Western Systemic Crisis 2017-2019 – The Almighty dollar against the Great Petro-Yuan Temptation

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Qatar, North Korea, the Baltic Sea, risk of a World War III… and all the military ranting mentioned in the media lately, are issues going hand in hand with the programmed and imminent advent of the catastrophic scenario for the dollar as a unique world reference currency: the Petro-Yuan will be in place at the end of the year. More than a petro-currency, it will be a petro-gas-gold-currency! The West is thus preparing to switch to total anachronism with this founding act of the 21st century multipolar world. 2014-2017: here we are, at the end of a three-year exacerbation period of tensions on all front lines (West against the rest of the world) and we are witnessing the up-coming end of the dollar’s reign over the world and over all financial systems and their related economic activities. Sanctions, blockades, proxy-wars, direct military threats… the question is whether the current clash of arms is really a warning sign of an Nth suicide of the West whilst hoping in vain to stop time, or whether the solution conveying power is on the verge of carrying away all possible resistance.

The magnet effect of the brand new Petro-Yuan! 

The world’s biggest oil importer, China is preparing to launch gold-backed Yuan-denominated oil futures, possibly creating the most important Asian benchmark in the oil sector, allowing oil exporters to switch from US dollar-denominated assets by transactions in Yuan[1]. To make the Yuan-denominated contracts more attractive, China plans to have the Yuan fully convertible into gold on the Shanghai and Hong Kong foreign exchange markets. Last month, the Shanghai Futures Exchange and its subsidiary, the Shanghai International Energy Exchange (INE) successfully completed four production environment tests for crude oil futures; also, the exchange continues with preparatory work for crude oil futures contracts, aiming to launch operations at the end of this year. China’s Yuan asset value – coupled with the Hong Kong Stock Exchange’s plan to sell Yuan-denominated physical gold futures – will create a system helping countries to bypass the US banking system.

The countries which will immediately benefit from this revolution are, of course, the countries under Western sanctions, such as Russia, Iran, Venezuela… Those mentioned countries are, by the way, sitting on the world’s largest reserves of gas and oil, that is the reason why we are talking of petro-gas-Yuan, knowing that gas represents the energy of the future much more than oil does.

fig1Figure 1 – World gas reserves. Source: EIA, 2015

fig2Figure 2 – World oil reserves. Source: Wikimedia Commons, 2014

Iran and Venezuela have particularly suffered from their isolation from the international system which stopped them from investing significantly in production infrastructures, their potential being therefore largely untapped; these two countries will lose no time in using the opportunity opened by the petro-Yuan. Iran[2] and Russia[3] mainly, but also other smaller producers like Angola[4] and Nigeria[5], are already selling their oil and gas for Yuan to China. But the inconvertibility of the Yuan leads to the development of a Yuan zone outside the international system, without any official existence, with all the uncertainties for the producers concerned about the future of this share of monetary reserves. But everything will change with these new futures, which now come with clear instructions from China, a country already sick of the almighty dollar reign: “From now on, we will favour producers who agree to sell us their energy in Yuan!”

Which brings us to Qatar…

Over the past two years, Qatar has had more than $86 billion transactions in Yuan[6]. This summer, it also became friends with Iran[7], the country sharing with it the largest natural gas field in the world; this allows Qatar to restart drilling after its 12-year moratorium, thus exploiting the gigantic reserve which makes it the third largest gas power in the world. In short, the Sunni and pro-Western Qatar, friend with Iran and China, is now risking bringing along Saudi Arabia, an alliance which would obviously sign the end of the petrodollar; hence the feverish agitation that gripped the region at the end of the spring. But the banning policies and the boycott have thrown countries into the arms of the “Other World”, which has become an irresistible magnet.

Will Saudi Arabia swing over to the other side?

The context has changed rapidly: gas dethroned oil, Saudi Arabia starts to invest in gas extraction infrastructure, the US is now a major competitor of its Saudi strategic ally in terms of gas production (with reduced imports from 14 million barrels a day in 2007 to 8 million barrels in 2017) and the Russians reduce their imports of Saudi oil. All this means that Saudi Arabia, already  a victim of the price crisis in the past years[8], must absolutely not risk losing China as a customer as it will end up with vast production reserves which will automatically bring down prices. Besides, the “Other World” provides guarantees of firmness and price stability (via its new OPEC/NOPEP system), guarantees which the West no longer conveys (as the United States does not participate).

Under these circumstances, no wonder that King Salman of Saudi Arabia[9] has just removed from the succession Prince Ben Nayef in favour of Prince Ben Salman, the latter being known for his Russian and Chinese sympathies[10].

Naturally, by accepting to be paid in Yuans, Saudi Arabia risks to lose US military protection. The Chinese are aware of the thorny dilemma they put the country in, and they keep for this matter something up their sleeve: an authorisation to issue treasury bills in Yuan by Saudi Arabia, the creation of a Saudi investment fund and the acquisition of a 5% share of the Saudi Aramco (Saudi Arabian national oil company), which will soon be listed on the international markets[11].

Will it swing over? Will it not? It is the Iranian file, and thus the Saudi military apparatus which can block the evolution via an Iran-Saudi Arabia open conflict. But again, the choice of Ben Salman as heir could play in favour of the swinging operation. Ben Salman is really a major player in the military campaign in Yemen and, as such, is close to the military apparatus of his country, which is probably 100% confident in him.

Another argument in favour of a reversal of Saudi Arabia: the region. We have seen that Qatar has already taken sides. Kuwait and the Sultanate of Oman, faithful to the principles of a neutral foreign mediation oriented policy (especially in the Yemen related conflict[12]), have all refused to take a stand and actually find themselves in the opposite camp. The historical proximity of Kuwait and Russia is well known and the Sultanate of Oman is happily the air hub of the Qataris, instead of Dubai[13]. Turkey, as our readers have known before anyone else, has “passed to the East”… Even among the four boycotters – Saudi Arabia, Bahrain, Egypt, United Arab Emirates – one of the seven Arab emirates, the Emirate of Sharjah, already plans to issue bonds in Yuan and consequently will become the first issuer of the Middle East Market for Chinese Interbank Bonds[14]. It would not be a very good starting point to launch a war against Iran as a prerequisite for the implementation of the Vision 2030 plan[15] originally set up by Prince Ben Salman himself, a plan which positioned Saudi Arabia as a regional power.

Finally, international public opinion will not be easily won over to Saudi Arabia’s support for a direct conflict between Saudi Arabia and Iran. Its reaction to the Qatar boycott provides a clear predecessor. Our team does not really see how the Arabian Peninsula could resist such siren calls.

The armies of the Almighty Dollar to the rescue of the US indebtedness-financing system

The arrival of the petro-Yuan is of course the end of the dollar as a pillar of the international monetary system and thus the end of the unavoidability of the dollar, a national currency that the vagaries of history have led to support the global economy, which are currently too heavy for it.

Since there is no longer an obligation to go through the US dollar in international transactions, the perception of the value of the US currency will radically change, to focus more on the reality of the solidity of the US economy , its production, its exportations… so many indicators currently in the red.

fig3Figure 3 – American balance of trade (Aug 2016 – Jul 2017) – Source: US Census Bureau, 2017

The dollar will not disappear at the end of the year, certainly. But it is a matter of trend, and several big countries are going to rush on the petro-Yuans: Russia, Iran, Venezuela to start with, besides China. Practically, the dollar will lose value and trigger a leak out of a dollar-system which everyone knows as based on weak fundamentals. The likely massive return of dollars to the United States will cause inflation[16]. And we are entering the mined territory of the debate on the virtues and/or dangers of inflation on the US’ debt, a debate this article is not intended to enter. We know, though, that it exists and therefore some parts of the US governance system (beginning with the current president) may be in favour of a weaker dollar.

In short, there are those who insist on the perpetuation of the indebtedness system, which allows to continue to finance oneself even if one does not have the means to do so (the army, nurtured by public funds, is probably on this side) and those who are in favour of reducing the debt burden (real economy). If inflation is a means of reducing debt, which satisfies the latter, it also discredits the mechanism of indebtedness which is unsuitable for the former.

The superiority of the US military

The disproportionate sector supported by the indebtedness system allowed by the centrality of the dollar is of course the US military and all its avatars around the world, beginning with NATO but also the defence systems in Japan, South Korea, Saudi Arabia, etc.

This military-industrial machine is also a good business producing large amounts of money to the United States. But this business, like any other one, is hit hard by the competition of the new powers (Russia, China, India, etc…). If the country no longer has the means to invest in its absolute technological superiority, competitors are there to bite in the market shares. Now the race for technological superiority in this field is under way and the competitors are close to the finish line[17].

One of the reasons Turkey, for example, has moved away from NATO, is also probably the fact that the Russians, have better quality products in certain fields. Their choice of the S-400[18] is also to be understood from the following angle[19]: in the region, the level of tensions around Turkey does not allow it to please an ally; in military affairs, only performance counts. And it is not totally impossible that NATO’s military-industrial system no longer provides the best products available on a wide-open arms market filled with competition: Russia, China, India, the United Kingdom, etc. countries whose strategic independence and deterrence are survival issues and, therefore, they are forced to “market” around the world to find the most convincing products.

Our team believes that it is time to question the speeches of absolute superiority of the American military system, speeches far too sonorous not to evoke communication effects. If we are unable to state anything sure in this field, we believe that it is useful today to question this predicate because this questioning provides a sufficiently relevant way of understanding the world…
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[1]    Source: Nikkei Asian Review, 01/09/2017
[2]    Source: BBC, 08/05/2012.
[3]    Source: Financial Times, 01/06/2015.
[4]    In 2015, Angola adopted the Yuan as the second official currency of the country… and its first currency, the Kwanza, is accepted by China as exchange currency. Source: MacauHub, 05/08/2015
[5]    Since 2011, Nigeria has opened its exchange reserves to the Yuan. Source: CSMonitor, 06/09/2011.
[6]    Source: Reuters, 26/04/2017.
[7]    Source: The Independent, 24/08/2017
[8]    Source: South China Morning Post, 04/09/2017
[9]    King Salman is 81 and apparently is having health problems.
[10]   Source: Sputnik, 21/06/20017
[11]   Source: Nikkei Asian Review, 01/09/2017
[12]   Source: AlMonitor, 14/11/2012
[13]   Source: ArabianIndustry, 13/06/2017
[14]   Source: Reuters, 31/08/2017
[15]   Source: Les Echos, 21/06/2017
[16]   Since August 2016, US inflation has dramatically increased, from 1 to 2.7 in February (!), but then it fell back to 1.6 in June and continued to rise ever since (1.9 in August). Source: US Inflation Calculator, 14/09/2017
[17]   For a long time, DeDefensa has been trying to draw the attention of the public to this evolution with highly documented articles on the failure of the F-35, the limits of US air domination, etc. Source: DeDefensa, 16/09/2015. Read also on this topic « The US Army is in bad shape ». Source: NationalInterest, 14/02/2017
[18]   Source: The Drive, 25/07/2017
[19]   Israel’s air superiority is clouded by the new Russian missiles in Syria. Source: Times of Israel, 01/12/2017