A few weeks ago, I published an article on this site suggesting that China and Russia may be jointly working to reduce or remove the dominance of the U.S. dollar in the international energy trade. Since that time, both countries have taken a number of steps to achieve that goal. In addition, a number of other countries, including ones which are commonly considered to be friendly to U.S. interests, have also expressed a desire to move away from using the U.S. dollar as the primary currency in the energy trade. These nations appear to be not only opposed to the petrodollar standard but, in fact, want to replace or at least reduce the dollar's dominance in all forms of trade. Should they succeed, this would represent a significant blow to spending habits in the United States as well as to the country's standard of living.
On April 24, Russia's First Deputy Prime Minister Ignor Shuvalov chaired a meeting consisting of representatives from Russia's enormous energy, banking, and governmental sectors which had the stated goal of reducing the use of the dollar in Russia's export operations and replacing it with the Rouble. Admittedly, accomplishing this would require the agreement of Russia's trading partners. Sources cited by Politonline.ru cited two countries that would be willing to go along with this plan: China and Iran.
About a month after this meeting, Russian President Vladimir Putin visited China to put the finishing touches on a deal between the two countries in which Russia's Gazprom (OTCPK:OGZPY) will sell an enormous amount of natural gas to China. I have written about this deal before. According to U.S. News and World Report, Putin also worked to strengthen his country's relationship with China in response to Russia's increasing isolation from the Western powers due to the sanctions that have been imposed on the country. For its part, China actively denies having an interest in creating a Cold War-esque anti-Western alliance but it has expressed a strong distaste for certain American actions. That is not the most important news to come out of these meetings, however. The most important news came at the end of June, when Gazprom's CEO announced that his company's energy deal with China would be transacted in Roubles and Chinese Yuan. This deal is valued at nearly half a trillion dollars and so quite clearly represents an enormous amount of energy trade that will be conducted outside of the petrodollar standard that has dominated international trade for more than four decades.
Another country that may be willing to depart from the petrodollar standard is the tiny but very gas-rich nation of Qatar. This is due, at least in part, to the United States' ambitions to become a significant exporter of natural gas. According to Voice of Russia, Russia's Deputy Foreign Minister Mikhail Bogdanov visited Qatar on a diplomatic mission on May 6, 2014. On this visit, Mr. Bogdanov met directly with the Emir of Qatar who appeared to be unwilling to impose sanctions of his own against Russia, as the United States demands. But, what is perhaps much more important is that the Russian envoy put emphasis on the need to accelerate the establishment of coordination within the Gas Countries Exporting Forum. The Gas Countries Exporting Forum is an analogue to OPEC in that it seeks to be a cartelized group of natural gas exporters. The organization has been dormant since 2001 but this move by Russia and Qatar could be an attempt to reactivate the organization. Considering that Russia is the leading member of this organization (much as Saudi Arabia is the leading member of OPEC), the reactivation of the Gas Countries Exporting Forum could represent a threat to the U.S. dollar's dominance in the energy trade. This is because Russia, Qatar, and Iran (another important member of the forum) are among the largest exporters of natural gas in the world and it seems likely that the world's largest natural gas producer (Russia) will encourage the other nations in the Forum to go along with its plan to sell their gas in currencies other than the U.S. dollar. Admittedly, the Voice of Russia article did not state what Qatar's response was to the Russian envoy's request and historically Qatar has been a staunch supporter of the United States. Should the U.S. continue to threaten Qatari gas exports with exports of its own though, Qatar may choose to begin selling its gas for currencies other than the dollar and thus deal a blow to the petrodollar standard.
China is the world's largest manufacturer and exporter of consumer and industrial goods and is the largest trade partner for many of the world's nations. This puts it in a unique position to weaken the dollar's standing as the preferred currency of global trade. Unfortunately for the dollar, China has been using its position to accomplish such a goal. On June 18, DW reported that China and the United Kingdom had agreed to make the British pound and the Chinese renminbi directly convertible. Previously, all conversions between the two currencies had to use the U.S. dollar as an intermediary. At first glance, this may not appear to be a direct threat to the U.S. dollar's dominance in international trade because it is not an agreement between the two nations to trade with each other in their own currencies. However, when put in perspective with some other moves that China has made, it is fairly obvious how this benefits than yuan at the expense of the dollar. First is that this continues the Chinese attempt to turn the yuan into a freely convertible international currency. For years, the yuan was only directly convertible into U.S. dollars. This meant that banks and other currency dealers needed to keep a supply of dollars on hand to facilitate transactions between the yuan and other local currencies. This produced demand for U.S. dollars abroad, helping to keep the value of the U.S. dollar relatively high. China recently made the yuan freely convertible into Japanese yen, Australian dollars, New Zealand dollars, Russian roubles, and Malaysian ringgits, thus removing the need for these countries to hold dollars just to do business with China. The United Kingdom represents the first European country to have its currency directly convertible into Chinese yuan, though.
As many readers are no doubt aware, earlier this month, the United States Department of Justice imposed a record fine of $9 billion on French bank BNP Paribas (OTCPK:BNPQF) for violations of U.S. money laundering laws. The fine was imposed after the bank pleaded guilty to helping clients dodge sanctions on Iran, Sudan, and other countries. This fine was far more than the $1.9 billion fine that was imposed on Britain's HSBC (NYSE:HSBC) despite similar charges. This did not escape the notice of foreign officials, with Bloomberg Businessweek reporting that Vladimir Putin accused the U.S.-imposed fine as "blackmail." He accused the United States officials of offering to reduce the fine against BNP Paribas if France changed its mind about selling two Mistral-class helicopter carriers to the Russian navy. Regardless of whether Mr. Putin was correct or not, the French response to the fine could very well represent another significant blow to the U.S. dollar's dominance in international trade. On June 11, prior to the imposition of the fine against the bank, Christian Noyer, Governor of the Bank of France and a member of the European Central Bank's governing board, stated that there is no reason to conduct trade in U.S. dollars when the United States is not one of the parties to the trade. He also stated that imposition of a fine against BNP Paribas, which was at the time projected to be $10 billion, would "leave marks." French President Francois Hollande backed up Mr. Noyer's remarks and stated that the imposition of such a fine could jeopardize a free trade agreement that was being negotiated between the United States and the European Union.
After the Department of Justice levied the $9 billion fine against BNP Paribas, Mr. Noyer made a much stronger statement regarding France's future support of the U.S. dollar. He did this in a lengthy interview in French magazine Investir. Here is the Google translated relevant portion of the interview, originally found on Zero Hedge.
"Q: Doesn't the role of the dollar as an international currency create systemic risk?
Noyer: Beyond [the BNP Paribas] case, increased legal risks from the application of U.S. rules to all dollar transactions around the world will encourage a diversification from the dollar. BNP Paribas was the occasion for many observers to remember that there have been a number of sanctions and that there would certainly be others in the future. A movement to diversify the currencies used in international trade is inevitable. Trade between Europe and China does not need to use the dollar and may be read and fully paid in euros or renminbi. Walking towards a multipolar world is the natural monetary policy, since there are several major economic and monetary powerful ensembles. China has decided to develop the renminbi as a settlement currency. The Bank of France was behind the popular ECB-PBOC swap and we have just concluded a memorandum on the creation of offshore renminbi clearing in Paris. We have very strong cooperation with the PBOC in this field. But these changes take time. We must not forget that it took decades after the United States became the world's largest economy for the dollar to replace the British pound as the first international currency. But the phenomenon of U.S. rules expanding to all USD-denominated transactions around the world can have an accelerating effect."
Mr. Noyer is clearly stating here that he is supportive of a move away from the dollar as the dominant currency in international trade. Furthermore, he states that the Chinese have been moving to make the renminbi into a viable replacement through actions such as improving its convertibility as discussed earlier. Thus, it is possible that the reason that the Chinese have made the renminbi directly convertible into British pounds was not merely to make trade between the two countries more streamlined but instead to have the yuan supplant the dollar as the preferred currency of international trade. Finally, the last implication of Mr. Noyer's statement could be the most concerning for the dollar's status; he suggested that other nations may begin to conduct trade in currencies other than the dollar.
As the Huffington Post points out, BNP Paribas committed no crime under French law. The reason why the United States has levied the fine, which Mr. Noyer also states in his comment quoted above, is that the transactions which violated U.S. sanctions laws were conducted in U.S. dollars and so had to be processed by the company's dollar clearing operations in New York. It thus appears that if these transactions would have been performed in euros, Chinese renminbi, or any other currency then there may not have been a problem (assuming that Mr. Putin was in error and that this was not a direct retaliation for France's dealings with Russia). It is likely that the reason that the illegal transactions were conducted in United States dollars is because that is the primary currency in international trade. Thus, as Mr. Noyer also appears to be implying, the dollar's primacy in trade may be threatening the sovereignty of nations such as France and this threat may be partly responsible for encouraging more nations to move away from using the dollar as their primary currency in international dealings.
France is one of the largest economies in and one of the leading and founding members of the European Union, an entity whose economy is larger than that of the United States. Thus, if France actively moves to abandon or at least reduce the use of the U.S. dollar in international trade then the entire EU itself may follow suit. This is particularly true if it can convince the other major economy in the Union, Germany, to agree. Unfortunately for the U.S. dollar's status, Germany may just be inclined to agree.
The nation of Germany has become increasingly irritated with the United States because of the recent spying scandals. Evidence of this can be found in a recent move that the company has made regarding its procurement procedures. According to Bloomberg, Germany's Interior Ministry is reviewing its rules for awarding government contracts for computer and communications equipment and services. Ultimately, this could prove to be a negative to companies such as IBM (NYSE:IBM), Cisco (NASDAQ:CSCO), and Microsoft (NASDAQ:MSFT) that may now have a more difficult time winning German government contracts. American telecommunications giant Verizon (NYSE:VZ) has already lost a contract with the German government in favor of Deutsche Telecom (OTCPK:DTEGF) due to the spy scandals. But, the most important takeaway here is how relations between the United States and Germany have deteriorated, possibly so much so as to encourage the Germans to actively seek an alternative to the dollar.
Admittedly, German officials have thus far not called for a replacement to the dollar as the dominant currency in international trade, despite the deteriorating relationship with the United States. However, another move being made by the United States could lead to this result. As already discussed, the French only began calling for an end to the dollar's dominance after the United States levied a nine billion dollar fine on BNP Paribas for violating U.S.-imposed sanctions. According to the New York Times, the United States Department of Justice is currently bringing a similar case against the second largest bank in Germany, Commerzbank (OTC:CRZBF). The expected fine in this case is expected to be approximately $500 million, clearly much less than the fine that was levied against BNP Paribas. However, Commerzbank is 17%-owned by the German state and the case against Commerzbank is expected to pave the way for a similar case against the much larger Deutsche Bank (NYSE:DB). These cases combined with the spying scandals may just be enough to cause Germany to begin seeking an alternative to the U.S. dollar as the currency of international trade and if Germany begins to seek this out then it is possible that the entire E.U. will actively begin working towards replacing the dollar as the currency of choice in international trade.
One final point of contention that is straining the relationship between the United States and France and Germany is the matter of the former's imposition of sanctions against the nation of Russia. On July 16, RT reported that the United States has imposed a new round of sanctions against Russia, this time targeting oil giant Rosneft (OTC:RNFTF) and banking titan Vnesheconombank among others. However, France, Germany, and seven other E.U. nations do not want to follow the U.S. lead in this. This is likely due, at least in part, to the large amount of trade that the E.U. nations do with Russia. The European Union as a whole trades nearly nine times the value of goods with Russia that the United States does and Europe as a whole is highly dependent on Russian natural gas as a source of energy. Thus, there is the very real risk here that these sanctions could strain the relationship between the European Union and the United States further. Ultimately, these strained relationship could result in the various nations that make up the E.U. becoming disturbed with the dominant position that the U.S. enjoys in world affairs, which is at least partly due to the dollar's primacy in international trade and may lead them to seek alternatives. This would greatly reduce the international demand for U.S. dollars and result in a lower value for the dollar.
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