Surging Russia-China Trade Pressures Petrodollar

The comments above & below is an edited and abridged synopsis of an article by Tom Luongo

The latest trade figures on Chinese/Russian trade should be a warning that economic sanctions don’t work.

China has created the first challenge to the petro-dollar oil trade. To break the world’s use of the dollar as the sole settlement currency for oil required the right contract issued by a country that the US can’t immediately invade and conduct a regime change operation in (Libya, Iraq).

Russia wins here, because its Urals grade can become an international benchmark. Since Gazprom prefers to price its long-term gas contracts based on underlying oil prices rather than the more volatile natural gas price, this is also a win for them.

Gold convertibility is a means to deepen China’s sovereign debt markets by making it less risky to hold Chinese bonds. The lack of true yuan convertibility is the big impediment to people holding them. So, gold convertibility creates a viable exit route.

Increasing trade between Russia and China will go beyond energy for its partnership to thrive. Oil is a means to building the underlying capital flow between the two countries. It makes it easier for Russian businesses to get access to Chinese capital, and vice versa.

China announced last week that it would no longer be accumulating US Treasuries. Presumably, this mean that it will no longer recycle its trade surplus with the US to halt appreciation of the yuan versus the dollar.

It has had to over the past year, with the dollar weakening. But that is coming to an end with a reversal of Fed policy and tax cuts. Rising rates in the US will allow China to divest its Treasury holdings without affecting the yuan, while it also deepens yuan liquidity through its gold-convertible bond market.

Both countries understand the stakes and continue to make the right moves to support the changing macroeconomic environment. With US bonds on the verge of entering a bear market, conditions are ripe for China to deploy its massive savings to resume remaking the Asian continent.