When will the dollar’s dominance over the oil market be over?
Every year more oil-producing countries abandon settlements in the USD and switch to Euro, Yuan or even cyber currency. Russia is also considering selling oil to its foreign partners for Roubles. Several experts tried to assess the situation where a few players of the O&G market attempt to start a revolution by forcing the US dollar to sidelines.
«A worthless paper»>
The USD dominance on the oil market was established in the 1970s. Back then, through military assistance and a series of economic concessions, the United States managed to agree upon a transition to USD settlements for oil, first with the Saudi Arabia, and later with the rest of the OPEC members. The rise of spot positions at the exchange platforms and the launch of the crude oil futures in New York solidified the USD stronghold, while the petrodollar grew to become foundation for the US economy.
This situation, however, did not always please all the players. Back in 2007, the president of Iran Mahmoud Ahmadinejad urged the OPEC countries to shift away from settlements in dollars, labelling the US currency as «a worthless paper». In 2009, the USD was dropped for mutual settlements by Cuba, Bolivia, Venezuela, Honduras, Nicaragua and Ecuador.
The intentions to switch to the «gold dinar» instead of the dollar in the O&G settlements were voiced by the Libyan leader Muammar Gaddafi shortly before the coup d’état. With a great authority among the African oil-producing states, Gaddafi expected other countries to support him. Earlier, the former Iraqi leader Saddam Hussein also talked about the intention to switch from settlements in dollars to euros in the petroleum sector. Both failed to implement the plans to abandon the petrodollar: Gaddafi was caught up in the civil war and killed, while Hussein was hung by the new pro-American authorities.
Attempts to shift from dollar were made by Libya, Egypt and Tunisia, as well as by the largest Russian O&G companies: Transneft, Gazprom, Rosneft, Zarubezhneft, analysts recall.
The Iranian Way
One of the most auspicious fighters against the petrodollar dominance is Iran. Given the growing anti-Tehran rhetoric on the part of the US President Donald Trump and the relaunch of the US sanctions in May 2018, the Iranian authorities announced a complete abandonment of the US dollar.
«All the ministries, public companies and organisations are obliged to use the euro as the base currency in reporting and in the publication of statistical data and financial reports when engaging in external transactions,» the Iranian official statement says.
The pressure from the White House and the EU’s willingness to join sanctions creates uncertainty in respect of the future exports of the Iranian oil to Europe, the experts comment. Meanwhile, the export of Iranian oil grew by 1.6 times between 2015 and 2017 reaching 2.2 million barrels per day.
Previously Tehran has already taken action against the USD: in 2008, it launched a commodity exchange with O&G and derivative products priced in Iranian Rial. In January 2015, the Iranian National Bank announced that it stops settlements with foreign partners with the US currency. The regulator made it clear that other currencies, including the Yuan, the Euro, the Turkish Lira, the Russian Rouble and the South Korean Won will be used to settle contracts. This, however, did not lead to a complete disposal of the dollar contracts.
Iran claims it will sell oil for euros out of populist motivation: as the country does not supply oil to the US, it will sell it to Europe and Asia, so the US dollar, analysts say, is not required for the transactions. However, should Iran actively promote the dollar-free trade, some other countries might join in on an ad-hoc basis. Thus, one day, this trend might become noticeable, the experts add, and bear influence on the global trade.
Dollar, give way!
Other countries have joined indeed. Early in April, the Russian energy minister told the reporters that Moscow is studying a possibility of accepting payments in national currencies for oil trade with Ankara and Tehran.
«There is a need for this, as well as an intent on both sides,» the minister commented adding that this would require some changes to the financial, economic and banking sectors.
On the issue of switching to national currencies, Russia has not come out of the shade yet: while the formal and informal bilateral agreements are concluded, Moscow might gradually start driving this process together with Beijing and other countries. But nothing more than that, the analysts believe.
The active role in construction of a parallel settlement system is logical under the current strong political pressure and the sanctions that constrain the economic development and significantly complicate the economic environment.
China launched trading in oil futures, nominated in Yuan, at the Shanghai International Energy Exchange in the end of March 2018. The prospects are quite bright: over the past three years, oil consumption has been growing in the country by an average annual rate of 5% against the global average of 1.7%. Today, China accounts for about a quarter of the increase in oil demand in the world. In 2017, the country imported 420 million tons of oil.
Any further increase in consumption of the black gold, according to the forecast of the International Energy Agency, will be largely ensured at the expense of China. Beijing repeatedly announced its intention to impose the Yuan in international settlements.
Meanwhile, the trade war unleashed by President Donald Trump only adds fuel into the fire.
Given this environment, experts do not rule out that the oil exporters to China might switch to settlements in Yuan. Thus, Saudi Arabia may partially go through with this, experts reckon, as China is among the main consumers of Saudi oil. A similar situation today is with Venezuela, and this trend might pick up pace, certainly given the continued pressure of the US sanctions.
Abandoning the dollar would be easiest for the countries with relatively stable local currencies. They, however, are very few, analysts say. This is why in the short-term the most reasonable policy for the majority is to rely on the Yuan, which has strengthened by almost 10% over the past year against the dollar, despite a relative protectionism of the state over the Chinese foreign exchange market, and despite the Euro.
This club will be gradually joined, first of all, by the countries of Asia and Latin America, the other BRICS countries — Brazil, perhaps South Africa or India.
This however, will happen gradually, with the settlements in US dollars still in place, but a growing proportion of trade executed in other currencies, the analysts believe.
Among the potential dollar deserters are Iraq and Libya, both more dependent on exports to Europe than to the US.
Recently, the French management of Total issued a statement saying that if the oil prices were historically denominated in dollars, this does not mean that keeping all transactions exclusively in dollars was mandatory.
Uncle Sam does not let go
In the future, Yuan and Euro will undoubtedly (at least, in part) force out the dollar from the oil settlements market. However, we should not expect a total rejection of the US currency, experts believe.
Oil prices are quoted in USD, not in euro, so any oil trade contract, albeit signed in euro, would still refer to the dollar quotations on oil, experts comment.
Pricing on the oil market is also directly tied to the US dollar. On top of this, most of the oil producing and oil consuming countries have established trade links with the USA, whose economy is still the strongest in the world.
In the next 10 years, the disposition of forces in the world energy market may change dramatically.
Given that the main global oil suppliers maintain mutual trade relations with either China or Europe, this may be a potential opportunity to switch to payments for the oil delivered in currencies alternative to the dollar.
However, the analysts warn that one should not ignore the powerful American lobby present around the world, as well as the fact that within the current financial system the US dollar remains a reliable and stable currency.
Nevertheless, the process of transformation of the global settlement system is on and will continue to expand, especially as the inflow of new capital into the US debt system may start to dry out, and eventually it should be clear that this inflow cannot cover interest on the debt already accumulated.
Beijing already started to sign contracts partially guaranteed not by cash but rather by the country’s sovereign assets secured by US debt obligations; therefore it is not in China’s interest to amass the dollar settlements, the experts observe.
There is a tendency around the world to reduce the share of international and domestic transactions made in dollars. It was particularly strengthened in 2014–2017 and, as a result, the share of dollar settlements decreased from 46.6% to 39.9%.
The global financial settlements system may naturally become multipolar, the analysts assert.
Donald Trump and the rest of the elite close to him perfectly understand that the rest of the world is not prepared to feed the US indefinitely. Even if they claim, that it is the United States that feed everyone, it would, in fact, be nothing more than a comfortable negotiating stance, designed to delay the inevitable changes until the moment when the USA would be able to digest and absorb these changes after focusing on its own economy and abandoning the usual globalist ambitions, the experts reckon.
Russians saved some 34 billion pound Sterling on offshore accounts in British overseas territories, the Sunday Times reports citing data from Global Witness. Earlier London threatened to disclose the names of all these businessmen from Russia.
The total amount of savings kept by Russians in the British offshores *such as the BVI or the Cayman Islands) nears 34 billion pound Sterling (or USD 47 billion), the Sunday Times reported citing information published by Global Witness, a British NGO fighting against the human rights violations and against the policies of countries, exporting natural resources.
This amount, the publication emphasizes, is five times the savings that the Russian citizens keep in the UK mainland banks. At the same time, 30 billion of this amount is kept on the British Virgin Islands.
On the whole, over the past decade, as the Global Witness experts found, 110 billion pounds from Russia passed through the British overseas territories. Britain has therefore become the second most popular destination for the Russian offshore investments, second only to Cyprus, the Sunday Times observes.
Earlier, British Prime Minister Teresa May promised to freeze all Russian assets and cash accounts open in the UK in response to the poisoning in Salisbury. On March 4 a former Russian intelligence colonel Sergei Skripal, convicted in Russia for espionage in favour of London, was found poisoned along with his daughter Yulia. London has blamed the incident on the Russian authorities, although Moscow repeatedly denied these accusations. Nonetheless, the newspaper notes, that in May 2018 the British PM warned: «There is no place for these people [Russian businessmen] or their money in our country.»
Next, on April 26, a group of British MPs, including Tories, Labourists and the SNP members, announced their intention to call on the British authorities to pass a bill for the overseas territories to require a disclosure of the identity of businessmen who keep assets in their jurisdiction. Currently, the BVI and the Cayman Islands are free from this requirement, applicable, under the British law, to all other British territories. This initiative, as one of its authors pointed out, was aimed at revealing the names of the Russian entrepreneurs who keep their assets in the British offshores.
«So far, Theresa May called on the world to respond to the violation of the international norms by Russia. But if she is going to fulfil her promises, she must ensure that filthy money fuelling the worst abuses isn’t sheltering under a British flag anywhere in the world,» conservative MP Andrew Mitchell explains.
As a consequence, the British Parliament deprived of anonymity all the holders of offshore accounts and the data on beneficiaries should be made public before the end of 2020.
British Overseas Territories will have to create a public register of beneficiaries of offshore companies. The relevant amendment was voted by the MPs of the House of Commons. The amendment is included in the draft law on sanctions and the fight against money laundering.
Previously, the authorities of the 14 territories under the British flag (including the BVI and the Cayman Islands) rejected attempts to create a centralized register with details of all the beneficiaries. The amendment, adopted without a vote, compels the MPs to create this list by the end of 2020.
The British Cabinet did not support the initiative, but was forced to give in, as 21 conservative MPs expressed solidarity in this matter with the Labour party. The Deputy Head of the UK Foreign Office Alan Duncan said that the firm message of the members of the House of Commons was received: the overseas territories should have publicly accessible registers.
The amendment adopted by the British Parliament will also affect the Russian citizens. Earlier, The Sunday Times, quoting the data of the NGO Global Witness, reported that Russian citizens keep up to 34 billion Pounds (USD 47 billion) on offshore accounts. Most of these accounts are registered in the British Virgin Islands.
Turkey collected its gold ingots from the US storage facilities. Recep Tayyip Erdogan is no longer going to trust the country’s gold supply to Washington. Turkey is removing 28 tons of gold from the depository in New York. An article about the Exodus of the Turkish gold from the American depots appeared in the German daily Frankfurter Allgemeine Zeitung. The gold theme is quite relevant for Germans, as part of Germany’s precious metal portfolio is also stored in the US.
German observers insist on the fact that since the beginning of this year Turkey’s reserves have increased significantly. The rate of growth, on a global scale, is, in fact, second only to Russia. Furthermore, as the daily observes, Moscow and Ankara pursue similar goals, both trying to reduce dependence on the dollar by purchasing more gold.
As Turkey withdraws 28 tons of gold from the US, this is one of the steps in a larger-scale process for the precious metal withdrawal from the US banks. Germany, however, has also returned some 300 tons of gold from the United States and about 374 tons from France.
Journalists write that Germany has the world’s second largest gold reserve after the USA.
Analysts point out that Turkey must be particularly vigilant give the possibility of drawing coloured tungsten instead of gold from the US. The commentators allude to the infamous scandal with China who accused Washington of swapping the gold ingots.
This memorable affair is still not over. Beijing claims that the gold bars received around 2010, in fact, contained tungsten ’hearts’. Which effectively undermined their market value. The United States have long refused to admit anything appealing to the fact that gold was allegedly stored in Fort Knox.
In the end of the day, it was clear that a falsification indeed had taken place, although the real perpetrator was never identified.
In any case, there are no media reports about a detention of some enterprising businessman who switched gold with tungsten.
Similar incident was later registered in Ukraine, where part of the country’s gold reserve turned out to be tainted lead. The criminals did not even bother to pick a more precious metal, rather choosing about the cheapest metal one could obtain. Well, at least it wasn’t aluminium.