$, and the ENTIRE need for the “petrodollar” disappears.
Not that I expect the peak oil doomer community to acknowledge this — dollar doom is a frequent topic of doomer discussion, after all.
The petro-dollar was likely a “real thing” in the 70’s and even the 80’s, before electronic trading became common. Today, not by a long shot.
Mike989 on Wed, 10th Jun 2015 6:12 pm
Doesn’t matter, My next car will be an EV.
Ted Wilson on Wed, 10th Jun 2015 6:55 pm
China’s growth is of big benefit to Russia as they can export Steel, Aluminium, Platinum, Palladium and lot of other ores, metals and also in return attract Chinese tourists.
Apneaman on Wed, 10th Jun 2015 6:57 pm
“We currently have a robust currency futures market where roughly $5 TRILLION of currency bets/hedges/exchanges happens on average, 6 days a week.”
As opposed to a real economy.
HARM on Wed, 10th Jun 2015 7:45 pm
@Apneaman,
Exactly. I don’t think his example illustrated what Outcast_Searcher *thought* it was illustrating.
Davy on Wed, 10th Jun 2015 8:02 pm
You want to trust a development bank whose country is run like this?
http://www.bloomberg.com/news/articles/2015-06-11/could-wenzhou-be-china-s-detroit-
Apneaman on Wed, 10th Jun 2015 8:24 pm
I guess your partial to American banks Davy seeing how it’s your hard earned tax dollars they are spending, along with GM and who knows what other tit sucking corporations. Same thing in Canada. I know of no Chinese banks that me and my family and friends have been forced to bail out…..at gun point if you think about it.
HARM on Wed, 10th Jun 2015 9:46 pm
As Kunstler likes to say, America no longer has a “real” functioning economy, we have a culture of pervasive racketeering, aka Crony Capitalism. A real economy would require things like “creative destruction” (large bad banks and businesses being allowed to fail) and rule of law (powerful rich men being allowed to go to jail for pervasive racketeering, fraud, front-running and interest rate manipulation). Oh, and a financial sector that’s a lot smaller than one-third of the economic output for the ENTIRE NATION, and a manufacturing base that’s a whole lot larger –as in 1950s larger. Not to mention a return to employee/management compensation ratios we haven’t seen in half a century.
He laid it out really well back in January:
http://kunstler.com/forecast/forecast-2015/
Makati1 on Wed, 10th Jun 2015 10:04 pm
Apneaman, some are Chino-phobic as well as Russo-phobic and want them to fail before the US. Not going to happen. The US plans 90 days ahead at most. Russia and China plan 5+ YEARS ahead and more. Nor are the Chinese stupid. They are obviously learning from US mistakes. Maybe they don’t care if the economy crashes, if they are ready to pick up the pieces when it does.
After all they have over a trillion USDs that are about worthless. They are spending them as fast as possible without bringing down the whole house of cards just yet. They know a crash is coming and they may actually precipitate it when they are ready. When the dust settles, they will have new built infrastructure, even down to new cities, to build on. Whereas, the US has crumbling infrastructure and cities that will never be rebuilt.
Some world views are way too narrow on here.
dissident on Wed, 10th Jun 2015 10:22 pm
The size of the financial sector is a fiction designed to inflate the size of the GDP. This “industry” does not employ many people and the “product” it produces is very hard to actually measure. Are derivatives a source of GDP growth? How are they like goods and real services (e.g. sales).
Apneaman on Wed, 10th Jun 2015 11:46 pm
Mak I hate em all. China has probably built double the N American infrastructure in only 35 years, but they have the concentrated pollution to go with it. Whereas ours was somewhat dispersed over a hundred years or more. Were still toxic – look at the health stats – but they are dropping like flies over there. Let’s not forget that a fair bit of that urban build out is sitting empty and unused – total waste. We might have spent even more money maintaining the infrastructure then building it in the first place, so therein lies the trick for China. But I doubt we’ll ever find out as it is global overshoot. If one goes down hard we all go down hard. Then there is that little CO2 problem that humanity has never dealt with before. 15 extinction periods in earth’s history all started with massive increases of CO2 triggered by volcanism over tens of thousands of years. That we dug it up and burned it in 275 years makes no difference as far as the physics are concerned. Every year in my country fire season starts earlier and there are more fires and they are more intense. One of many positive self reinforcing feedback loops no one can stop. Soon the earth will greatly surpass the apes in CO2 and methane emissions.
Mrwonderfully on Thu, 11th Jun 2015 12:55 am
Smart move flood the world with RMB! By doing this China now has made the RMB a world currency.Well I hope China know the problem that come as a world currency replacing the US Dollar
Makati1 on Thu, 11th Jun 2015 1:45 am
Apneamna, the US loses:
umber of deaths for leading causes of death
Heart disease: 611,105
Cancer: 584,881
Chronic lower respiratory diseases: 149,205
Accidents (unintentional injuries): 130,557
Stroke (cerebrovascular diseases): 128,978
Alzheimer’s disease: 84,767
Diabetes: 75,578
Influenza and Pneumonia: 56,979
Nephritis, nephrotic syndrome, and nephrosis: 47,112
Intentional self-harm (suicide): 41,149
These are ANNUAL numbers… now, multiply them by 3.5 (population difference) and see how ‘bad’ Chinese numbers really are.
For instance: Coronary deaths = US ~600,000 X 3.5 = 2,100,000 in US vs China’s 1,040,000. Half those in the US, per capita.
Or cancer deaths = US 580,000 X 3.5 = ~2,030,000 vs China’s ~2,500,000. Not so bad really, if you take in the total number in the list above.
Yes, they have pollution problems. The same ones we had 50 years ago. We traded our middle class life style for cleaner air and water, when we shipped all of our pollution producing factories, and the related jobs, to Asia. Fair trade?
Perspective is important as you will not get it in US MSM sources. You get only exaggeration and lies about the newest ‘bad guys’, China and Russia.
Makati1 on Thu, 11th Jun 2015 1:55 am
Apneaman, the build out is not totally wasted as it will be still there in 5 or 10 years, when they need it. And if they don’t need it, is it any bigger waste than the $400,000,000,000.+ that has been wasted so far on the F35 that cannot even fly and shoot? Or the trillions wasted in Iraq/Afghanistan/Libya/Egypt/Syria/Ukraine/etc.?
If you had $4,000,000,000,000.+ to spend, what would you spend it on? That is the reserves China has to burn, while it still has some value. Not to mention the interest income on those bonds that needs to be spent. They are buying up everything of value that they can use in the future. If there is no future, they will be no worse off than the US or any other country.
Makati1 on Thu, 11th Jun 2015 2:05 am
Apneaman, we just had the bad luck to be born at the end of a cycle. Kinda like the dinosaurs that witnessed the comet hitting the earth 65 million years ago. The momentum of it all makes it impossible to stop at this point. The edge of the comet is approaching the atmosphere and the glow is beginning. All I can say is, make the best of it.
There is still a chance we will nuclear self destruct first. Maybe that would be better, over and done. No gradual decline to extinction. Just a morning of hundreds of mushroom clouds and bright flashes. Only time will tell.
Apneaman on Thu, 11th Jun 2015 2:36 am
Mak, they are all following the same blue print – growth growth growth – if there is a “winner” it will be a very short lived victory.
This is fairly new info as far as science is concerned, but the evidence is showing that it was not the comet itself that killed the dinosaurs as is commonly portrayed in documentaries with really cool graphics of T Rex instantaneously frying to death (it took tens of thousands of years for all of them to die off), but climate change due to major releases of greenhouse gasses from the Deccan traps (volcanism) in India. Same as the other 14 extinction events. It is thought that the comet triggered the Deccan traps to start their eruption.
Dinosaur-killing asteroid caused India’s Deccan Traps?
http://earthsky.org/earth/dinosaur-killing-asteroid-caused-indias-deccan-traps
So what did-in the dinosaurs? A murder mystery…
Scientists have assembled a slew of new forensic evidence – from high-resolution dates to microscopic fossils – to prosecute the dino-killer. Their indictment has worrying implications for us.
Everyone knows that the dinosaurs were wiped out – along with about 70% of all species – by a massive asteroid slamming into Mexico, right? Well, not so fast. Like a good murder-mystery, a steady drip of evidence and some major new revelations have implicated another suspect – were they in it together or is one innocent?
http://www.skepticalscience.com/So-what-did-in-the-dinosaurs.html
Davy on Thu, 11th Jun 2015 6:03 am
NO, Ape Man, I am not partial to US banks. Like US attorneys you like em when you need em otherwise I despise banks and attorneys. I especially despise the paperwork they generate to disguise the racketeering.
My mention of the Chinese bank above is only to say they are no better. The Chinese are master of economic deception and trickery. The Chinese are not a solution to the global banking crimes just more of the same.
Davy on Thu, 11th Jun 2015 6:06 am
Harm said “As Kunstler likes to say, America no longer has a “real” functioning economy, we have a culture of pervasive racketeering, aka Crony Capitalism.” Come on Harm, this is global and I challenge you to show me any other major financial power that is not part of the same racket. Show me any other major power that is not technically insolvent. I will kiss your feet if you do.
Davy on Thu, 11th Jun 2015 6:09 am
Mak, try to explain this away as propaganda:http://www.zerohedge.com/news/2015-06-09/sick-man-asia-chinas-looming-health-disaster
Here are some estimates of China’s public health problems: (source links below)
— Half the population is estimated to be prediabetic (suffering from metabolic syndrome/diabesity).
— 12% of the populace now has diabetes, roughly 115 million people.
— An estimated 70% of China’s diabetics are undiagnosed; only 25% are receiving any treatment and of the 25%, the disease is only being controlled in 40% of those getting treatment.
— Noncommunicable diseases–cardiovascular disease, chronic respiratory diseases and cancer, account for 85% of total deaths in China today — much higher than the global average of 60%.
— Mental disorders rose by more than 50 percent between 2003 and 2008. An estimated 17.5% of the population (225 million) suffers from some form of mental problem, one of the highest rates in the world.
— More than 300 million people in China — roughly equivalent to the entire U.S. population of 317 million — smoke tobacco.
— 200 million workers are directly exposed to occupational hazards.
— Informal estimates suggest a large percentage of the urban population suffers from lung/pulmonary diseases. Over the last 30 years, deaths ascribed to lung cancer have risen by a factor of five in China.
— 160 million Chinese adults have hypertension (high blood pressure).
— In 2006, 80 percent of China’s health budget was spent on just 8.5 million government officials.
— The rate of health-care coverage is high, but the level of benefits is still very low. 836 million rural residents who were officially covered by the government’s plan still had to pay the lion’s share of their medical bills. The government coverage paid a mere 8.6% of rural residents’ total healthcare expenditures.
Davy on Thu, 11th Jun 2015 6:17 am
Mak, while you are at it if the health issues in China are not enough munch on this: http://www.zerohedge.com/news/2015-04-22/china-has-massive-debt-problem-and-why-it-about-get-much-massiver
China has a $28 trillion problem. That’s the country’s total government, corporate and household debt load as of mid-2014, according to McKinsey & Co. It’s equal to 282 percent of the country’s total annual economic output.
Now hold that thought, and consider this: China’s also trying to prop up a $10.4 trillion economy that’s decelerating and probably will continue to do so through 2016, or so says the International Monetary Fund
Come on Mak, China and Asia are no alternative to the US. They are just a continuation of a failed system on a collision course with reality. Asia has 1st a 4BIL problem with population, 2nd is has a ecosystem in decline and failure, and 3rd it has huge pollution problems. Asia is toast just like the west and all your cheerleading just makes you look like a fool.
Makati1 on Thu, 11th Jun 2015 7:27 am
Davy, and what is the debt load of the US? Multiples of China’s. So what? Does it matter who pushes the first domino? Nope, but it appears that the US will be the one to do so as it is already collapsing…See Detroit, etc. After all, the US is in debt to the tune of 70 trillion plus at last count. Or 200+ trillion by other counts. No debt is ever going to get paid so who cares? I don’t.
Makati1 on Thu, 11th Jun 2015 7:29 am
Funny that when you default on your mortgage, the house is still there even if you don’t own it anymore. When the monetary system of China crashes, they will still have all of the tangible assets in their possession. New infrastructure, cities, etc. Not to mention pipelines to Russia’s resources.
Davy on Thu, 11th Jun 2015 8:34 am
Damn, Mak, you admitted China may crash that is a start in the process of the end of denial you have had ever since I joined this board.
The US is awash in debt. Do you think I don’t believe or understand that? The whole global system is in disequilibrium and set to crash any time but likely in no more than a few years.
Mak, what good is all that infrastructure in China after it crashes you mention in your above comment? It ain’t because it was built for an oil/transport culture. In the process the Chinese destroyed their land and sustainability and created mega cities. Mega cities are human death traps. China is hell bent on skyscraper construction. Tell me Mak, how is that good infrastructure?
We used to see crowds of Chinese in much smaller cities riding bikes in the early 80’s before their economic reforms. Now we see the worst traffic jams in the world there. How is that good Mak? The US is a mess no doubt but Asia is right there with the US.