The Ukraine-Russia war and related sanctions have driven Russia to work with China to forward alternatives to the Swift banking system and the hegemony of the US Dollar in international trade. Much has been written lately about the possible collapse of the PetroDollar with some arguing that the the PetroDollar will never fail and others worrying over its imminent demise. If you live in the USA, the existence of the PetroDollar contributes to your quality of life by making the dollar stronger, increasing your purchasing power. If the PetroDollar were to cease to exist, then you would probably be paying more for all goods. Below are a couple of articles discussing the issue.
Herland Report: The Global Financial Revolution and the End of the PetroDollar hegemony?
Foreign critics have long chafed at the “exorbitant privilege” of the U.S. dollar as global reserve currency. The U.S. can issue this currency backed by nothing but the “full faith and credit of the United States.”
Foreign governments, needing dollars, not only accept them in trade but buy U.S. securities with them, effectively funding the U.S. government and its foreign wars, writes author attorney Ellen Brown, published at her blog. Brown is chair of the Public Banking Institute, and author of thirteen books, follow her website here.
But no government has been powerful enough to break that arrangement – until now. How did that happen and what will it mean for the U.S. and global economies?
First, some history: The U.S. dollar was adopted as the global reserve currency at the Bretton Woods Conference in 1944, when the dollar was still backed by gold on global markets. The agreement was that gold and the dollar would be accepted interchangeably as global reserves, the dollars to be redeemable in gold on demand at $35 an ounce. Exchange rates of other currencies were fixed against the dollar.
But that deal was broken after President Lyndon Johnson’s “guns and butter” policy exhausted the U.S. kitty by funding war in Vietnam along with his “Great Society” social programs at home. French President Charles de Gaulle, suspecting the U.S. was running out of money, cashed in a major portion of France’s dollars for gold and threatened to cash in the rest; and other countries followed suit or threatened to.
In 1971, President Richard Nixon ended the convertibility of the dollar to gold internationally (known as “closing the gold window”), in order to avoid draining U.S. gold reserves. The value of the dollar then plummeted relative to other currencies on global exchanges.
To prop it up, Nixon and Secretary of State Henry Kissinger made a deal with Saudi Arabia and the OPEC countries that OPEC would sell oil only in dollars, and that the dollars would be deposited in Wall Street and City of London banks.
In return, the U.S. would defend the OPEC countries militarily. Economic researcher William Engdahl also presents evidence of a promise that the price of oil would be quadrupled. An oil crisis triggered by a brief Middle Eastern war did cause the price of oil to quadruple, and the OPEC agreement was finalized in 1974.
The deal held firm until 2000, when Saddam Hussein broke it by selling Iraqi oil in euros. Libyan president Omar Qaddafi followed suit. Both presidents wound up assassinated, and their countries were decimated in war with the United States. Canadian researcher Matthew Ehret observes:
“We should not forget that the Sudan-Libya-Egypt alliance under the combined leadership of Mubarak, Qadhafi and Bashir, had moved to establish a new gold-backed financial system outside of the IMF/World Bank to fund large scale development in Africa. Had this program not been undermined by a NATO-led destruction of Libya, the carving up of Sudan and regime change in Egypt, then the world would have seen the emergence of a major regional block of African states shaping their own destinies outside of the rigged game of Anglo-American controlled finance for the first time in history.”
The first challenge by a major power to what became known as the petrodollar has come in 2022. In the month after the Ukraine conflict began, the U.S. and its European allies imposed heavy financial sanctions on Russia in response to the illegal military invasion.
The Western measures included freezing nearly half of the Russian central bank’s 640 billion U.S. dollars in financial reserves, expelling several of Russia’s largest banks from the SWIFT global payment system, imposing export controls aimed at limiting Russia’s access to advanced technologies, closing down their airspace and ports to Russian planes and ships, and instituting personal sanctions against senior Russian officials and high-profile tycoons. Worried Russians rushed to withdraw rubles from their banks, and the value of the ruble plunged on global markets just as the U.S. dollar had in the early 1970s.
The trust placed in the U.S. dollar as global reserve currency, backed by “the full faith and credit of the United States,” had finally been fully broken. Russian President Vladimir Putin said in a speech on March 16 that the U.S. and EU had defaulted on their obligations, and that freezing Russia’s reserves marks the end of the reliability of so-called first class assets.
On March 23, Putin announced that Russia’s natural gas would be sold to “unfriendly countries” only in Russian rubles, rather than the euros or dollars currently used. Forty-eight nations are counted by Russia as “unfriendly,” including the United States, Britain, Ukraine, Switzerland, South Korea, Singapore, Norway, Canada and Japan.
Putin noted that more than half the global population remains “friendly” to Russia. Countries not voting to support the sanctions include two major powers – China and India – along with major oil producer Venezuela, Turkey, and other countries in the “Global South.” “Friendly” countries, said Putin, could now buy from Russia in various currencies.
On March 24, Russian lawmaker Pavel Zavalny said at a news conference that gas could be sold to the West for rubles or gold, and to “friendly” countries for either national currency or bitcoin.
Energy ministers from the G7 nations rejected Putin’s demand, claiming it violated gas contract terms requiring sale in euros or dollars. But on March 28, Kremlin spokesman Dmitry Peskov said Russia was “not engaged in charity” and won’t supply gas to Europe for free (which it would be doing if sales were in euros or dollars it cannot currently use in trade). Sanctions themselves are a breach of the agreement to honor the currencies on global markets.
Bloomberg reports that on March 30, Vyacheslav Volodin, speaker of the lower Russian house of parliament, suggested in a Telegram post that Russia may expand the list of commodities for which it demands payment from the West in rubles (or gold) to include grain, oil, metals and more.
Russia’s economy is much smaller than that of the U.S. and the European Union, but Russia is a major global supplier of key commodities – including not just oil, natural gas and grains, but timber, fertilizers, nickel, titanium, palladium, coal, nitrogen, and rare earth metals used in the production of computer chips, electric vehicles and airplanes.
On April 2, Russian gas giant Gazprom officially halted all deliveries to Europe via the Yamal-Europe pipeline, a critical artery for European energy supplies.
U.K. professor of economics Richard Werner calls the Russian move a clever one – a replay of what the U.S. did in the 1970s. To get Russian commodities, “unfriendly” countries will have to buy rubles, driving up the value of the ruble on global exchanges just as the need for petrodollars propped up the U.S. dollar after 1974. Indeed, by March 30, the ruble had already risen to where it was a month earlier…(continues)
Independent Speculator: Are You Ready for the End of the Petrodollar?
Even before we stop burning gasoline and diesel entirely, they will become marginal energy commodities—that ends the main use case for the US dollar outside the US.
It may still have “rule of law” and the “good faith and credit of the United States government” behind it, but I don’t think these things are as important to other countries. The main reason they hoard dollars is that Saudi Arabia only takes dollars for oil. For now.
Now, what happens if the need for dollars is greatly reduced at a time when high inflation is rapidly eating away at the dollar’s “cleanest shirt in the dirty-clothes basket” status?
Reserve-currency regime change would be anything but a surprise.
That would be as big a game-changer for the global economy as almost any I can think of—and not just for resource speculators.
Granted, I don’t see this happening tomorrow.
But don’t kid yourself that it won’t be until 2050. It could come as soon as 2030, which is a nearer-term goal for many Green agenda items. The New Iron Curtain could bring it on even faster.
Bear in mind that this change won’t be like a light switch that suddenly flips… and the process has already started.
Imagine, for example, that in light of the London Metal Exchange (LME) breaking the nickel market this month, traders start quoting Shanghai metals prices more often? What if they do it in yuan? This may not happen now, but I think it will in due course.
I’m not saying I like it, by the way. As I’ve written before, a world in which the gold-dollar exchange ratio is north of $10,000 would be a very scary place.
But whether I like it or not, I see the scales tipping more and more away from the US dollar. At some point, there may be some big headline event that marks the end of the US dollar’s hegemony as reserve currency of the world. That would simply be the culmination of what we already see starting to happen around us now.
I can’t give you a precise prediction of when the US dollar loses its top-dog status, but I can say that I don’t want to be caught on the wrong side of history when it happens.
And while a timeframe like 2030 may seem to be a long way off, it takes time to prepare for historic changes like this. That makes it important to start thinking ahead now.
What to do?
My friend Doug Casey’s old “Crisis Investing” formula still makes sense: Liquidate, Consolidate, Speculate, and Internationalize.
IFA: The Rise and Fall of the PetroDollar
The Burning Platform: Gradually, then Suddenly This is a long article, and it takes a while to get to the PetroDollar part.
Medium: The US Dollar Tale – Entering the PetroDollar System