Lending markets

China and Russia move to disrupt dollar dominance in oil markets

The long-talked-about prospect of the end of US dollar hegemony in global oil and gas markets took another step closer to fruition last week with the announcement that Russian and Chinese oil and gas giants Gazprom and China National Petroleum Corporation (CNPC) agreed to change payments for gas supply in 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 gas pipeline route “Power of Siberia” which totals at least 38 billion cubic meters of gas per year (bcm/year ). After that, a further expansion of the New Payments Scheme will roll out. It should be noted at this point that while ongoing international sanctions against Russia following its invasion of Ukraine in February provided the final impetus for this crucial payment method change, the basic strategy of China since at least 2010 is to challenge the US dollar’s position as a global currency de facto reserve currency. China has long viewed the position of its renminbi currency in the world currency rankings as a reflection of its own geopolitical and economic importance on the world stage. As analyzed 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), signaled the idea that the Chinese wanted a new world reserve currency to replace the US dollar at some point. He added that the inclusion of the RMB in the composition of the IMF’s Special Drawing Rights (SDR) reserve assets would be a key stepping stone in this context. At that time, at least 75% of the US$4 trillion daily turnover in the global foreign exchange (FX) markets, as determined by the Bank for International Settlements (BIS), was represented by the “four major” international currencies. : the US dollar (USD), the euro zone euro (EUR), the pound sterling (GBP) and the Japanese yen (JPY). In addition to dominating the daily turnover of the foreign exchange markets, SDR currencies also dominate in payment, reserve and investment functions in the global economy. Huge media fanfare in China followed the RMB’s inclusion in the DTS mix in October 2016, when it was assigned a weighting of 10.9% (USD had a 41.9% share, l EUR 37.4%, GBP 11.3% and JPY 9.4%). In 2022, the RMB’s share of the SDR mix has increased to 12.28%, which China still sees as not quite matching its growing superpower status in the world.

China has also long been well aware that as the world’s largest annual crude importer of crude oil since 2017 (and the world’s largest net importer of oil and other liquid fuels as of 2013), it is subject to the vagaries of US foreign policy indirectly through the US dollar’s oil pricing mechanism. This view of the US dollar as a weapon has been powerfully reinforced since Russia’s invasion of Ukraine and the ensuing US sanctions, the most severe of which – such as the sanctions against Iran from 2018 – concern the excluding the use of US Dollars. 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. She further suggested that China should help the world “get rid of dollar hegemony as soon as possible.”

Russia itself has long shared the same view on the benefits to it of removing US dollar hegemony in global hydrocarbon prices, but while China was unwilling to openly challenge the US- United at the height of its trade war under the wildly unpredictable former US President Donald Trump, it could do little on its own. A sign of Russia’s intent, however, came just after the United States reimposed sanctions in 2018 against its main Middle Eastern partner Iran, when Novatek chief executive Leonid Mikhelson said in September of the same year that Russia had discussed switch from trading centered on the US dollar with its largest trading partners such as India and China, and that even the Arab countries were considering it. “If they [the U.S.] are creating 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 wildly successful Shanghai Futures Exchange with oil contracts denominated in yuan (the renminbi’s trading unit). Such a strategy was also initially tested on a large scale in 2014 when Gazpromneft tried to exchange crude oil shipments in yuan and Chinese rubles with China and Europe.

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This idea has resurfaced again following the latest international sanctions imposed on Russia following its invasion of Ukraine. Almost as soon as they were introduced, Russian President Vladimir Putin signed an executive order requiring buyers of Russian gas in the European Union (EU) to pay in rubles through a new currency conversion mechanism or risk seeing their supplies suspended. This threat has nearly succeeded in exploiting existing loopholes running through the US-led NATO alliance, as major European consumers of Russian gas have scrambled to determine how appease Putin’s demands for ruble payments, without openly violating the sanctions. Since then, Russia has simply toyed with the EU over ongoing gas supplies, most recently last week with its declaration that it has abandoned the resumption of on/off supply from the Nord Stream 1 gas pipeline – l one of the main supply routes to Europe – after “discovering a defect during maintenance.” The scale and scope of this implicit threat was underscored again last week when Putin said that Russia could cut off all energy supplies to the EU if price caps were imposed on Russian oil and gas exports. gas.

The continued expansion of other currencies – realistically only the RMB – to reverse the dominance of oil and other hydrocarbon prices in US dollars also depends on the use of the currency in countries other than those already under US sanctions. Fortunately, for China, another world leader in the Middle East (to be added to Iran, which already uses RMB and RUB trading) – Saudi Arabia – has shown itself very willing to expand its activities. RMB-dominated with China, including as payment for oil supply. . Already in August 2017, as also analyzed 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 into other Chinese products”. He added, “China is by far one of the best markets” for diversifying funding…[and] we will also have access to other technical markets in terms of unique funding opportunities, private placements, panda bonds and others.

Given that the vast majority of Saudi government borrowing (including large bond and syndicated loan facilities) in recent years has been denominated in US dollars, a move away from dollar funding would give Saudi Arabia more flexibility in its overall funding structure, although after an initial dislocation related to its de facto currency peg to US currency. In recent months, there has certainly been another notable shift from Saudi Arabia to China, as OilPrice.com has 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 join forces to renew vitality and mark new progress.” of the Belt and Road Initiative. [BRI] and [Saudi Arabia’s] Vision 2030.” The scale and scope of the MoU is enormous, covering deep and extensive cooperation in refining and petrochemical integration, engineering, supply and construction, petroleum services, technologies upstream and downstream, carbon capture and hydrogen processes. Crucial to China’s long-term plans in Saudi Arabia, it also covers the opportunities for the construction of a huge manufacturing center in the King Salman Energy Park which will involve the continued presence on Saudi soil of a significant number of personnel. Chinese. : not only those directly related to oil, gas, petrochemical and other hydrocarbon activities, but also a small army of security personnel to “ensure the security of Chinese investments”.

By Simon Watkins for Oilprice.com

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