- Organize a cartel of oil producers
- Denominate sales in rubles, yuan
- Dollar is no longer a good store of value
- With more gold backing ruble, yuan can be
This is an excerpt from an article that originally appeared at The Huffington Post
A profound transformation of the global monetary system is underway.
It is being driven by a perfect storm: the need for Russia and Iran to escape Western sanctions, the low interest rate policy of the U.S. Federal Reserve to keep the American economy afloat and the increasing demand for Middle East oil by China.
As economic sanctions are increasingly part of the West's arsenal, those non-Western countries that are the target -- or potential target -- of such sanctions are devising a counterpunch: non-dollar trading.
It would, in effect, nullify the impact of sanctions.
Whether in yuan or roubles, non-dollar trading -- which enables countries to bypass U.S. claims to legal jurisdiction -- will transform the prospects facing Iran and Syria, particularly in the field of energy reserves, and deeply affect Iraq which is situated between the two.
President Putin has said (in the context of reducing Russia's economic vulnerabilities) that he views the dollar monopoly in energy trade as damaging to the Russian economy.
Since hydrocarbon revenues form the most substantive part of Russia's revenues, Putin's desire to take action in this area is not surprising.
In the face of sanctions, Putin is seeking to reduce its economic dependence on the West.
All of this will be to the benefit of Iran, too: the Russians recently announced a deal to build several new nuclear power plants there.
THE STRAW THAT BREAKS THE PETRODOLLAR'S BACK
This new oil price drop simply is crushing producers' currencies in foreign exchange markets.
The combination of the petrodollar losing its ability to act as a store of value, combined now with exchange rate blues, may be the straw that breaks the producer "camel's back" in respect to OPEC and dollar denomination.
IRAN AND RUSSIA VS. SAUDI ARABIA?
Such a moment would seem ripe for Russia and Iran to begin a gradual challenge to Saudi's leadership of the OPEC cartel and to the dollar-denominated energy system, if enough OPEC members and other producers are prepared to rebel. Iran has been lobbying hard in this direction.
In the longer term, Russia might take up Prince Bandar's suggestion that Russia become a key determiner of oil prices and output -- but in a cartel of its own making, rather than in the manner Bandar had proposed in July 2013 when he said:
"Let us examine how to put together a unified Russian-Saudi strategy on the subject of oil.
The aim is to agree on the price of oil and production quantities that keep the price stable in global oil markets," according to one diplomatic account.
WHY THE ROUBLE OR YUAN INSTEAD OF THE DOLLAR?
And why should producers opt for roubles or yuan?
Well, both China and Russia have recently been big buyers of physical gold. Russia's present gold reserves would back 27 percent of the narrow rouble money supply.
That is a high ratio -- far in excess of any other major country, and also in excess of the U.S. Fed's original stipulated gold coverage minimum.
Moreover, Russia is a large net exporter of goods and energy, notwithstanding sanctions. So Russia's gold reserves, by implication, are likely to continue to grow, rather than decline.
In the longer term, holding roubles or yuan may allow producers to escape the damaging inflationary effects of a dollar system now dependent for its stability on low interest rates and monetary expansion.
These prospective changes are still speculative, but are potentially highly significant. The petrodollar has lasted for over 41 years, and has been the driving force behind America's economic, political and military power.
It would be ironic, indeed, were the tensions with Russia inadvertently to become the driver of America finally losing its petrodollar card.