Yuan priced Futures can be the end of the Petrodollar Age
by Martin Berger on 04 Mar 2018 2 Comments

The diminished reliance on the US dollars is one of the major trends of international geopolitics. A lot of media attention has been paid to steps taken by the BRICS states, namely Brazil, Russia, India, China and South Africa to decrease their dependence on American currency. Both the BRICS states and a number of other international players have repeatedly voiced their concern over the design of the modern global economic architecture that was imposed on the rest of the world by the United States. The whole structure of this global economy simply ignores the growing influence of new emerging markets. Because of Washington’s relentless desire to remain a global hegemon, imposing its will on other countries, the US dollar remains an instrument of economic suppression. The creation of the Euro, the rapid rise of the Chinese economy, and the intentions of a number of countries of the former USSR,  the Middle East and Asia to switch to regional currency settlements have transformed the US dollar as a measuring instrument, thus undermining its status as a mandatory transaction currency.


Russia’s and China’s gold reserves against the dollar domination


The traditional transaction scheme, in which all financial operations are processed by London and a number of Swiss banks, is losing its relevance these days as new centers of gold trade are emerging, primarily in India, China and South Africa. Suffice to say that Moscow and Beijing have already signed a memorandum on the development of mutual trade in gold. According to Singapore-backed financial expert Ronan Manly, the gold reserves accumulated by China and Russia are a part of their strategy to move away from international trade denominated in US dollars. Manly is convinced that should those states show that they are holding more gold combined than the US, this would deal an enormous blow to the US dollar and to the position of the US within the global economy.


While all these initiatives cannot immediately render the US dollar obsolete, one has to remember that China has been building its financial system for years and shows no signs of stopping.


The existing Western sanctions along with threats of new sanctions are forcing China and Russia to cooperate more strategically in what is becoming the seed of a genuine alternative to the dollar system. Since the 1998 sovereign default triggered by the West, Russia has been extremely cautious in all of its financial dealings, which allowed it to withstand the sanctions imposed on it by Washington in 2014, and forced the country to search elsewhere for the means of ensuring financial stability. That “elsewhere” is increasingly called the Peoples’ Republic of China.


Yuan-denominated bonds they are


Now the Treasury of Russia is planning to launch the sale of Russian debt in the form of bonds denominated in Chinese yuan. The size of the first offering, a sort of a test of the market, will barely reach 1 billion US dollars, which amounts to 6 billion yuan. The move is being accelerated by reports that the US Treasury is examining the potential consequences of extending its economic pressure on Russia. It’s curious that Turkey’s Deputy Prime Minister Mehmet Simsek has recently announced that Ankara is going to issue bonds in rubles and yuan in 2018, as it’s been reported by the Gercek Gundem recently.


These events are unravelling against the backdrop of the undeclared economic war between the US and China, which is moving into its active phase. The United States has already formally notified the World Trade Organization (WTO) that they refuse to recognize China as a market economy and are preparing another portion of anti-dumping duties. Washington has been constantly engaged in all sorts of investigations of China’s market policies, while relying on the rules that are most commonly applied to states with non-market economies. In turn, China’s authorities are seeking ways to achieve a “market” status, in a bid to get rid of the protective duties that are hampering its goods.


Gold for oil


But China has its own ways of turning the tables back on Washington, and while those ways are not quite as straightforward, their effects can potentially be much more devastating. China keeps pushing the US dollar off the global exchange market. Earlier, Beijing achieved the inclusion of the yuan in the SDR basket and is now about to challenge the dollar as a universal means of settling for oil futures. The twist is that the futures priced in yuan are going to be convertible into gold. It should be noted that gold-backed-oil-yuan-futures can prove to be extremely attractive for investors and oil-producing countries, particularly those that possess conflicting interests with the sole remaining “superpower”. Those are, among others, Russia, Venezuela, and Iran.


The sale of yuan priced futures is aimed at decreasing the dependency of the global financial markets on the US dollar, but this process can take a while. Since the 1970s, OPEC states have been selling oil in petrodollars, which has made the transformation of petrodollars into US treasury bonds an integral component of the US economy. But from now on, oil producers will be able to sidestep dollar priced futures by choosing those futures that they can freely convert into gold.


In addition, China is going to give a greater share of the market to those countries that will agree to trade oil futures in yuan, thus the biggest trading partners of Beijing are going to be forced to invest in those futures in a bid to preserve their market share. The possibility of trading oil futures for yuan, no doubt, will be in very high demand across the Eurasian economic space, as well as in several countries of Africa and Latin America. Yet, this will be enough to increase China’s influence along the path chosen for the implementation of the One Belt, One Road massive infrastructure project.


Given the great strategic importance of oil and energy resources in general, the political aspect of yuan priced futures outweighs even the economic component of this shift. Even if initially they will occupy a small margin of the market, this will mean that China is capable of undermining the global reliance on the US dollar, which lays at the very foundation of Washington’s geopolitical power. As a result, we should expect a gradual, but nonetheless imminent reduction in the global dependence on petrodollars.


Martin Berger is a freelance journalist and geopolitical analyst, exclusively for the online magazine “New Eastern Outlook.” Courtesy 


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