¥uan and Waterloo of Petro$ (Part 1/2)

Ongoing western sanctions due Ukraine are pushing China and Russia to close cooperation – the great Eurasian axis is already in motion. Despite the headlines in mainstream western media related to civil war in Ukraine the primary war is being fought monetarily. The Russia-China Strategic Partnership (RCSP) is truly global in scope, having come to encompass the entire world to varying degrees. The Ukraine War might be the U.S. Dollar Waterloo event.
As the Americans and their allies are trying to squeeze Russia and Iran with a combination of economic sanctions and political isolation, alternative poles of power are emerging that soon may present a serious challenge to the U.S.-dominated world that emerged from the end of the Cold War.
The Russian response to ongoing western sanctions has been launching a counter-strategy that could bring the cost boomeranging right back to Washington. Namely, the formation of a potential non-dollar trading block among major players in the global energy markets including Iran and China.


The end of the Petrodollar

(In 1971 Richard Nixon was forced to close the gold window taking the U.S. off the gold standard and setting into motion a massive devaluation of the U.S. dollar.In an effort to prop up the value of the dollar Nixon negotiated a deal with Saudi Arabia that in exchange for arms and protection they would denominate all future oil sales in U.S. dollars. )

For decades, virtually all oil and natural gas around the world has been bought and sold for U.S. dollars. Since World War II, America’s geopolitical supremacy has rested not only on military might, but also on the dollar’s standing as the world’s leading transactional and reserve currency.
Last year Russia produced about 10.5 million bbls. of oil per day and exported 70% of it. That amounts to nearly 2.6 billion barrels with a value of nearly $250 billion at world market prices. It also exported the equivalent of nearly 1 million barrels per day of natural gas with a market value of upwards of US$50 billion. The truth is that Russia is the largest exporter of natural gas and the second largest exporter of oil in the world. If Russia starts asking for payment in currencies other than the U.S. dollar, that will essentially end the monopoly of the petrodollar.
China just overtook the US as the world’s largest economy. The US national debt is now past €17 trillion. China – their biggest creditor – has been cutting on US debt holdings and hoarding gold on the side to be prepared for the possible collapse of the dollar. The US federal government ran an estimated budget deficit of $486 billion, or 2.8 per cent of GDP, in fiscal year 2014. By contrast, Russia just posted a federal budget surplus of 2 per cent of GDP.
When U.S. politicians started plan economic sanctions on Russia, they probably never even imagined that there might be serious consequences for the United States. But now the Russian media is reporting that the Russian Ministry of Finance is getting ready to pull the trigger on a “de-dollarization” plan. For decades, virtually all oil and natural gas around the world has been bought and sold for U.S. dollars. As I will explain below, this has been a massive advantage for the U.S. economy. In recent years, there have been rumblings by nations such as Russia and China about the need to change to a new system, but nobody has really had a big reason to upset the status quo. However, that has now changed. The struggle over Ukraine has caused Russia to completely reevaluate the financial relationship that it has with the United States.
The largest natural gas producer on the planet, Gazprom, has signed agreements with some of their biggest customers to switch payments for natural gas from U.S. dollars to euros. If other nations start following suit - start trading a lot of oil and natural gas for currencies other than the U.S.$ - that will be a massive blow for the petrodollar, and it could end up dramatically changing the global economic landscape.
Moscow, allied with the BRICS, is actively working to bypass the US dollar. The core point is that Russia is not alone. Besides the BRICS also the G-77, the Non-Aligned Movement (NAM), the whole Global South is critical to U.S. led bullying and would like to have other alternative in international relations. This past summer, the BRICS countries created an alternative to the largely U.S.-controlled World Bank and International Monetary Fund (IMF), and the Shanghai Cooperation Organization (SCO) added 1.6 billion people to its rolls.

Back in 1971, it was necessary to assure that the dollar would retain its position in world trade as the world’s premiere currency, in spite of the fact that it was no longer backed by anything. The U.S. reached an agreement with Saudi Arabia that, in trade for arms and protection, the Saudis would denominate all future oil sales, worldwide, in dollars. The other OPEC countries fell into line, and the “petrodollar” was assured.
Now the Sino-Russian cooperation is challenging the Americans, and there are many countries that would be happy to join them in dethroning the US dollar as the world’s reserve currency. The historic gas deal between Russia and China is very bad news for the petrodollar – it might be start of the “de-Americanised” world.

Yuan replacing the Petrodollar
On April 24^th 2014 the Russian government organized a special “de-dollarization meeting” dedicated to finding a solution for getting rid of the US dollar in Russian export operations. Top level experts from the energy sector, banks and governmental agencies were summoned and a number of measures were proposed as a response for American sanctions against Russia.
“Over the last few weeks there has been a significant interest in the market from large Russian corporations to start using various products in renminbi and other Asian currencies, and to set up accounts in Asian locations,” Pavel Teplukhin, head of Deutsche Bank in Russia, told the Financial Times, The renminbi is the official currency of the People’s Republic of China. literally means "people's currency". The yuan is the basic unit of the renminbi, but is also used to refer to the Chinese currency generally, especially in international contexts.
Moving the yuan towards internationalisation involves three distinct phases: turning the Chinese currency into a) a trading currency, b) an investment currency, and c) a reserve currency.
Some recent developments:

• Chinese credit rating agency Dagong has downgraded U.S. debt from A to A- and has indicated that further downgrades are possible.
• China has just entered into a very large currency swap agreement with the eurozone that is considered a huge step toward establishing the yuan as a major world currency.
• Back in June 2014, China signed a major currency swap agreement with the United Kingdom. This was another very important step toward internationalizing the yuan.
• China currently owns about 1.3 trillion dollars of U.S. debt, and this enormous exposure to U.S. debt is starting to become a major political issue within China.
• Mei Xinyu, Commerce Minister adviser to the Chinese government, warned (on Oct 2014) China may decide to completely stop buying U.S. Treasury bonds.

China is the largest producer of gold in the world, and it has also been importing an absolutely massive amount of gold from other nations and in addition China plans to buy another 5,000 tons of gold.) There are many that are convinced that China eventually plans to back the yuan with gold and try to make it the number one alternative to the U.S. dollar.
If China does decide to back the yuan with gold and no longer use the U.S. dollar in international trade, it will have devastating effects on the U.S. economy. If other nations stopped using the dollar to trade with one another, the value of the dollar would plummet dramatically. One could claim that the entire way of life in U.S. depends on the U.S.$ being the primary reserve currency of the world. (Source: The Economic Collapse )

The dollar does not just predominate in China’s trade with the United States, but with other countries as well. The first steps towards the internationalisation of the yuan emerged in 2008-2009. At that time, businesses and companies were allowed to use the yuan in trade with Hong Kong (Xianggang), Macau, and ASEAN countries. In 2012, every Chinese company with a licence for export and import transactions was able to use the yuan. An active transition to foreign trade settlements in yuan is happening alongside an increase in the use of the national currencies of China’s trading partners. This is being facilitated by the signing of bilateral currency swaps between the People’s Bank of China (PBC) and the central banks of China’s trading partners. To date, the PBC has signed more than 20 currency swap agreements. At the end of 2013-beginning of 2014, the yuan overtook the euro in terms of the amount of payments used for international trade, and took second place after the US dollar. According to the People’s Bank of China (PBC) , there was more than 1.3 trillion yuan overseas at the end of 2013, which is equivalent to approximately US $250 billion. In fact, this money is forming an offshore yuan market. At present, the yuan can be directly converted with the US dollar, the Japanese yen, the Australian dollar, the Russian rouble, the Malaysian ringgit, and the New Zealand dollar. The latest such agreement was signed between China and New Zealand in March 2014. (Source: Strategic Culture Foundation )

My conclusion
In my conclusion the era when the IMF, World Bank, and U.S. Treasury could essentially dictate international finances and intimidate or crush opponents with sanctions, pressure and threads are drawing to a close - the BRICS and the Shanghai Cooperation Organization are two nails in that coffin. These independent poles (BRICS, SCO, USAN) are developing fast and it remains to see what their ultimate impact on international politics will be – my scenario is that the impact will be a drastic shift from U.S. dominance to more balanced juxtaposition of U.S. and Eurasia.

New Player in Caspian Sea Power Corridor

Competition – or development – of EU's eastern gas supply routes has intensified this year. Both EU/U.S. backed Nabucco and Russia's South Stream have made deals to guarantee realization of new pipelines until 2015. The EU’s new “southern corridor” - Nabucco as essential part of it - has been dubbed a version of U.S. “Silk Road Strategy” aimed to block Russia from gas fields around Caspian Sea and its connection to Iran. Russia on the other hand wants direct access to EU markets without transit via Ukraine.

Until this summer the gas game has be seen as battle between Russia and West. Now the world economic crisis and current low price of gas have brought a new player to game in fuel sector - China. With its financial strength China has now had ability to intensify its offensive towards the Caspian Sea energy sources especially in Kazakhstan (especially oil) and Turkmenistan (especially gas). Will the outcome be, that both Russia and Western powers with their companies will lose Caspian oil and gas while it will flow to East? Not necessary but from now on one can not ignore China as key player in region.

As main source related to energy game in Kazakhstan and Turkmenistan I have used Ajdar Kurtov's fine article “SCO Yekaterinburg summit and China’s energy offensive towards the Caspian Sea”

Kazakhstan

Back in the 1990s Kazakhstan made easily available its mineral wealth to American, British, French and Italian companies. The bulk of the profit generated was channeled to Kazakhstan’s new partners. A threat loomed large of Kazakhstan turning into a third-world country with a raw exports role to play for the highly-advanced states.

However, Kazakhstan growing stronger economically, socially and politically while the world hydrocarbons market prices shooting up early this century made Kazakhstan leaders think better of their old stands. The new conditions prompted Kazakhstan to reconsider the earlier signed agreements, and Astana specifically proclaimed the objective of establishing state control over the oil and gas sector. The Kazakh authorities brought pressure to bear on the foreign companies in a bid to force the latter to accept changes to the earlier signed contracts.

The national company “KazMunaiGaz” was made responsible for advancing Kazakhstan’s state interests in the oil and gas field institutionally. Initially Kazakhstan leaders applied much the same tactic to pursue the same objective to one of Kazakhstan’s three oil refineries, the Pavlodar refinery, which is located by the Russian border and technologically oriented to Russian oil refining. The facility was privatized in January 1997 and the government’s stake placed in management by the US CCL Oil Ltd. Company on the terms of a public-private partnership agreement. But the Kazakh government prematurely terminated the agreement a few years later and handed over a 51% stake to the OAO “Mangistaumunaigaz”. The company later brought its stock of shares to 58%, with 42% of the Pavlodar oil refinery’s stock capital owned by the state. After that the national company “KazMunaiGaz” bought 51% of the “Mangistaumunaigaz” stock of shares from Indonesia’s Central Asia Petroleum and consequently gained control over the facility.

It was reported on the 16th of April 2009 that amid the world economic crisis Kazakhstan borrowed from China 10 billion dollars during N. Nazarbayev’s visit to Beijing. The Chinese CNPC Company bought a 50% stake of “Mangistaumunaigaz” for 1.4 billion dollars. Kazakhstan leaders are ousting western partners from the hydrocarbons market and refusing to meet Russian companies halfway, while losing ground to China. Chinese companies already own a third of Kazakhstan-produced oil, or more than 20 million tonnes per year. The purchasing of Kazakhstan’s “Mangistaumunaigaz” assets by China’s CNPC further tightens China’s grip on the Kazakh oil market and weakens the positions of Russia and the West in Kazakhstan’s fuel and energy complex.

Turkmenistan

China’s policy of advancing towards the Caspian Sea region resources is seen also in Turkmenistan. Ashgabat has long discussed the construction of a 6,500 kilometer gas pipeline from Turkmenistan to China to Japan. The construction project was due to be carried out in 10 years and was pretty costly (11 billion dollars, of which some 1.7 billion dollars would account for the sea section of the pipeline). Later the easterly direction of Turkmen natural gas deliveries was sort of “updated”, namely the option for laying a pipeline to Japan was dropped, with China having been made the only terminal point of delivery.

A more important development for Turkmenistan in 2006 was the republic’s president S. Niyazov’s visit to China in early April. The main agreement in a package he signed in Beijing was the General intergovernmental agreement on the implementation of the Turkmenistan – China gas pipeline project and on selling natural gas from Turkmenistan to the People’s Republic of China in the volume of 30 billion cubic metres annually for 30 years since the time the gas pipeline was commissioned, which was due in 2009.

The new Turkmenistan-China gas pipeline will be nearly 6,500 kilometres, with over 180 kilometres due to be laid in Turkmenistan, 530 kilometres, - in Uzbekistan, 1,300 kilometres, - in Kazakhstan, and over 4,500 kilometres, - in China. The overall cost of the project makes up some 20 billion dollars. 17 billion cubic metres of Turkmen gas were due to be annually exported through the development of new gas fields, while the remaining 13 billion cubic metres of annual gas exports,- through the construction of gas purification and treatment plants at the largest gas condensate field Bagtyyarlyk.

The construction of the pipeline (Turkmenistan-China) got under way in 2008 when Russian Company “Stroytransgaz” won 395 m€ contract for laying the Turkmen section of project and also plant to purify and dehydrate gas and a gas-measuring station. The Turkmen stage is expected to be finished by December 2009 and the entire pipeline in late 2010.

Iran?

On February 21st 2009 the Iranian and Turkmeni governments signed an agreement that will give Iran the rights to develop the Yolotan gas field in Turkmenistan. The deal will help Iran resolve gas supply problems in its north-eastern provinces. Turkmenistan will sell Iran an additional 350 billion cubic feet of gas annually, more than doubling current supplies of almost 300 bcf a year, according to the agreement first disclosed by Iran’s official media and later confirmed by Turkmenistan.Iran also recently offered to invest $1.7 billion for a 10 percent stake in the second phase of Azerbaijan’s huge Shah-Deniz gas field which will come on line by 2014. Iran already has a 10 percent share in the first phase and it wants to import large volumes of gas from the Azeri field. For Iran, the deals couldn’t be better suited to its objectives. It’s economically unviable currently to supply gas to its isolated, north-eastern third of the country. Getting gas from Turkmenistan would therefore make more Iranian gas available for export to Turkey.

Turkmenistan-Afghanistan-Pakistan-India (TAPI)

The Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline on the other hand would feed natural gas into downstream economies that are desperate for natural gas supplies. Afghanistan is the first of these, and energy shortages are rarely discussed as one of the problems of their economy, but with only 10 - 12% of the populace having access to electricity and with only limited natural gas resources (perhaps enough for a 100 megawatt power station), the country needs to import natural gas in large volumes. Pakistan is still desperate for help with natural gas and other energy fuels. But so far there is no pipeline to help.

There is some base to claim that U.S.military's involvement in Afghanistan is directly related to the large reserves of natural gas in Turkmenistan. While the U.S. military may be a wholly owned subsidiary of the international (i.e. American and British)oil companies), its anyway clear that demand to increase troop levels in Afghanistan jumped a bit along with the recently publicized discovery of the very large large natural gas reserves in the Yoloten-Osman gas field in southern Turkmenistan.

Some (geo)political remarks

• In March 1999, the U.S. Congress adopted the Silk Road Strategy Act, which defined America’s broad economic and strategic interests in a region extending from the Eastern Mediterranean to Central Asia. The act was revised in 2006 to include the energy interests of the US as one of the primary reasons for the US to be in Afghanistan - note no reference to Osama Bin Laden or Al Qaeda ;The Silk Road Strategy (SRS) outlines a framework for the development of America’s business empire along an extensive geographical corridor. The successful implementation of the SRS requires the concurrent "militarization" of the entire Eurasian corridor as a means to securing control over extensive oil and gas reserves, as well as "protecting" pipeline routes and trading corridors. This militarization is largely directed against China, Russia and Iran. More about background of this battle in my article “Is GUUAM dead?”

• As said the new pipeline will run through Uzbekistan and Kazakhstan to Xinjiang in western China. Xinjiang is becoming increasingly important as a transit route for gas pipelines from Russia and Central Asia. Given the vast region’s location several thousand kilometers inside China, it is impractical for the Chinese to protect fully the long stretches of pipelines through Xinjiang’s vast mountains and deserts so they are trying to eliminate the militant groups before the pipelines become operational. So far the unrest in Xijiang has be seen based to ethnic questions. The energy aspect explains why China's response to unrest is and will be strong also in future.

• Summit of the Shanghai Cooperation Organization that was called in Yekaterinburg on the 16^th of June. Besides some universal ideas in statements and declarations the SCO Energy Club has to this day failed to come up with a cooperation model that would suit all member-states. China's actions on the ground will lay the basis for actual energy cooperation in the SCO framework since instead of some remote private owner China as state (via state-owned company) is implementing the projects. Promoting energy cooperation in SCO framework must from now on take the “Chinese Factor” seriously.

• The bad news for Russia is that there is a customer willing to take all the gas that Turkmenistan has for sale: China. It has been steadily gaining access to the energy wealth of Central Asia, while ousting American, European and Russian companies from the area. Beside oil and gas the Chinese are simultaneously planing to transport also the mineral resources in question to China’s western border.

• For contest between EU's Nabucco and Russia's South Stream China's actions favor later. Today's arrangements are securing gas for South Stream while Nabucco still is searching supply. It is more clear that Nabucco should be filled with Iraqi and/or Iranian gas and political aspects related to this may delay finding(private) investors and the implementation of project as whole. In bottom line while Russia is taking its part from old gas fields and China from old and new gasfields the Nabucco pipe still is more than half empty.

More about background of Nabucco/South Stream battle in my articles "Is it time to bury Nabucco?" and "EU's big choice - Nabucco or South Stream?"