The US dollar has been reigning as the world’s reserve currency since the Bretton Woods agreement in 1944. The US then possessed the world’s largest gold reserves and were able to peg the dollar to gold. By 1971, the US gold reserves had significantly reduced and Washington was no longer able to guarantee the dollar convertibility into gold. A couple of years later, the US found a new way to ensure the supremacy of their currency. Following the Yom Kippur war, OPEC members stopped selling oil to the US. The American economy quickly started to feel the impact of skyrocketing oil prices, which led President Nixon to strike an agreement with Saudi Arabia. This agreement would set the rules of oil trade for the next forty years. In return for Washington’s military protection in case of an Israeli attack, the sale of weaponry, and the purchase of Saudi oil, Riyadh would impose the dollar as the trading currency for all OPEC oil trade in the world.
Since 1973, the petrodollar has faced little competition, with only Iraq, Syria, and Libya which made ill-fated attempts to stop trading oil in dollars. Today, US sanctions on some of the world’s top energy producers have changed the situation. It is no longer a single state trying to challenge the dollar supremacy but what increasingly looks like a club of outsiders, among which some of the world’s energy heavyweights. Together they represent 40 percent of the world’s population and hold 36 percent of the world’s oil proved reserves. China, India, Iran, Qatar, Russia, and Venezuela have all started to trade oil in other currencies than the dollar.
As it turns out -and despite Washington’s effort to provoke the opposite-, this club of outsiders, which counts some of the world’s largest energy consumers and producers, if it keeps showing solidarity, could be self-sufficient.
US sanctions have reduced or cut access to the dollar for some of these states and therefore increasingly led them to conduct bilateral oil trade in their national currencies, and their first attempts seem promising.
Breaking free of the US-Saudi Arabia pact
US sanctions have been preventing Iran from accessing dollar transactions. In order to avoid resorting to foreign bureaus, and thus reducing costs, in February 2018 the Iranian Ministry of Industry, Mine and Trade banned imports made in dollars. This new directive is actually likely to be welcomed by Iran’s biggest trade partners, among which are China, India and Turkey. In fact, since 2013, India has been paying 45 percent of its oil imports from Iran in Indian rupees. After the remaining 55 percent were blocked under US sanctions, the two partners started working on amendments to their agreement so as to allow oil payments to be fully made in rupees.
Iran has been a strong supporter of the de-dollarization of trade with its partners. In November 2017, during the Russian president’s visit to Iran, Ayatollah Khamenei urged his Russian counterpart to increase the use of national currencies for bilateral trade and declared Iran could support and use China’s petroyuan in future energy transactions.
Earlier this month, the Russian Energy Minister Alexander Novak declared Russia was working on adjustments in the financial, economic and banking sectors to replace the dollar with national currencies in oil transactions with Iran as well as Turkey. If Russia has been so quick to answer Tehran’s call, it is because it has already been successfully trading oil and gas in rouble and yuan with China since 2014.
The Asian dragon’s energy policy and economic moves to advance its national interests pushed another of its top energy suppliers and the world’s biggest LNG exporter, Qatar, to switch to yuan for payments of LNG deliveries.
The last member of the outsiders club to have defied the dollar, Venezuela, ordered the state oil company, Petróleos de Venezuela SA (PdVSA), to stop receiving or making payments in dollars and to switch to the euro instead. PdVSA told its partners “to open accounts in euros and to convert existing cash holdings into [euros],” as reported in the Wall Street Journal last September. The Venezuelan Vice President, Tareck El Aissami, declared his country, which sits on the world’s largest proven oil reserves, will be using a “basket of currencies to liberate [itself] from the dollar,” and to avoid being isolated by Washington’s sanctions.
Towards new petrocurrencies
Some outsiders decided to take the challenge one step further by issuing sovereign bonds denominated in each other’s national currency.
In May 2016, Chinese and Russian financial regulators agreed to issue Russian yuan-denominated bonds and Chinese rouble-denominated bonds. The initial sale amounts to ¥6 billion (just under $1 billion) and is planned to take place sometime this year. The two giant neighbours also launched a payment versus payment system for transactions in their national currencies so as to reduce settlement risk. These recent moves have alerted Washington which is now considering extending sanctions to the Russian sovereign debt.
Challenge to the petrodollar really reached its peak at the end of March 2018, when the Shanghai International Energy Exchange launched crude oil futures contracts denominated in yuan. To convince international traders, China now provides them with the possibility to convert yuan oil futures into gold at the Shanghai and Hong Kong gold exchanges. The launch of the petroyuan demonstrates China’s determination to assert the yuan as an accepted international currency, even if this entails defying the world’s first economy and reshaping global oil trade.
The US dollar has been facing growing challenges in the past 5 years. In its attempt to contain, isolate, and in some cases punish economies that refuse to abide by decades long rules established by the US, Washington could have shot itself in the foot and signed the end of the petrodollar supremacy. While history has shown the petrodollar already faced and crushed challenges, today its adversaries are coming out as the global energy arena’s heavyweights. An upcoming article will explore how US sanctions could have in fact helped their targets grow stronger and closer, and enabled them to represent what could be the petrodollar’s toughest and last challenge.
Diane Pallardy studied an MA in Politics and International Relations at the University of Kent, and MA in World Politics and Fossil Energy at the Higher School of Economics, in Moscow.
