The increasingly closer relations between China and Russia and the Chinese push to make its currency more relevant on the global markets are challenging the dominance of the petrodollar.
The U.S. dollar, which has been the currency of choice in oil trade since the 1970s, is still the dominant currency in the market and global currency reserves. But several recent deals and highest-level summits have sought to undermine the dollar’s dominance.
The new geopolitical alliances, where China and Russia are working to oppose a U.S.-led global order, could undermine the petrodollar.
China has been looking for years to establish more trade deals in yuan to increase the relevance of its currency on the global markets and challenge the U.S. dollar’s dominance in international trade, including in energy trade.
During a landmark visit to Saudi Arabia’s capital Riyadh in December, Chinese President Xi Jinping said that China and the Arab Gulf nations should use the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trades.
“China will continue to import large quantities of crude oil from GCC countries, expand imports of liquefied natural gas, strengthen cooperation in upstream oil and gas development, engineering services, storage, transportation and refining, and make full use of the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trade,” Xi said in December, as carried by Reuters.
While the Chinese currency has made inroads in global trade, the yuan accounts for just 2.7% of the market, compared to the U.S. dollar’s share of 41%. Related: Tesla Smashes Q1 Delivery Record Thanks To Price Cuts
Moreover, the U.S. dollar accounted for more than 58% of the global currency reserves as of the end of 2022, compared to a 2.7% share for the Chinese yuan, per data from the International Monetary Fund (IMF).
Several deals and summits in recent weeks signaled that China and Russia are moving to try to sideline the U.S. dollar.
Last month, China’s Xi met with Putin in Moscow, and the Russian president not only endorsed trade in yuan with China but also with other countries.
“We support the use of Chinese yuan in payments between Russia and countries of Asia, Africa, and Latin America,” Putin was quoted as saying by Russian media.
According to Putin, two-thirds of the bilateral trade between China and Russia is already being done in the two national currencies—the yuan and the ruble, respectively.
Over the past year, Russia has turned to trade in yuan in the wake of the Western sanctions on its exports, imports, and energy trade, as the Chinese currency has become Putin’s only alternative to reducing exposure to the U.S. dollar and the euro, and limiting the fallout of the sanctions that have seen Russian state assets seized in Western countries.
Last week, China and Brazil agreed to carry out bilateral trade settlements in their own currencies and dump the U.S. dollar as the intermediary currency, in another move seen as China’s increased efforts to undermine the dollar dominance.
Brazil and China are part of the so-called BRICS alliance of five major emerging economies—Brazil, Russia, India, China, and South Africa.
Also last week, China reportedly completed its first trade of liquefied natural gas (LNG) settled in yuan on the Shanghai Petroleum and Natural Gas Exchange.
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Chinese state oil and gas giant CNOOC and TotalEnergies completed the first LNG trade on the exchange with settlement in the Chinese currency, the exchange said in a statement carried by Reuters.
The U.S. dollar hasn’t lost its power in global trade, especially in energy trade, but the growing divide between the U.S. and the West on the one hand, and the China/Russia axis on the other hand, could embolden China to look to further boost the relevance of the yuan in the new world order.
By Tsvetana Paraskova for Oilprice.com
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The petrodollar came to existence in 1973 and Saudi Arabia played an instrumental role of making it happen by agreeing to price and sell its oil exports exclusively in the petrodollar. OPEC members followed suit in 1975.
Since then China’s economy became the world’s largest economy based on purchasing power parity (PPP) virtually 31% bigger than US economy and China became the largest importer of crude oil in the world in 2013.
In 2014 President Putin began to de-dollarize the Russian economy after the United States imposed sanctions on Russia in the aftermath of the annexation of the Crimea.
On the 26th of March 2018 China launched the petro-yuan for oil contracts. Since then, the use of the petro-yuan has been accelerating at the expense of the petrodollar.
The fight against the petrodollar intensified after President Putin announced on 23 March 2022 that ‘unfriendly’ countries (those imposing the sanctions) have to pay for Russian gas and (and perhaps oil too) in rubles. This move was a retaliation against Western sanctions.
Then came Chinese President Xi Jinping’s landmark visit to Riyadh in December last year. During a summit meeting with heads of States of the Gulf Cooperation Council (GCC) countries, he demanded that that Arab Gulf countries should accept the petro-yuan as payment for Chinese crude imports. The GCC countries can’t refuse President Xi’s demand since 75%-80% of their oil exports go to China. Moreover, China has become the largest destination for their investments.
Furthermore, President Putin was quoted saying that Russia supports the use of Chinese yuan in payments between Russia and countries of Asia, Africa, and Latin America. In fact, two-thirds of the bilateral trade between China and Russia amounting to $190 bn in 2022 is already being done in their national currencies—the yuan and the ruble, respectively according to President Putin.
Last week, China and Brazil agreed to carry out bilateral trade settlements in their own national currencies and dump the dollar. Brazil and China are part of the BRICS alliance of five major economies—Brazil, Russia, India, China, and South Africa.
Russia also indicated that it accepts in principle the Indian rupee as payment for its oil and gas exports to India.
Sooner or later Saudi Arabia and other GCC countries will adopt the petro-yuan. Were China to pay for its almost 13.0 mbd of crude imports in petro-yuan, Russia to sell its 8.0 million barrels a day (mbd) of exports in ruble, Venezuela and Iran to accept the petro-yuan for their exports and India to pay in rupees for its 5.0 mbd of crude imports, the petrodollar will certainly lose an estimated 60% of its global oil trade.
The petrodollar provides at least three immediate benefits to the United States. (1) It increases global demand for US dollars. (2) It also increases global demand for US debt securities and (3) it gives the United States the ability to buy oil with a currency it can print at will. In geopolitical terms, the petrodollar lends vast economic and political power to the United States.
By undermining the petrodollar, the US financial system and therefore the US economy will also be undermined. This could possibly lead to a devaluation of the dollar by one quarter to one third of its current value.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert