The petrodollar is more important for US global domination than either arms exports or Hollywood culture, because it allows the US to be the biggest exporter of the dollar bills the rest of the world, which needs to be able to buy oil. Venezuela has decided to start de-dollarizing its economy. To understand what this means, it’s necessary to look at the geopolitical context in which the move takes place.
After President Nicolas Maduro announced last Thursday that every business signing contracts with the Venezuelan State should do so in a foreign currency other than the US dollar, Vice President Tareck El Aissami sought to ensure the country’s productive sector gets the necessary mechanisms via public and private banks to be able to migrate to a new basket of foreign currencies.
In a working meeting with business people on the Constituent Plan for Peace and Economic Prosperity, Aissami said, “We have to throw off the yoke of the dollar”, arguing that anyone wanting to bid in auctions of the Floating Exchange Rate System (DICOM) should switch their bank accounts to another currency. Aissami added, “We’re doing no more auctions in dollars, those auctions are over”. He emphasized that these measures are meant to counteract economic sanctions imposed by the US.
Aissami also said that Venezuelan citizens promoting the sanctions would face trial, adding that Venezuela is closing existing bank accounts and migrating them to other banks around the world, whom he thanked for their assistance. He reported that, “In the public banking system we already have partner banks in all those countries” (Russia, China, India, Europe).
Why does the petrodollar rule?
The US dollar became the predominant currency for international payments because, until the middle of the 20th Century, the gold standard was the dominant monetary system. This system was based on the fixed quantity of gold reserves stored in national banks, which set a limit on possible credit. At that historical moment the US government managed to appropriate 70% of the world’s gold (except that of the Soviet Union), thus weakening Britain and bypassing the Bretton Woods financial system set up in 1944.
To reach its long desired world dominance, the US government used two main tools: the US dollar and its military power. Some countries developed alternative military alliances and broke with dependency on the US dollar to avoid being subjugated.
In the 1970s, the US dollar suffered a dramatic fall due to the economic growth of Germany and Japan and the reluctance of the US authorities to adjust economic policy to maintain a balance between the US dollar and gold. The US currency was revived with help from oil exporters like Saudi Arabia, who exchanged their oil for US armaments. In 1971, US President Richard Nixon unilaterally cut the convertibility of the US dollar to gold (the so-called Nixon shock) and so oil became the basis of the US dollar system, and for that reason keeping control of oil trading is today a priority of US foreign policy.
So long as the members of OPEC supported this system, world demand for US petrodollars reached historic high and countries were obliged to buy dollars in order to purchase oil on the international markets.
Currently, the US contribution to global GDP is calculated at no more than 22%. But 80% of international payments are made in US dollars, making the dollar overvalued in comparison with other currencies. That is why US consumers can buy imported goods at extremely low prices, giving them a significant financial advantage, while the high demand for dollars in the rest of the world allows the US government to refinance its debt at very low interest rates.
The threat of de-dollarization
Any country fighting against the dollar is considered to be a direct threat to US economic hegemony and its citizens’ high standard of living which means the US elites do whatever it takes to defeat resistance. Libyan leader Muammar al Gaddhafi was overthrown and brutally murdered when he decided to sell oil in euros, and then to replace the euro by introducing a gold dinar currency.
That meant the emergence of a national leader with 150 tons of gold reserves proposing to sell oil in exchange for real gold, which is why then French President Nicolas Sarkozy said, “Libya is putting at risk global financial stability” which is based on an unsupported currency of benefit only to US consumers.
Along with some banks and energy companies operating in their countries, China, Russia and Iran are following a de-dollarization policy to escape US domination. In 2014, the Russian treasury announced a plan to increase the participation of ruble-based contracts while, last May, at the Shanghai Summit, Russia committed to selling China US$400 billion of natural gas over the next 30 years, invoiced in rubles and the yuan. It has been called “the deal of the century”.
During his visit to China last August, Russian President Vladimir Putin announced, “the petrodollar system should be a thing of the past”. Given the Western sanctions policy against his country, he added, “Russia is discussing the use of national currencies in swap agreements with various countries.”
Over the last few months China has signed currency swap agreements with Canada and Qatar, thus making Canada the first offshore center for the Chinese yuan in North America, while doubling or even tripling trade with China by as much as an estimated RMB200 billion. The currency swap between China and Qatar, itself recently the target of sanctions, are equivalent to US$5.7 billion, turning Qatar into a base for the yuan in Middle East markets already suspicious of the US dollar because it exports inflation. It may only be a matter of time before other OPEC countries sign currency swap agreements with China.
China has also promoted establishing a compensation center in Malaysia’s capital Kuala Lumpur to encourage greater use of the yuan in South East Asia. This is within less than a month of Singapore, Asia’s biggest financial center, becoming an exchange center for the yuan via a currency swap for Singapore dollars.
Iran has also recently announced its reluctance to use dollars for foreign trade. Kazakhstan’s President Nursultan Nazarbayev, has likewise instructed his country’s national bank to de-dollarize the economy. The United Kingdom plans to issue debt in yuan while the European Central Bank is discussing whether to include the yuan in its official reserves.
While in the real world this tendency grows, along with domestic US inflation, so too does anti-Russian propaganda.
The war is worldwide and self-evidently economic
In terms of resources, whoever has gold or oil underground is be able to decide geopolitical issues or currency hegemony. However, military power is also a determining factor in the readjustment of leadership currently taking place with the collapse of the capitalist system. Many countries are seeking to withdraw their gold reserves held in the vaults of the US Federal Reserve Bank, especially since that bank refused in 2013 to hand over German gold reserves to their respective owners.
Seeing that much of the world no longer needs dollars, the US government opted for regional destabilization so as to weaken any potential rival.
In the meantime, US$20 trillion of US debt is almost as much as the total of the 28 members of the European Union and bigger than US Gross Domestic Product. The message investors take away from the ratio of debt to GDP is that the US might eventually be unable to pay its debts. Presidents George W. Bush and Barack Obama used up the state’s reserves and plundered Social Security, among other things, to finance the “War on Terror”, and increasing spending in other departments.
Even though Russia, through its Prime Minister Dmitry Medvedev, has recognized that the US has waged a large scale economic war against it, Russia’s debt is low in comparison with European countries. Russia’s growth before 2011 was greater than that in the United States, Germany, France, Japan and the rest of the G8 countries. President Vladimir Putin paid off almost all of Russia’s debt selling hydrocarbons during the period when prices were high.
The established mechanisms of global power wrecked relations between the US and Russia via intrigues and offensives ending up with a battery of sanctions against the Russian people. Furthermore, despite the blockades NATO has contrived against Russian natural gas via conflicts in Ukraine and Syria, Vladimir Putin’s government has finessed them via the South Stream project with Turkey and the imminent defeat of the Islamic State in Syria.
De.dollarization by the European Union would throw the West into crisis, especially when Europe is wracked by a banking crisis and the US Senate has decided to raise the US government debt ceiling temporarily to allow the US authorities to assign US$15 billion to help victims of Hurricane Harvey.
“Futures” on the horizon
The Venezuelan oil market now has the chance of trading so called future oil contracts offered by China denominated in yuan. Under this type of contract, the parties agree to buy or sell an asset at a price fixed beforehand. This could become the new template for people trading financial instruments in commodities markets and could well become a new standard reference point for traders, since China is the world’s biggest oil importer. Also, according to Venezuela’s vice president, China has expressed interest in paying for Venezuela’s oil in yuan.
Currently, only contracts in the West Texas Intermediate and Brent oil benchmarks are traded in global futures markets and both are traded in US dollars. But oil and gas exporters like Russia, Iran, Qatar and Venezuela could avoid dollar trades if their buyers could pay for oil in yuan or even in gold after converting their yuan into gold ounces.
According to Michael Snyder in his blog The Economic Collapse, in economic and financial terms China’s government has been playing chess while the West has been playing checkers. Unfortunately for the US, play has now reached a stage where check mate is within view. Venezuela is positioning itself to preserve its peaceful sovereignty and self determination at a moment of geopolitical reconfiguration that will decide the world’s economic course for decades to come.