Russia and China Challenge Dollar Domination

THE CHINESE PETRO-YUAN IS ON THE RISE, AND MAY REPLACE THE U.S. PETRO-DOLLAR FOR INTERNATIONAL OIL TRADE

By F. William Engdahl – Dec. 21, 2017

The Russian government has recently announced it will issue nearly $1 billion equivalent in state bonds, but denominated not in US dollars as is the usual case. Rather it will be the first sale of Russian bonds in China’s yuan. While $1 billion may not sound like much when compared with the Peoples’ Bank of China total holdings of US Government debt of more than $1 trillion or to the US Federal debt today of over $20 trillion, it’s significance lies beyond the nominal amount. It’s a test run by both governments of the potential for state financing of infrastructure and other projects independent of dollar risk from such events as US Treasury financial sanctions.

Russian Debt and China Yuan

Since the August 1998 sovereign default triggered by the West, Russian state finances have been prudent to almost a fault. The size of the national government debt is the lowest of any major industrial country, a mere 10.6% of GDP for the current year. This has enabled Russia to withstand the US financial warfare sanctions imposed since 2014, and forced the country to turn elsewhere for their financial stability. That “elsewhere” is increasingly called the Peoples’ Republic of China.

Now the Russian Ministry of Finance is reportedly planning the first sale of Russian debt in the form of bonds denominated in Chinese yuan currency. The size of the first offering, a testing of the market, will be 6 billion yuan or just under $1 billion. The sale is being organized by the state-owned Russian Gazprombank, the Bank of China Ltd., and China’s largest state bank, Industrial & Commercial Bank of China. The move is being accelerated by reports that the US Treasury is examining potential consequences of extending penalties, until now concentrated on Russian oil and gas projects, to include Russian sovereign debt in its sanctions warfare. The new yuan bond will be traded on the Moscow Exchange and will aim to sell to mainland Chinese investors as well as international and Russian borrowers at attractive interest rates.

Western sanctions or threats of sanctions are forcing Russia and China to cooperate more strategically on what is becoming the seed of a genuine alternative to the dollar system. The Russian yuan debt offerings will also give a significant boost to China’s desire to build the yuan as an accepted international currency.

China Petro-Yuan

The steps to begin issuing Russian state debt in yuan are paralleled by another major development towards broader international yuan acceptance vis a vis the US dollar. On December 13, Chinese regulators completed final testing in preparation for launch of not a dollar-backed, but rather, a yuan-backed oil futures contract to be traded on the Shanghai Futures Exchange. The implications are potentially large.

China is the world’s largest oil importing country. Control of financial oil futures markets until now has been the tightly-guarded province of Wall Street banks and the New York, London and other futures exchanges they control. Emergence of Shanghai as a major yuan-based oil futures center could significantly weaken dollar domination of oil trade.

Since the 1970’s oil shock and the 400% rise in the oil price from OPEC countries, Washington has maintained a strict regime in which the world’s most valuable commodity, oil, would be traded in US dollars alone. In December 1974, the US Treasury signed a secret agreement in Riyadh with the Saudi Arabian Monetary Agency, “to establish a new relationship through the Federal Reserve Bank of New York with the US Treasury borrowing operation” to buy US government debt with surplus petrodollars.

The Saudis agreed to enforce OPEC dollar-only oil sales in return for US sales of advanced military equipment (purchased for dollars of course) and a guarantee of protection from possible Israeli attack. This was the beginning of what then-US Secretary of State Henry Kissinger called recycling the petro-dollar. To the present, only two oil export country leaders, Iraq’s Saddam Hussein and Libya’s Qaddafi, have tried to change the system and sell oil for euros or gold dinars. The US government arranged to murder both Saddam Hussein and Qaddafi, and bomb their countries into the stone age for it). Now China is challenging the petro-dollar system in a different way with the petro-yuan.

The difference between Saddam Hussein or Qaddafi is that far more influential countries, Russia and now Iran, with China’s implicit support, are cooperating to avoid the dollar out of necessity forced by US pressure. That is a far stronger challenge to the US dollar than Iraq or Libya could ever manage.

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