“The unipolar model of the world is over,” declared Vladimir Putin last week.
As it tries to punish Russia for the latter’s dismemberment of Ukraine, the West is discovering that the balance of power isn’t what it used to be. Russia is a huge supplier of oil and gas —traded in US dollars— which gives it both leverage over near-term energy flows and, far more ominous for the US, the ability to threaten the dollar’s reign as the world’s reserve currency. And it’s taking some big, active steps towards that goal.
I’m not just referring to the $400bn deal struck between Moscow and Beijing, under which Russia will supply 38bn cubic meters (bcm) of gas to China over 30 years from 2018.
What is not being outwardly discussed is that during Putin’s two days visit in Shanghai, Russia and China took another small step to undermine U.S. monetary hegemony, when Russia’s second biggest financial institution, VTB, signed a deal with the Bank of China to bypass the dollar and pay each other in their domestic currencies.
And as if pushing Russia into the warm embrace of the world’s most populous nation was not enough, there is also the second most populated country in the world, India. Today we learn just how prescient this particular comment also is, when Reuters reported that Rosneft, the world’s top listed oil producer by output, may join forces with Indian state-run Oil and Natural Gas Corp to supply oil to India over the long term, the Russian state-controlled company said on Tuesday.
Rosneft CEO Igor Sechin, an ally of President Vladimir Putin, travelled to India on Sunday, part of a wider Asian trip to shore up ties with eastern allies at a time when Moscow is being shunned by the West over its annexation of Crimea. Rosneft said it had also agreed with ONGC they may join forces in Rosneft’s yet-to-be built liquefied natural gas plant in the far east of Russia to the benefit of Indian consumers.
While the particular banking deal may not be incredibly significant in and of itself, there is another deal that is in the works that could have a much wider impact. According to Reuters, the BRICS block (Brazil, Russia, India, China, South Africa) aim to finish preparations for a new international development bank by this July. The bank, which has been in the works for several years now, aims to provide an alternative to the IMF (The United States is currently the dominant shareholder of the IMF).
While the new bank is being presented as a means of facilitating investment within the BRICS block, If Brazil, Russia, India, China and South Africa are able to establish a stable financial network that bypasses Washington and the Federal Reserve, it would not only make it impossible for the U.S. to bully any one member (i.e. Russia), but it could also open the door to dollar free energy exchanges… exchanges like the one that Russia has announced it will open this June.
That’s right. On June 8th Russia is opening its own oil exchange to trade crude oil and petroleum products for rubles and gold.
To understand why trade deals between Russia, China and India are potentially huge, a little history is useful: Back in the 1970s, the US cut a deal with Saudi Arabia —at the time the world’s biggest oil producer— calling for the US to prop up the kingdom’s corrupt monarchy in return for a Saudi pledge that it would accept only dollars in return for oil. The “petrodollar” became the currency in which oil and most other goods were traded internationally, requiring every central bank and major corporation to hold a lot of dollars and cementing the greenback’s status as the world’s reserve currency. This in turn has allowed the US to build a global military empire, a cradle-to-grave entitlement system, and a credit-based consumer culture, without having to worry about where to find the funds. We just borrow from a world voracious for dollars.
But if Russia, China and India decide to start trading oil in their own currencies —or in gold— then the petrodollar becomes just one of several major currencies. Central banks and trading firms that now hold 60% of their reserves in dollar-denominated bonds would have to rebalance by converting dollars to those other currencies. Trillions of dollars would be dumped on the global market in a very short time, which would lower the dollar’s foreign exchange value in a disruptive rather than advantageous way, raise domestic US interest rates and make it vastly harder for us to bully the rest of the world economically or militarily.
For Russia, China and India this looks like a win/win. Their own currencies gain prestige, giving their governments more political and military muscle. The US, their nemesis in the Great Game, is diminished. And the gold and silver they’ve vacuumed up in recent years rise in value more than enough to offset their depreciating Treasury bonds.
The West seems not to have grasped just how vulnerable it was when it got involved in this latest backyard squabble. But it may be about to find out. In any case, don’t get your hopes up for immediate fireworks though. Rome didn’t collapse in a day.
The chess player – Dugutigui, on some excerpts from different sources.