I found a good thread on Twitter about the possible economic endgame in play here. The “petrodollar system” is simply the fact that globally, since the end of the gold standard in 1971, oil has been priced and thereby paid for by US dollars.
To say that the US dollar is a pure fiat currency not backed by anything tangible is inaccurate: when Nixon took the dollar off of the gold standard, it became essentially backed by oil instead. In order to purchase oil, nations of the world need to possess US dollars.
But now that 50-year-old system is in jeopardy. It’s now possible that due to severe economic sanctions being imposed on Russia by the US and Europe, we are looking at the end of the petrodollar system, and as a result, the end of the US dollar’s status as global reserve currency. This would represent a massive sea change in the global economy.
The chart shows that in 2015, 90% of transactions between China and Russia were conducted in US dollars. But by 2020, only 46% of their transactions were denoted in dollars. The figure is probably even lower today in early 2022. This represents a major shift away from dollars by China and Russia.
Putin knew there would be serious economic consequences for invading Ukraine. It’s safe to say both he and Xi have been planning for this, though.
The thread continues:
-Russia has stated NATO expansion into Ukraine was a red line.
-They knew their invasion of Ukraine would be inevitable and would have strategized that the US/West’s response would be SWIFT $ system exclusions/sanctions, sanctions which started today.
–Reasonable to expect that Russia’s next step will be to shut off oil/gas pipelines to Europe, as Russia has built up huge Yuan, gold & commodity reserves.
-This will cause massive price and supply disruptions (war level) to the western markets & monetary system.
Russia, due to its massive oil reserves and the fact that Europe is heavily reliant on Russian energy exports, has a good amount of leverage here to enact counter countermeasures to the sanctions.
-For years Russia & China have looked for ways to re-monetize gold & exit abuses of SWIFT system as a geo-political tool against them, but how to do it, how to exit, without West declaring it an act of aggression or war against West?
-Well, this Ukraine invasion just accomplished that end for them. And the West is doing it themselves.
–Now, freed to declare themselves SWIFT system outcasts by the western govt hands, Russia can now say “we will turn oil pipelines back on, but not for dollars.”
-Russia then declares that Europe or anyone that wants Russian oil (as 3rd largest global producer) or Russian/Ukrainian wheat (1/4 of worlds production) must pay in gold, or use the ruble-yuan gold backed payment system.
-Their leverage as an oil producer (who cuts off supply) will cause almost immediate price shocks to the western world. A good part of the population could immediately be unable to heat their homes.
-Almost equal to the oil shock they’d cause is their ability (though not as immediate) to cause food shortages and price spikes through the disruption of wheat production.
Russia and Ukraine together control over a quarter of the world’s wheat supply. Ukraine is often referred to as the “breadbasket of Europe.” And since Russia is now de facto in control of Ukraine, this means that Putin dominates the world’s wheat supply.
-Unmentioned in all of this is China. Who has been silent and not condemned Russia. That means silent approval & cooperation.
– China will act to soak up Russian production of oil and wheat to soften the blow to their “strategic partner”.
-This will again be through the Yuan-Ruble facility and at some point overtly-stated gold backing of that system by Russia and a China.
-The West will of course declare those last two bullets as acts of global aggression and direct threats to the “world monetary system”.
– It’s at this point that there will be a clear fracture of the world’s monetary system(s) into 2 competing East/West structures, circling back to the initial point that the 50 year global #petrodollar system has just officially been ended by Putin.
– At some point in all this, China’s aims on Taiwan will come into play and that will move hot-war as well. But these are just my best guesses at trying to work out the current play by Russia (and soon China).
– But the upshot in all of this is that we seem very much to be exiting the unipolar monetary world we all grew up in and will now (like NOW, now) see two warring systems and global opponents. George Orwell was just early, but here come Oceania, Eurasia & Eastasia.
The fact that the West has in response to Russia’s incursion into Ukraine decided to wage financial warfare on Russia and attempt to excommunicate Russia from the dollar-backed global financial system means there’s really no reason for Russia not to do this. They essentially have to, they have no choice. And energy is their main means of financial leverage.
They will need to leverage their energy production here.
I think it’s also safe to say that both Putin and Xi have been planning this for a while now. They have for many years sought to either get around or bring down the dollar-dominated world economic system. This may be their means of doing so.
Now, I doubt Russia will cut off energy sales to Europe right now, as the author of the thread says. Russia will wait until they have secured control of Ukraine and no longer have to worry about the war. The war is their number one priority right now.
Given that none of the litany of sanctions imposed on Russia have affected the energy sector, that means Russia is still able to continue selling oil and gas as they wage this war. And that’s crucial for them because they need money coming in.
But once the war is won, they’ll be free to start using their energy leverage to their advantage, and this will probably take the form of just what the author of the thread suggested: cutting off the energy supply to Europe and demanding future payments be made in rubles, yuan or gold.
That will essentially mark the end of the petrodollar system. It will cause a massive surge in demand for yuan, rubles and/or gold, and a drop in demand for US dollars. This in turn will lead to more inflation in the US—the drop in demand for dollars, and of course US treasuries (which countries with lots of US dollars buy with their dollars, because they pay interest and dollars don’t.)
A drop in demand for dollars means a drop in demand for treasuries, which means interest rates go up as well. And if it’s a significant spike in interest rates, then it will undoubtedly trigger a recession, perhaps a significant one.