The elephant in the room is US debt and the ability to QE (print money) as resolution to infinity, or until others refuse to play that game any longer.
This post first appeared on Russia Insider
One refreshing aspect of living in Moscow is that the number 13 is just that, a number. As a native New Yorker, I took for granted that 13th floors were just not fated to exist or be built. There is even a word in the English lexicon, triskaidekaphobia: the extreme fear or suspicion of number 13. This fascination with 13 even had its role when I was trading on the COMEX/NYMEX exchanges, the locals and the traders made jokes, all the while rubbing their rabbits feet, coddling charms or crossing fingers especially when the 13th was a trading day. That being said, there is enough developing in the world geopolitically and economically to justify getting with the spirit of the day and see how weird fortune may play out.
Much has happened here in Russia in these first 13 days of October. King Salman of Saudi Arabia together with his retinue of 1,500 and their 459 tons of luggage made his first official visit to the Kremlin. A number of take-a-way’s happened because of the visit, one of the more apparent is the understanding that Russia has begun to displace the United States as the go-to power broker politically and militarily in the Middle Eastern neighborhood, or as some call it the Arc of Evil.
The visit also promoted Russian support for his son, Crown Prince Mohammed bin Salman, who is expected to inherit the throne. It goes without saying that strategizing on the oil price, which is a bouquet of geopolitical balancing acts essential for both countries was doubtlessly picked over. After all, Saudi Arabia and Russia together produce 25% of all the oil used in the world today. That brings up the neighborhood again, namely Iran and its allies. A thorn in the side of Saudi Arabia to be sure and in need of a Putin-like arbiter if Saudi national development plans over the next two decades are to be realized. Iran and its allies are the only oil, political and religious groups able to attract and/or push the various Shiite minorities throughout the Sunni Middle East to rebellion - including Saudi Arabia’s biggest oil region.
Ever since the Nixon era birth of the Petrodollar and the US-Saudi umbrella defense quid-pro-quo the Saudi’s were and are a major and consistent client for US weapons systems. Just this year Saudi military spending alone has accounted for 61 billion US dollars, namely 21% of that country’s current budget.
As relationships begin to slowly change it is not coincidental this meeting was also to purchase a specific Russian weapons system more advanced than the United States equivalent, and that can defend against its missiles. This may be a logical response to the amount of US-made missiles available to various Middle East countries that may pose a threat. The new relationship between the Saudi’s and Russia is also viewed as positive by Israel, who as the saying goes - is Russia’s "sub-rosa ally" in the Middle East.
While Russia is interested in this new relationship with Saudi Arabia, it has no wish or reason to disregard Iran, a long term commercial partner. The interests shared between Russia and Iran are firm in Syria, Afghanistan, and Iraq. Russia will not risk her standing in these regions by any overwhelming desire to cuddle with Saudi Arabia. In many ways the role of bridge between Sunni and Shiite states stretching from the Central Asian region through to the Greater Middle East is one where the interests of many local players today hinge on Russia more than ever.
Taking this a large step further, and it involves the dollar, Saudi Arabia’s biggest trading partner is now China. The Chinese have been absorbing US treasuries, and with them, US inflationary/disinflationary volatility for years. All the world’s emerging markets have been on a rollicking ride with the US dollar. Eventually, probably rather soon, players like China and the Saudis will grow tired of this ride. The Russians are already there, and steps have already been taken to eventually de-dollarize trade with China as well as Saudi Arabia (where the 1974 petrodollar was born), and with it the One Belt One Road group of countries stretching from India throughout Eurasia and the Middle East
With current stresses in relationships within NATO, like Turkey, the US could find itself at an inflection point with regard to several traditional allies, which in turn may well nudge trade contracting away from the dollar in consequence. When we think of NATO, it largely mirrors member states of the EU, and that entity is not having a stress free time of late. There are the frictions of Spain vs. Catalonia and Basque, Italy where strains exist between Padania and Mezzogiorno, France with Corsica, and of course, Greece keeps simmering away. The UK Brexit event is also in ongoing process and has its support and opposition forces sniping and bickering in Brussels. Then there are the US led economic sanctions against Russia, which have led to a world of economic pain in the EU, while not affecting the US or its dollar trade in the least, nor have sanctions worked to bring Russia to “heel”, or Ukraine to “democracy”. They have instead succeeded in enabling further more detailed questioning of the hegemony of the US dollar especially as it is so closely tied to US mandated unipolar political and economic behavior not necessarily in the interests of independent sovereign nations or their indigenous peoples.
Traditional US diplomatic and military ties have encouraged America’s allies to hold dollars. States with their own nuclear arsenals tend to hold fewer dollars than countries that depend on the US for their security. Being in a military alliance with a reserve-currency-issuing country has been said enhances the foreign exchange reserves held in that currency (US Dollar) by roughly 30 percentage points. The converse than indicates that the share of reserves held in dollars would fall appreciably should such ties erode. The current political, military and diplomatic overtures from Washington have not been well received in several parts of the planet. From North Korea, to Venezuela, and from China, and Russia and even NATO ally Turkey. There seems to be an unthinking autopilot switched on as the US diplomatic front not only aims its traditionally historic vitriol at Russia and China, but at America’s allies as well, even neighboring NAFTA participants, not to mention Central or Latin America.
Estimates are that South Korea and Japan together hold about 80% of their international reserves in dollars. It is therefore expected that the financial behavior of these and other countries would change dramatically, negatively influencing the dollar’s exchange rate and US borrowing costs, if America’s close military alliances with such allies start to unravel as well due to current foreign policies.
The world is looking for alternatives to the dollar for several reasons; one of them is to get out from under the influence of the US and its brand of globalized vision. Today we can see the trend starting from the large oil producing nations to countries who make significant exports; they are slowing, even stopping their accumulation of US debt securities. For instance when China and Russia find alternatives for their bilateral trading activity, they will require far fewer dollars. The same applies to European countries, which have adopted the euro since 1999. The elephant in the room is US debt and its historical reliance and ability to QE (print money) as resolution to infinity, or until others refuse to play that game any longer. That and mandating behavior to align with US preferences and unipolar interests.
Some nations have attempted in the past to escape the dollar hegemony, but failed largely due to prompt US action. One example was Iraq's former dictator Saddam Hussein who wanted to sell Iraqi oil for euros; another was Libya's Muammar al-Gaddafi who planned to issue a pan-African gold currency. Both attempts would have resulted in tiny bites at the dollars dominance. Today the man drivers of de-dollarization are Moscow and Beijing. Both the Russians and the Chinese have openly supported the key role of gold in this transition from the dollar. The process of moving away from the dollar, originally initiated in Europe and today taken up by China and Russia can no longer be stopped. Despite the fact that it is Friday the 13th, I doubt the demise of the almighty dollar will happen today, but the trend is set, and in time, multi-polar currencies will occupy key seats at the world economic table. Probably with gold as a “supra-national” reserve asset. We will see how this unwinds down the road, but one thing is certain – we are living in an era of tectonic geopolitical and economic shifts that are tailor made for any Friday the 13th . Buckle up!
Chairman, Disciplinary Committee, National Association of Corporate Directors, Russian Federation.
This post first appeared on Russia Insider
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