China And Russia Move To Disrupt The Dollar’s Dominance In Oil Markets

The long-discussed prospect of an end to US dollar hegemony in world oil and gas markets took another step towards realization last week with the announcement that Russian and Chinese hydrocarbon giants Gazprom and China National Petroleum Corporation (CNPC) agreed to change payments for gas supplies to 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 totaling a minimum of 38 billion cubic meters of gas per year ( bcm/a). After that, further expansion of the new payment scheme will be implemented. It is pertinent to note at this point that while the ongoing international sanctions against Russia for its invasion of Ukraine in February have provided the final impetus for this crucial change in payment methodology, it has been a core Chinese strategy since at least 2010. to challenge the position of the US dollar as the world dollar de facto reserve currency. China has long viewed the position of its renminbi currency in the world currency ranking as a reflection of its own geopolitical and economic importance on the world stage. As discussed in depth in my latest book on world oil markets, an early indication of China’s ambition for the 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), pointed to the notion that the Chinese wanted a new global reserve. currency to replace the US dollar at some point. He added that the inclusion of the RMB in the IMF’s special drawing rights (SDR) reserve asset mix would be a key step in this context. At the time, at least 75 percent of the then $4 trillion daily turnover in global foreign exchange (FX) markets, as determined by the Bank for International Settlements (BIS), was in the international currencies of the ‘ Big Four’: the US dollar (USD), the euro zone euro (EUR), the British pound (GBP), and the Japanese yen (JPY). In addition to dominating the daily turnover of the foreign exchange markets, SDR currencies also dominate the roles of payment, reserve and investment currency in the global economy. A huge media fanfare in China followed the inclusion of the RMB in the SDR mix in October 2016, when it was assigned a weight of 10.9% (USD had a 41.9% share, EUR 37, 4%, GBP 11.3% and JPY 9.4%). As of 2022, the RMB’s share of the SDR mix has risen to 12.28 percent, which China still sees as not really corresponding to its rising superpower status in the world.

China has also long been well aware of the fact that, as the world’s largest annual gross importer of crude oil since 2017 (and the world’s largest net importer of total oil and other liquid fuels in 2013), is subject to the vagaries of US foreign policy tangentially through the US dollar oil price mechanism. This view of the US dollar as a weapon has been powerfully reinforced since Russia’s invasion of Ukraine and the US-led sanctions on the US dollar. Former Bank of China Executive Vice President Zhang Yanling said in a speech in April that the latest sanctions against Russia “would cause the United States to lose its credibility and undermine the [U.S.] long-term hegemony of the dollar. Furthermore, he 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 merits of removing the hegemony of the US dollar in the global price of hydrocarbons, but while China was unwilling to openly challenge US Trump, it could do little to respect for itself. However, a sign of Russia’s intent came just after the US re-imposed sanctions in 2018 on its key Middle East partner Iran, when Russia’s Novatek CEO Leonid Mikhelson said in September of that year that Russia had been discussing changing form of trading focused on US dollars with its biggest trading partners like India and China, and that even the Arab countries were thinking about it. “If they [the U.S.] creates difficulties for our Russian banks, so all we have to do is replace the dollars,” he added. At around the same time, China launched its now extremely successful Shanghai Futures Exchange with oil contracts denominated in yuan (the trading unit of the renminbi currency). Such a strategy was also initially tested at scale in 2014 when Gazpromneft attempted to exchange Chinese yuan and ruble cargoes of crude oil with China and Europe.

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This idea resurfaced again after the latest international sanctions imposed on Russia after its 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 through a new currency conversion mechanism or risk supply is discontinued. This threat almost succeeded in exploiting existing fault lines running through the US-led NATO alliance, as the EU’s major consumers of Russian gas scrambled to find out how. appease Putin’s demands for payment in rubles, without openly violating any sanction. Since then, Russia has simply toyed with the EU over ongoing gas supplies, most recently last week with its statement that it has ruled out resuming on/off supplies from the Nord Stream 1 pipeline, one of the main routes supply to Europe, after “discovering a fault during maintenance”. The scale and scope of this implied threat was underscored again last week when Putin said Russia could cut off all energy supplies to the EU if price ceilings are imposed on Russia’s oil and gas exports.

The further expansion of other currencies (realistically only the RMB) to subvert the dominance over the price of oil and other hydrocarbons in US dollars also depends on the use of the currency in countries other than those already under US-led sanctions. Fortunately for China, another Middle Eastern world leader (to add Iran, which already uses RMB and RUB trading), Saudi Arabia, has been very willing to expand its RMB-dominated business with China, even as payment. for oil supplies. . Already in August 2017, as also discussed in depth in my latest book on world 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 bonds and syndicated loan facilities) in previous years have been denominated in US dollars, a shift from dollar funding would allow Saudi Arabia more flexibility in its structure. general financial situation, though after an initial dislocation connected to his de facto currency peg to US currency. In recent months, there has certainly been a noticeable shift from Saudi Arabia to China, as exclusively cataloged. 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 Chairman Yu Baocai himself said: “The signing of the MoU ushers in a new chapter of our partnership in the Kingdom…The two companies will come together to renew vitality and make new progress in the Belt and Road Initiative. Route. [BRI] Y [Saudi Arabia’s] Vision 2030.” The scale and scope of the MoU are enormous, encompassing broad and deep cooperation in the integration of refining and petrochemicals, engineering, procurement and construction, oilfield services, upstream and downstream technologies, carbon capture and hydrogen processes. Crucially for China’s long-term plans in Saudi Arabia, it also covers opportunities for the construction of a huge manufacturing hub at King Salman Energy Park that will involve the continued on-the-ground presence on Saudi soil of a significant number of Chinese personnel. . : Not only those directly related to oil, gas, petrochemical and other hydrocarbon activities, but also a small army of security personnel to ‘ensure the safety of China’s investments’.

By Simon Watkins for

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