China and Russia move to break the dollar’s dominance of oil markets

The long-awaited prospect of an end to US dollar hegemony in global oil and gas markets took another step towards realization last week with the announcement that Russian and Chinese oil giants Gazprom and China National Petroleum Corporation (CNPC) have decided to change payments for gas supplies into rubles (RUB) and renminbi (RMB) instead of dollars. In the first phase of the new payment system, this will apply to Russian gas supplies to China via the eastern “Power of Siberia” pipeline route which amounts to a minimum of 38 billion cubic meters of gas per year (bcm / y ). Subsequently, a further expansion of the new payment scheme will be launched. It is worth noting at this point that although the ongoing international sanctions against Russia for the invasion of Ukraine in February provided the final impetus for this crucial change in payment methodology, it has been a key strategy of China since at least 2010. to challenge the position of the US dollar as that of the world in fact reserve currency.

China has long regarded the position of its renminbi currency in the global ranking of currencies as a reflection of its geopolitical and economic importance on the world stage. As analyzed in depth in my latest book on global oil markets, an early indication of China’s ambition for RMB was evident at the G20 summit in London in April 2010, when Zhou Xiaochuan, then governor of the People’s Bank of China ( PBOC), disproved the idea that the Chinese wanted a new global reserve currency to replace the US dollar at some point. He added that the inclusion of RMB in the IMF’s mix of reserve assets for special drawing rights (SDRs) would be a key stepping stone in this context. At that time, at least 75 percent of the $ 4 trillion daily turnover in global FX markets, as determined by the Bank for International Settlements (BIS), was represented by the “big four” international currencies: the US dollar (USD), the Eurozone euro (EUR), the British pound (GBP) and the Japanese yen (JPY). In addition to dominating the daily turnover of the FX markets, currencies in SDRs also dominate the payment, reserve and investment currency functions in the global economy. The huge media fanfare in China followed the inclusion of RMB into the SDR mix in October 2016, when it was given a weighting of 10.9% (the USD had a share of 41.9%, 37 , 4% of EUR, 11.3% of GBP and 9.4% of JPY). As of 2022, RMB’s share of the SDR mix has risen to 12.28%, which China still considers not really suitable for its status as a growing superpower in the world.

China has also long been keenly aware that, being the world’s largest annual gross crude oil importer since 2017 (and the world’s largest net importer of total oil and other liquid fuels in 2013), it is subject to the whims of US foreign policy tangentially through the US dollar oil price mechanism. This view of the US dollar as a weapon has been heavily reinforced by the invasion of Ukraine by Russia and the resulting US-led sanctions, the most severe of which, like the sanctions against Iran since 2018, involve exclusion. from the use of the US dollar. Former Bank of China Executive Vice President Zhang Yanling said in an April speech that the latest sanctions against Russia “would cause the United States to lose credibility and undermine the [U.S.] long-term dollar hegemony. He further suggested that China should help the world “get rid of dollar hegemony sooner rather than later”.

Russia itself has long held the same view on the benefits to her of removing US dollar hegemony in global hydrocarbon prices, but, while China was unwilling to openly challenge the United States during the height of its trade war under the highly unpredictable former US President Donald Trump, it alone could do little. A sign of Russia’s intention, however, came soon after the United States re-imposed sanctions in 2018 on its key Middle East partner Iran, when Russian Novatek chief executive Leonid Mikhelson said. in September of that year that Russia had discussed shifting away from US dollar-centric trade with its major trading partners like India and China, and that Arab countries were thinking about it too. “If they [the U.S.] create difficulties for our Russian banks, so all we have to do is replace the dollars, “he added. Around the same time, China launched its now hugely successful Shanghai Futures Exchange with yuan-denominated oil contracts. (the trading unit of the renminbi currency) This strategy was also initially tested on a large scale in 2014, when Gazpromneft tried to trade cargoes of crude oil in Chinese yuan and rubles with China and Europe.

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This idea has resurfaced again following the latest international sanctions imposed on Russia following the invasion of Ukraine. Almost as soon as they were introduced, Russian President Vladimir Putin signed a decree requiring buyers of Russian gas in the European Union (EU) to pay in rubles via a new currency conversion mechanism or risk suspension of supplies. This threat has almost succeeded in exploiting the existing fracture lines running through the US-led NATO alliance, as the EU’s major consumers of Russian gas were quick to figure out how to appease Putin’s ruble payment demands, without openly infringe any sanction. Since then, Russia has simply been playing with the EU about ongoing gas supplies, last week with its statement that it canceled the resumption of on / off supplies from the Nord Stream 1 pipeline – one of the main supply routes. to Europe – after “discovery of a failure during maintenance.” The scale and scale of this implicit threat was underlined once again last week when Putin said Russia could cut off all energy supplies to the EU if price limits were imposed on Russian oil and gas exports.

The further expansion of other currencies – realistically only the RMB – to subvert the dominance over the US dollar price of oil and other hydrocarbons also depends on the use of the currency in countries other than those already subject to US-led sanctions. Fortunately, for China, another Middle Eastern world leader (to be added to Iran, which already uses RMB and RUB trade) – Saudi Arabia – has shown much willingness to expand its RMB-dominated business with China. , including as payment for oil supplies. Already in August 2017, as also analyzed in depth in my latest book on global oil markets, the then Saudi Deputy Minister of Economy and Planning, Mohammed al-Tuwaijri, told a Saudi-Chinese conference in Jeddah that: ” We will be very willing to consider financing in renminbi and other Chinese products ”. He added: “China is by far one of the main markets for diversifying funding …[and] we will also access other technical markets in terms of unique financing opportunities, private placements, panda bonds and others ”.

Given that the vast majority of Saudi government loans (including large bond and syndicated loans) in previous years were denominated in US dollars, a switch from USD funding would allow Saudi Arabia more flexibility in its overall financial structure, too. if after an initial dislocation connected to his in fact peg of the currency to the US currency. In recent months there has certainly been a notable further shift of Saudi Arabia to China, as exclusively cataloged by OilPrice.com. The most recent was the signing in August of a multi-pronged memorandum of understanding (MoU) between the Saudi Arabian Oil Company – formerly the Arabian American Oil Company – (Aramco) and the China Petroleum & Chemical Corporation (Sinopec). As Sinopec president Yu Baocai himself said: “The signing of the MoU introduces a new chapter of our partnership in the Kingdom … The two companies will join together to renew vitality and mark new progress of the Belt and Road Initiative. [BRI] And [Saudi Arabia’s] Vision 2030. ” The scope and scope of the MoU are enormous and cover broad and deep cooperation in petrochemical refining and integration, engineering, procurement and construction, oilfield services, upstream and downstream technologies, carbon capture and processes hydrogen. Crucial to China’s long-term plans in Saudi Arabia, it also covers opportunities for the construction of a massive manufacturing hub in King Salman Energy Park which will involve the ongoing field presence on Saudi Arabian soil of a significant number of Chinese personnel: not only those directly related to oil, gas, petrochemicals and other hydrocarbon activities, but also a small army of security personnel to “ensure the safety of Chinese investments.”

By Simon Watkins for Oilparmi

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