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Page added on June 26, 2014
Gazprom Ready To Drop Dollar, Settle China Contracts In Yuan Or Rubles
A little over a month ago, when Russia announced the much anticipated “Holy Grail” energy deal with China, some were disappointed that despite this symbolic agreement meant to break the petrodollar’s stranglehold on the rest of the world, neither Russia nor China announced payment terms to be in anything but dollars. In doing so they admitted that while both nations are eager to move away from a US Dollar reserve currency, neither is yet able to provide an alternative. This changed rather dramatically overnight when in a little noticed statement, Gazprom’s CFO Andrey Kruglov uttered the magic words (via Bloomberg):
- GAZPROM READY TO SETTLE CHINA CONTRACTS IN YUAN OR RUBLES: CFO
In other words just as the US may or may not be preparing to export crude – a step which would weaken the dollar’s reserve status as traditional US oil trading partners will need to find other import customers who pay in non-USD currencies – the world’s two other superpowers are preparing to respond. And once the bilateral trade in Rubles or Renminbi is established, the rest of the energy world will piggyback.
But wait, there’s more. Because only now does Gazprom appear to be unveiling all those “tangents” that were expected to hit the tape in May. Among Kruglov’s other revelations were that Gazprom is in talks on a Hong Kong listing and is weighing the issuance of Yuan bonds. Gazprom is also considering selling bonds in Singapore dollars, the CFO said at briefing in Moscow. Wait, you mean that by alienating and embargoing Russia from western (USD, EUR-denominated) funding markets, it has pushed the country to turn to its pivoting partner, China and thus further cementing the framework for the next Eurasian strategic alliance?
Unpossible
But wait, there’s still more, because it is not just Gazprom. As the PBOC announced overnight, PBOC Assistant Governor Jin Qi and Russian central bank Deputy Chairman Dmitry Skobelkin led a meeting held yesterday and today in Shanghai. The meeting discussed cooperating on project and trade financing using local currencies. The meeting discussed cooperation in bank card, insurance and financial supervision sectors.
In other words, central bankers of China and Russia discussed how to replace the dollar with Rubles and Yuan. From the PBOC:
In retrospect it will be very fitting that the crowning legacy of Obama’s disastrous reign, both domestically and certainly internationally, will be to force the world’s key ascendent superpowers (we certainly don’t envision broke, insolvent Europe among them) to drop the Petrodollar and end the reserve status of the US currency.
20 Comments on "Gazprom Ready To Drop Dollar, Settle China Contracts In Yuan Or Rubles"
bobinget on Thu, 26th Jun 2014 11:05 am
Good luck to that Zero.
Every basket of currencies has to be valued against something; Gold a hoarders delight, not suitable for large transactions in oil markets. Because, like oil, gold is unevenly distributed, way too volatile.
The world could value a basket against oil except there are too many grades.
How bout USD?
That’s it! Value oil & gas shipments against the USD.
Why didn’t I think of that?
penury on Thu, 26th Jun 2014 11:58 am
I do not know if you are sarcastic or serious. But I might ask a question that has puzzled me for a while. What is a dollar (FRN) worth? Define worth. Well basically what I can get for my FRN is another one just like it. In other words the value of the currency is not set by the issuer but rather by the entity receiving it. If people perceive that the value of the fiat has decreased they will no longer accept it. This may be what is happening to the U.S. FRNs.
rockman on Thu, 26th Jun 2014 2:39 pm
I’ve asked this question before: if China gives Russia Yuan for NG instead of exchanging those Yuan for $’s and sending them to Russia exactly where is the big negative impact for the US? I’m not saying it would cause some wiggles in the system in the long but where is the EOTWAWKI? Or if the Chinese pay the Russians with a portion of their holdings of US $’s they have in their $3 trillion pile of foreign currency? Again, where is the huge seismic shift some anticipate?
As I’ve said before macroeconomics isn’t my thing. But if there really is a huge negative impact of the switch from the $ it should easy to describe. Just saying it would be really bad for the US won’t cut it.
Davey on Thu, 26th Jun 2014 3:52 pm
Rock, the whole dollar demise story is hype. The dollar is in natural decline but tell me another currency that isn’t. There is no substitute for the dollar now or in a few years. The dollar will be and has been reduced in its importance in the global economy but it will be around until globalism is over. It is more apparent everyday the world is turning confrontational economically. This will definitely preclude the necessary agreements to form a replacement to the dollar and that is if the US cooperates. The complexities of changing an already complex system will have far reaching consequences and unintended consequences. What China and Russia are doing makes good economic sense. Where economic these bilateral deals will make sense. It is a big jump to go from a few billion to a few trillion.
Keith_McClary on Thu, 26th Jun 2014 3:59 pm
rockman- Me too. If prices are pegged to the oil price, it shouldn’t make much difference what currency is used to make the payments. In effect, you could say that oil is the currency.
J-Gav on Thu, 26th Jun 2014 4:21 pm
Agreed Rockman and Davey (to a certain extent). One fact is, the dollar is on the way out because confidence in it is gone (for good reasons). Another fact is that, for the time being, there ain’t nothin’ else out there ready to replace it on a worldwide scale.
I’m sure there are plenty of feverish secret meeetings going on to try and work this out, involving baskets of currencies, SDRs, etc but we’re not privy to that are we?
Just to throw an idea out into the blue, what if nothing replaced it? I’ll be more specific and say ‘as a global currency.’ Personally, I think globalization has already failed and central banks around the planet are scrambling to keep it on life support until some genius figures out a next step. Seen the Baltic Dry statistics lately?
Pretending can only last so long. The dollar will be still around for a while and nobody knows (including the so-called experts), what the hell could possibly replace it for international exchange. That’s understandable, as this situation is new. So, for now, it looks like a gradual nibbling away at dollar hegemony (Russia-China, yes, but also other countries, including France, agreeing to non-dollar international trade deals).
The upshot if I’m not too far wrong? Other (including local) currencies will gradually gain more traction, but none of them will dominate internationally (who wants to repeat the dollar fiasco with another name on the paper?)
Eventually, we’ll move away from paper fiat money to some other system(s). Do I know what that will look like? No.
Arthur on Thu, 26th Jun 2014 4:31 pm
Rockman, only the US can print dollar, not China, not Russia. So every time someone produces real value, oil, food, stuff… the US can switch on the printing press to ‘pay’ for it. Out of thin air. This goes on until that someone refuses to accept the dollar. And if big parties like Russia and China start to refuse the dollar, other parties follow. And out of the blue the US becomes a poor countriy, because she can’t pay for anything. And all the dollars absorbed in the world economie can’t go anywhere except to the only place where they can’t be refused, in the US itself –> hyperinflation. And the only way for the US to recover is to start all over again, building a productive economy. This will take years, if not decades. And then there is peak oil.
Davey on Thu, 26th Jun 2014 6:23 pm
Art, you just described a global economic collapse where no country gets out of it whole. The world can’t decouple from a hyperinflation US financial collapse. All those foreign owned dollars will be worthless. You are talking like this will happen in the abstract within the US with everyone watching it on tv but all still being well at home. All those worthless dollars migrating back to the US with the world buying up America. Do you really think it would happen that way. Don’t you think all these foreign countries with their own set of problems would surely drop like dominos?
Arthur on Thu, 26th Jun 2014 6:46 pm
Davey, there was hyperinflation in Weimar Germany, but not in other countries. Yes the global economy is interconnected, but if my neighbour dies, that does not mean I will die on the spot as well.
rockman on Thu, 26th Jun 2014 7:26 pm
Arthur – “This goes on until that someone refuses to accept the dollar”. So when the US buys Canadian oil they won’t accept the $ what do we do…buy Yuan and send them to the Canadians? And when we make interest payments to China we have to buy rubles because they won’t accept $’s?
Sorry…still doesn’t wash. Not that I’m not a big fan of the fed creating $’s but if they stop the presses for whatever reason will we stop using the $ domestically? Will the rest of the world burn the $’s they posses? Will they sell them at a big discount for Yuan?
So again I’m still missing the “big downside”.
Makati1 on Thu, 26th Jun 2014 9:32 pm
Well, Arthur, and a few others, seems to understand what is happening. Most of the rest of you are in deep denial. Can’t blame you. According to some, non-MSM outlets, the dollar’s perceived value will fall over 50% as this switch grows. At some point, the switch will be an avalanche when countries see that they can bypass the dollar skim and deal in their own currency.
It is also the next step in the IMF’s plan for a world trade currency based on a number/’basket’ of currencies, and not just the Charmin dollar. Many countries are already doing the non-dollar trading. How long before the Saudis switch? Soon, I suspect, as they are getting pissed with the US in the ME and China is now their biggest customer. They to know that the Fed paper they hold is basically worthless.
No, the dollar’s days as the reserve currency are numbered. You don’t want to know what will follow in the US.
Makati1 on Thu, 26th Jun 2014 9:37 pm
rockman, maybe the US will have to get rubles or yuan to buy their imports in the future. Now wouldn’t it be a grand payback for the years of plunder when the dollar was king? Or maybe no one will trade with the US except for gold? They know the US is bankrupt (in many ways) and how do you treat beggars? Real money up front. Ask Ukraine…
Canada & Mexico are part of the US now so they will keep trading Charmin until the market in Asia is more profitable. Then the fun begins, or they are annexed as the 51st & 52nd states. LMAO
Arthur on Fri, 27th Jun 2014 12:55 am
Rockman… you can’t buy yuan with dollar to pay the Canadians. From who? The Chinese have refused to accept dollar, remember?
The Russians and Chinese are acting from a position of strength, because they have oil/gas and stuff respectively, where the US had a deficit of, what is it, 3 billion a day?
Under Hitler, the Germans likewise succesfully tried to circumvent Anglo finance and resorted to barter, especially with south-America. They could do that because they had a productive economy. German locomotives against Argentinian grain and meat. This was one of the many reason the Anglos did not like the Germans, but Russia and China are a little too big to give the Germany treatment and have nukes and strategic depth.
About China missing interest payments…. yep that’s true, that’s going to hurt China, but they have already correctly concluded that it does not make sense to add inherently worthless green paper to their existing pile of 3 trillion, for which they will never see anything back again. So they are doing the only rational thing there is to do and buy up all the gold and silver there is and once that market is empty they are going to get serious about dedolarizing international trade. Sensible people like Pat Buchanan have been warning for years that you can’t have structural deficits for ever. There is a limit to what creditors are willing to lend. That applies to Joe Sixpack and that applies to nations like the US. Sure, China and Russia will be willing to trade with the US, but real values against real values only, barter, gold, not green paper. The US has printed too much of those.
simonr on Fri, 27th Jun 2014 1:11 am
I imagine the status of the petrodollar is related to the status of the Dollar as a reserve currency.
The purpose (as I understand it) of a reserve currency is to allow governments to hold large stocks, that can be sold rapidly to actually buy their own currency (or not) to attempt to manipulate their own currency.
Naturally you need these in a currency, and not your own (duh !!!)
This currency cannot be to tightly controlled (byeee renmimbi)
The economy the currency belongs to has to be large and strong (otherwise selling of these bonds/currencies will devalue the reserve currency and you are back where you started)
This leaves
#1 The Dollar
#2 The Euro
#3 The Pound Sterling
there are no other real candidates, so if the dollar is still the major reserve currency, the fed can still run those printing presses for a few more years.
Arthur on Fri, 27th Jun 2014 4:59 am
Simon, it is not about being allowed to hold large quantities of a reserve currency, it is about governments and private enterprises chasing the reserve currency because everybody else does, thus creating a situation that if you want to buy stuff, you need money that is accepted by the seller.
It is all a leftover of the outcome of WW2, where the US was the only country with a serious economy, where the European economy was ruined. So if you wanted to acquire goods, you had to turn to America and pay in dollar. That situation was prolongued when the US could cash in on it’s military and propose a deal the House of Saud could not refuse: you Saudi’s from now on exclusively charge in dollar for your oil to all your customers and in return we provide you with security, read: keep you in the saddle. Basically protection money, an arrangement vagely reminiscent to arrangements in the shabbier corners of NYC and Chicago during the roaring twenties, involving Italian restaurants and colorful types like Al Capone.
This now is all in flux. The US no longer has an overarching economy like it had until 1965, nowdays it has to compete. Meanwhile, all the major US ‘partners’ have a clear understanding of the comparative advantage of owning a reserve currency, like being able to spend as much on the military as the rest of the world combined. Predictably, the ‘partners’ start to conspire to do something about in order to rise in the global pecking order, at the expense of the supreme position of the US. Has little to do with moralism, but everything with darwinism.
Davy, Hermann, MO on Fri, 27th Jun 2014 6:17 am
Art, China may have large account of dollars but that is because they have to have that because of the dynamics of an export economy. Let them dump dollars then let’s see how their exports fare. If any country should have a “Credit that is suspect” China is the number one candidate. They cannot be trusted for honesty in statistics and business accounting. How the hell would they have any chance of being anything close to resembling a reserve currency? Besides the fact an export lead economy cannot effectively offer a reserve currency when they are in a current account surplus. The whole idea of a reserve currency is having the country’s currency in effect much greater than its production of goods and services. It is the dynamics of a reserve currency. The manipulation of currencies is much worse in Europe, Russia, and China than America. America’s sin is printing dollars but last I looked this liquidity heads right out of America and into the global TBTF banks. It heads to emerging markets offering liquidity for investment. It heads into the global carry trade. It heads right into the global 1%ers pockets. Yes, Art, the US Gov is deficit spending but don’t try to tell me this is good for “Joe six”. What is happening now with zirp, QE, and (multiple other programs) is “Main Street” America is be gutted for globalism. Art, at least the US has energy look at poor Europe with very little in relation to GDP. What does Europe export??? Wine, cheese, pasta, and sausages (OK, exaggerating). I get sick of hearing about China’s pile of dollars when China has pervasive multiple rehypothecated collateral, ghost cities, housing bubbles, major heavy industry overcapacity, and an enormous shadow banking system. The dollar may not be what it used to be but thank God it is not what we see elsewhere.
simonr on Fri, 27th Jun 2014 8:30 am
Art
To be a valid reserve currency you need to be Fluid and Deep, fluid in that you can dispose of and or buy products in this currency and deep in that the economy of the proposed reserve currency is strong enough so that your trades will not affect the proposed reserve currency.
Now I accept the historical reasons for the USD being the strongest reserve currency.
However since the USD is the tool that 60% of trades are done in, this indicates that we pretty much don’t have a single reserve currency anyway.
We in Europe have I believe about 30% of this market with the last 10% going to the GBP.
I am not sure what other currency anyone could suggest as a valid reserve.
If the Chinese wanted to trade in their USD products they could do so in seconds, however how many of these are USD denominated products compared to actual piles of greenbacks ?
While I am sure Zambia wishes it was a reserve, the fact remains that there are too few economies able to do this and USD/EUR/GBP are it for several years to come
AgentR11 on Fri, 27th Jun 2014 11:07 am
People look for an all out victory/defeat kind of contest. Its how we like to think about any conflict of interests. That’s NOT what is going on. Gazprom does not care whether the dollar and the US do well, or do poorly, they only care that they get paid in a currency that they can use to buy equipment, make payroll, and produce a profit. It is becoming clear that Russia will lose more and more of its ability to use the dollar, therefore, it has to find ways to get paid in a currency it can use. It can USE renminbi.
This doesn’t mean the end of the dollar. It means Gazprom is not going to just sit back and be destroyed by US sanctions.
A reserve currency changeover is a many decades long process, not a victory in a soccer match.
Davey on Fri, 27th Jun 2014 11:41 am
Great point Agent R
Makati1 on Fri, 27th Jun 2014 6:55 pm
AgentR11, as in Empires, as in dollars. “A reserve currency dies slowly, then all at once.” Humans are herd animals. When the stampede starts…
The dollar will slowly be displaced by other means until the dollar falls to a point no one wants it, then it dies. Decades? No. I think years. Probably by 2020.
simonr, there is a lot of gold stacking up in Chinese vaults. There is more in Russia, India, Iran, etc. Then there are the countries that can barter oil for resources (ME). Iran is trading oil for Turkish gold even now. Many deals are already getting around the worthless dollar. At some point, the world will just dump the Charmin and declare it useless. When? I see it before 2025. Maybe in the next 4-5 years.
We are already in WW3 as it is a financial war, soon to escalate into a trade war, and then a cyber war and then the hot one when it is obvious that the West is losing. At that point, the dollar will be worthless. It will probably take a few years more, to get from financial to trade to cyber to …