De-dollarization on the March

While all eyes are fixed on Ukraine, they would do well to shift their focus and to pay attention to the new alliance forming between Saudi Arabia and China. And they should certainly pay attention to the recent reports that Saudi Arabia is considering taking payment for oil sold to China-- in yuan, not in dollars.

One understands that the Saudis are seriously unhappy with Joe Biden. Senile old Joe has managed to alienate Saudi Arabia and other Gulf Arab states by siding with Iran in a desperate attempt to revive the dead Iran nuclear deal. Biden has also accused the Crown Prince of Saudi Arabia of being a murderer and has removed Houthi rebels from the list of terrorist nations.

For those among other reasons, when senile old Joe wanted to talk to the leaders of those countries they refused to take his calls. 

At the same time, in what seems clearly to be a major diplomatic realignment Saudi Arabia and China are strengthening their ties. That they might get together to attack the dollar’s reserve status ought to be front and center on everyone’s list of dangers facing America.

Anyway, two days ago the Wall Street Journal reported on an upcoming visit by Chinese president Xi Jinping to Saudi Arabia.

Saudi Arabia has invited Chinese President Xi Jinping to visit Riyadh as the kingdom looks to deepen ties with Beijing amid strained relations with Washington, people familiar with the plan said.

The trip is expected to happen after Islam’s holy month of Ramadan, which begins in early April this year, the people said, in what could be Mr. Xi’s first foreign travel since the Covid-19 pandemic began. Riyadh is planning to replicate the warm reception it gave to former President Donald Trump in 2017 when he visited the kingdom on his first trip abroad, one of the people said.

“The crown prince and Xi are close friends and both understand that there is huge potential for stronger ties,” said a Saudi official. “It is not just ‘They buy oil from us and we buy weapons from them’.”

The Saudi Foreign Ministry and the Chinese Embassy in Riyadh didn’t immediately respond to requests for comment.

Note clearly, the Saudis greeted President Donald Trump with pomp and ceremony, with great respect. It will now do the same for the president of China. It is well worth noting.

More importantly, the Saudis are working to sell its oil to China in exchange for Chinese currency. Up to now, all such sales have taken place in dollars, this being a major support for the reserve status of the dollar. 

Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, people familiar with the matter said, a move that would dent the U.S. dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia.

The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom, the people said.

The Chinese want to diminish America’s power and influence by challenging the dollar. Now that they and the rest of the world has seen the Biden administration use the currency as a weapon against a key Chinese ally, Russia, the need to displace the dollar becomes of greater moment.

As for the loss of confidence in American governance, the Journal lists the reasons:

The Saudis are angry over the U.S.’s lack of support for their intervention in the Yemen civil war, and over the Biden administration’s attempt to strike a deal with Iran over its nuclear program. Saudi officials have said they were shocked by the precipitous U.S. withdrawal from Afghanistan last year.

China buys more than 25% of the oil that Saudi Arabia exports. If priced in yuan, those sales would boost the standing of China’s currency. The Saudis are also considering including yuan-denominated futures contracts, known as the petroyuan, in the pricing model of Saudi Arabian Oil Co. , known as Aramco.

Replacing the Petrodollar with the Petroyuan would be momentous, even cataclysmic:

It would be a profound shift for Saudi Arabia to price even some of its roughly 6.2 million barrels of day of crude exports in anything other than dollars. The majority of global oil sales—around 80%—are done in dollars, and the Saudis have traded oil exclusively in dollars since 1974, in a deal with the Nixon administration that included security guarantees for the kingdom.

The move has been in the works for several years now:

China introduced yuan-priced oil contracts in 2018 as part of its efforts to make its currency tradable across the world, but they haven’t made a dent in the dollar’s dominance of the oil market. 

For China, using dollars has become a hazard highlighted by U.S. sanctions on Iran over its nuclear program and on Russia in response to the Ukraine invasion.

Given how cataclysmic the move would be, the players are being cautious about their pronouncements. They are speaking of taking small steps-- because, they hold many dollars themselves:

The Saudis still plan to do most oil transactions in dollars, the people familiar with their talks say. But the move could tempt other producers to price their Chinese exports in yuan as well. China’s other big sources of oil are Russia, Angola and Iraq.

The Saudi move could chip away at the supremacy of the U.S. dollar in the international financial system, which Washington has relied on for decades to print Treasury bills it uses to finance its budget deficit.

“The oil market, and by extension the entire global commodities market, is the insurance policy of the status of the dollar as reserve currency,” said economist Gal Luft, co-director of the Washington-based Institute for the Analysis of Global Security who co-wrote a book about de-dollarization. “If that block is taken out of the wall, the wall will begin to collapse.”

The threat of de-dollarization ought to wake up some of our policy makers. Most likely it will not.

Also writing in the Wall Street Journal columnist Andy Kessler suggests that the Biden administration’s efforts to strong arm Russia by cutting it out of the world financial system have undermined American credibility in such matters:

Was cutting Russia out of the global financial system the right move? Naysayers think this is the beginning of the end of the dollar as the reserve currency because Russia will cozy up to China and adopt the yuan or pivot to cryptocurrencies. China may start dumping dollars. In fact, since 2014 China and Russia have severely reduced their dependence on the dollar for bilateral trade.

As you might know, I am far from being competent in such matters. And yet, the story is potentially so important that I believe in incumbent to report on it. While the Biden administration is pounding its chest and claiming to be tough on Russia, even to the point of destroying the Russian economy, other countries are taking notice and are not quite as impressed by Joe’s macho routine.