As it tries to punish Russia for the latter's dismemberment of Ukraine, the
West is discovering that the balance of power isn't what it used to be. Russia
is a huge supplier of oil and gas -- traded in US dollars -- which gives it
both leverage over near-term energy flows and, far more ominous for the US,
the ability to threaten the dollar's rein as the world's reserve currency.
And it's taking some big, active steps towards that goal. As Zero Hedge noted
on Tuesday:
Last week we reported that while the West was busy alienating Russia in every
diplomatic way possible, without of course exposing its crushing overreliance
on Russian energy exports to keep European industries alive, Russia was just
as busy cementing its ties with China, in this case courtesy of Europe's most
important company, Gazprom, which is preparing to announce the completion of
a "holy grail" natural gas supply deal to Beijing. We also noted the following: "And
as if pushing Russia into the warm embrace of the world's most populous nation
was not enough, there is also the second most populated country in the world,
India." Today we learn just how prescient this particular comment also was,
when Reuters reported that Rosneft, the world's top listed oil producer by
output, may join forces with Indian state-run Oil and Natural Gas Corp to supply
oil to India over the long term, the Russian state-controlled company said
on Tuesday.
Rosneft CEO Igor Sechin, an ally of President Vladimir Putin, travelled
to India on Sunday, part of a wider Asian trip to shore up ties with eastern
allies at a time when Moscow is being shunned by the West over its annexation
of Crimea. Rosneft said it had also agreed with ONGC they may join forces
in Rosneft's yet-to-be built liquefied natural gas plant in the far east
of Russia to the benefit of Indian consumers.
We just have one question: will payment for crude and LNG be made in Rubles
or Rupees? Or in gold. Because it certainly won't be in dollars.
Rosneft, which is increasing oil flows to Asia to diversify away from Europe,
did not provide any additional details but said it had discussed potential
cooperation with Reliance Industries and Indian Oil.
It did not have to: it is quite clear what is going on. While the US is
bumbling every possible foreign policy move in Ukraine (and how could it
not with John Kerry at the helm), and certainly in the middle east, where
it is alienating Israel and Saudi just to get closer to Iran, Russia is aggressively
cementing the next, biggest (certainly in terms of population and natural
resources), and most important New Normal geopolitical Eurasian axis: China
- Russia - India.
There is only one country missing - Germany. Because while diplomatically
Germany is ideologically as close to the US as can be, its economy is far
more reliant on China and Russia, something the two nations realize all too
well. The second the German industrialists make it clear they are shifting
their allegiance to the Eurasian Axis and away from the Group of 6 (ex Germany)
most insolvent countries in the world, that will be the moment the days of
the current reserve petrocurrency will be numbered.
To understand why trade deals between Russia, China and India are potentially
huge, a little history is useful: Back in the 1970s, the US cut a deal with
Saudi Arabia -- at the time the world's biggest oil producer -- calling for
the US to prop up the kingdom's corrupt monarchy in return for a Saudi pledge
that it would accept only dollars in return for oil. The "petrodollar" became
the currency in which oil and most other goods were traded internationally,
requiring every central bank and major corporation to hold a lot of dollars
and cementing the greenback's status as the world's reserve currency. This
in turn has allowed the US to build a global military empire, a cradle-to-grave
entitlement system, and a credit-based consumer culture, without having to
worry about where to find the funds. We just borrow from a world voracious
for dollars.
But if Russia, China and India decide to start trading oil in their own currencies
-- or, as Zero Hedge speculates, in gold -- then the petrodollar becomes just
one of several major currencies. Central banks and trading firms that now hold
60% of their reserves in dollar-denominated bonds would have to rebalance by
converting dollars to those other currencies. Trillions of dollars would be
dumped on the global market in a very short time, which would lower the dollar's
foreign exchange value in a disruptive rather than advantageous way, raise
domestic US interest rates and make it vastly harder for us to bully the rest
of the world economically or militarily.
For Russia, China and India this looks like a win/win. Their own currencies
gain prestige, giving their governments more political and military muscle.
The US, their nemesis in the Great Game, is diminished. And the gold and silver
they've vacuumed up in recent years rise in value more than enough to offset
their depreciating Treasury bonds.
The West seems not to have grasped just how vulnerable it was when it got
involved in this latest backyard squabble. But it may be about to find out.
