‘Game-Changer’: China To Launch ‘Petro-yuan’, Letting Russia, Iran Circumvent The ‘Petrodollar’

Beijing is expected to shortly launch a crude oil futures contract priced in yuan and convertible into gold in what could be a game-changer for the global oil industry. That is what the Nikkei Asian Review reports. Before this, global oil affairs have largely been exchanged through the use of U.S. dollars, commonly referred to as “Petrodollars”.

U.S. President Donald Trump (left), Chinese President Xi Jinping (center) and Russian President Vladimir Putin (right).

The contract has the potential to become the dominant Asia-based crude oil benchmark, given that China is the world’s biggest oil importer.

It will allow exporters such as Russia and Iran to circumvent U.S. sanctions — something especially valuable for Russia which has been hit by numerous U.S. sanctions (first after Russia annexed Crimea from Ukraine, the second round was signed by President Obama in December 2017 after alleged Russian interfering in the 2016 U.S. election, and the third imposed by President Trump in August 2017).

Adam Levinson, the head and founder of Graticule Asset Management Asia (GAMA), called the Chinese announcement a “wake up call” for investors who haven’t paid attention to the plans, according to Bloomberg.

However, other analysts are far less confident in the success of this new “petro-yuan”.

“Game changer it is not — at least not yet,” said Gal Luft, co-director of the Institute for the Analysis of Global Security, a Washington based think tank focused on energy security, as quoted by CNBC. “But it is another indicator of the beginning of the glacial, and I emphasize the word glacial, decline of the dollar.”

Grant Williams, an advisor to Vulpes Investment Management, a Singapore-based hedge fund sponsor, said he expects most oil producers to be happy to exchange their reserves for gold, rather than U.S. Treasuries. “It’s a transfer of holding their assets in black liquid to yellow metal. It’s a strategic move swapping oil for gold, rather than for U.S. Treasuries, which can be printed out of thin air,” he said.

Russia:

The announcement came just after Russian President Vladimir Putin described global finance as it is now as “unfair”, a view supported by other members of the association called BRICS (acronym for “Brazil, Russia, India, China and South Africa).

“Russia shares the BRICS countries’ concerns over the unfairness of the global financial and economic architecture, which does not give due regard to the growing weight of the emerging economies,” the Russian President said during a BRINC summit in Xiamen. “We are ready to work together with our partners to promote international financial regulation reforms and to overcome the excessive domination of the limited number of reserve currencies.”

Saudi Arabia:

The United States’ second largest oil importer — after Canada — is Saudi Arabia. Between 2008 and 2016 total imports from the Saudi kingdom to China has dropped from 25 % to 15 %, according to Nikkei Asian Review.

Chinese petroleum imports rose almost 14 % year-on-year during the first half of 2017, while supplies from Saudi Arabia inched up just 1 % year-on-year. During the same time, Russian oil shipments jumped 11 %, making the country China’s top supplier. While Angola assumed the second spot.

As stated by Louis-Vincent Gave, chief executive of Gavekal Research, a Hong Kong-based financial research company, if Riyadh were to accept yuan settlement for oil it “would go down like a lead balloon in Washington, where the U.S. Treasury would see this as a threat to the dollar’s hegemony … and it is unlikely the U.S. would continue to approve modern weapon sales to Saudi [Arabia] and the embedded protection of the House of Saud (the kingdom’s ruling family) that comes with them.” (Find more on the U.S.-Saudi arms shipment here)

Although, the alternative could be equally as unappetizing. “Getting boxed out of the Chinese market will increasingly mean having to dump excess oil inventories on the global stage, thereby ensuring a sustained low price for oil,” Gave said.

Nonetheless, the kingdom is finding ways to get in with Beijing. In late August, Saudi Vice Minister of Economy and Planning Mohammed al-Tuwaijri said in a conference in Jeddah that the government is looking into the possibility to issue a yuan-denominated foreign bond. Something which has previously only been handled with U.S. dollars.

Also, if Beijing were to invest in Saudi Aramco, Saudi Arabia’s state oil company, it would further cement the two countries relationship.

Venezuela:

Following U.S. financial sanctions, Venezuela, too, has made an effort to distance themselves from Washington as much as possible. First, Caracas announced they would drop the “petrodollar” in favor of other currencies, mainly Russian ruble or Chinese yuan.

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