The war on the petrodollar

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Since the Bretton Woods Agreement in 1945, countries worldwide have been forced to use the petrodollar to buy any form of oil. However, in the last decades, a new wind of protest is coming, that might very well throw away the petrodollar altogether.

After so many sanctions from the West, Russia is trying to find all ways to continue selling its gas abroad. Indeed, its economy needs the influx of foreign money, to keep the imports and exports balanced. The measures taken are a bold attempt at de-dollarizing the world.

Russia’s public debt

Russia is one of the countries of the world with the smallest debt compared to its GDP. Unlike the Western world which literally lives on debt, Russia has managed to clear its debt almost entirely.

Can you find Russia on this world debt chart?

Hint: Russia is at the outskirts, at the bottom right. Source: Visual Capitalist

People have been talking about a possible default for Russia, but this is just fearmongering. Yes, the sanctions and the war itself will take their toll on the Russian economy. Truth be told, the EU is currently laughing, ruthlessly applying sanctions ordered by the Americans, but I wonder how long it will laugh. This meme tells it all.

Sanctions…

While sanctions have been used extensively against many countries, their benefit is doubtful at best. First of all, the perspective of sanctions has certainly not stopped Putin from invading Ukraine. Second, the ones who end up starving are the people, not the elites. It is now a very well known fact that economic sanctions have only one effect: spreading more poverty.

And I won’t drop a tear for this Russian millionaire who allegedly can’t pay his maid anymore. Besides, many Russian oligarchs approved of the war, at least at the beginning. Indeed, they feared being at a loss should Ukraine turn toward the West and cut its ties with Russia.

Additionally, it seems that the West has rushed out all sanctions at once. This wasn’t a smart move, as it is now lacking any kind of extra pressure against Russia. This has left “the enemy” with some time to counterattack. I mean, anyone with a pair of neurons knows that you should never play all your cards at once. It looks like they don’t even teach the basics in schools for politicians. I mean, at least learn how to play cards!

… are useless

Of course, you may think that starving people might turn an angry crowd against their government. I mean, if any of our leaders in the West decides to wage a war, like in Iraq, Afghanistan, Libya, Syria, do we, the People have any say? We don’t. How could anyone in their right mind imagine that it would be any different in Russia?

Moreover, sanctions on the people by a foreign nation are also the best way of helping any dictator justify isolation and protectionism from the evil foes. And be right in the eyes of his citizens.

It does look like we are governed by lunatics with a total lack of common sense. Or maybe they did need a war and sanctions to hide the problems in their own countries. Like a crumbling economy and financial system. Or a 700+ billion dollar budget on the military that seems quite unjustified after pulling out of Afghanistan.

Russia stocks gold

For the last two decades, some countries like France and Switzerland have been massively selling their gold. On the other hand, Russia has stockpiled gold at an unprecedented rate. So has China.

While some Western countries sell their gold, Russia and China stockpile at an impressive rate. Source: IMF

Besides, Russia is the world’s second nation with the most gold to be mined in its soil behind Australia.

It is quite clear that Russia has tried to protect itself against any kind of sanctions thanks to its massive stock of gold. Now, the US attempts to ban any transaction involving gold with Russia worldwide. The problem is that, unlike an electronic transaction system like SWIFT, you can hardly ban anyone from transacting gold. It is untraceable and can be traded physically, melted and minted back.

Appreciating the rouble

Preliminary note: SWIFT is an electronic system that enables banks all over the world to exchange money. Most international commerce currently goes through it. Because of its monopoly, a number of countries, including Russia, have been developing their own transaction systems during the past decade. Besides, it is common knowledge that the US is doing everything it can to capture anything that transits through this system. Counter-terrorism, of course, nothing else, surely.

The sanctions from the West, including banning Russia from SWIFT, have really weakened the rouble. For the record, banning a whole country from SWIFT is unprecedented. A number of Iranian banks were once banned due to the Iranian nuclear program, but a nationwide SWIFT ban has never been applied anywhere else. Nevertheless, it hasn’t stopped the war anyway.

Besides, another set of sanctions, which nobody speaks about much, is those of the rating agencies. They have lowered Russia’s rating, which makes it more difficult for Russia to get credits from investors, and at least raises the interest rates to get foreign money. This is also a very important sanction, coming of course from the exact same West than the other sanctions. Indeed, rating agencies are part and parcel of the Western banking system.

As a result of all this, Russia is facing a very serious threat: the depreciation of the rouble. While this could be a godsend for a country with a lot of debt, it is not the case for Russia. A depreciating rouble means that Russia will have a hard time importing goods at affordable prices for its population.

The leverage of energy

However, despite the wild ban on SWIFT, Germany has stepped up immediately: without the Russian gas, it could not survive the winter. Just after the ban, the Germans have appealed to still keep SWIFT working with Russia only to pay for their gas.

If the Russians were indeed preparing for this war long ago, it makes you wonder why they did not attack Ukraine last November. They could have had even bigger leverage on the European gas in the heart of the winter. Besides, they love the cold, and they would have been able to use frozen soil to deploy tanks and other vehicles in the fields rather than being stuck on roads. Did they not have time to paint their tanks white?

Anyway, one sure thing here: the EU cannot simply stop paying for gas – it is a matter of survival. And some experts point out that even American gas cannot be an alternative at least for the next 10 years. The amount of infrastructure that would be needed, including transport ships, is massive. Here is the order of magnitude: gas transport ships around the world can currently deliver roughly one billion cubic meters of gas per year. The EU consumes 150 billion per year.

Putin is now taking advantage of Europe’s Achilles’ heel to salvage the rouble. He is now asking that gas be paid only in roubles by “unfriendly” countries. In other words, he’s clearly saying: you want to put sanctions on my country, well I’ll make you a deal you can’t refuse that will annihilate those sanctions. And there are no more cards to be played on the EU side, sanctions-wise.

The petrodollar

For the record, since the end of WWII, petrol and gas have been universally bought using “petrodollars”, a fancy name for… US dollars. There was no way around that, and those who have tried to do otherwise, such as Saddam Hussein and Muammar Gaddafi, have encountered some… “minor” problems, leading to their death.

However, the BRICS cooperation is not Iraq or Libya. China has been paying some of the gas it imports from Russia in yuan rather than in dollars since 2017. Check out the petroyuan. Note that Saudi Arabia, a historical ally of the US, is also changing its stance and considers accepting the petroyuan as well. Which is quite huge geopolitically.

Anyway, Putin’s move does seem to work, as the downfall of the rouble has been stopped. Indeed, if everyone needs to buy roubles to pay for their gas, then obviously there is some high demand for the rouble, which makes it more valuable.

In the meantime, US dollars that were used to buy Russian gas will be ditched, which will have an impact on its value. Granted, if it is only about the purchase of Russian gas, the effect could be quite negligible. However, if more international trade ditches the dollar, there is a possibility that a lot of dollars will go back to the US, worsening the current inflationary trend.

Cryptocurrencies

As I was already warning in 2017 in my book “Money: What You Don’t Know”, Russia, among others, has been looking at cryptocurrencies very closely. Russia is working on creating its own legal Central Bank Digital Currency.

This currency would of course not be a real decentralized cryptocurrency, and in this sense, Russia is obviously opposed to them. Giving the power to the people is not really Putin’s credo.

But again, right now the master of the Kremlin is looking at all the possible ways of selling its gas. Including cryptocurrencies. But that’s only for “friendly” countries. This move is also new, as he did not seem to like cryptocurrencies that much in the past, even banning them from Russia at some point.

Money machines

As my readers already know, the US dollar, as well as the euro, are being created in an uncontrolled way. This is especially true in the last decades. Typically, the amount of euros has doubled every decade since its creation. No wonder inflation is now lurking around the corner!

The amount of euros created by the European Central Bank in the last 20 years is following an exponential curve. Source: Statistica.com.

Gold rouble

So, following the new Russian counter-sanctions, “unfriendly” countries are left only with two options when it comes to buying Russian gas starting March 31st, 2022. It is either with gold or with roubles.

Besides this quite bold move, Russia now starts pegging its rouble to gold. This is somehow a reminder that the rouble is not like Western currencies.

By pegging its currency on gold, the Russian Central Bank is calling for a return to the gold standard. Besides, it is also a warning sign to any investor, following the sanctions: anything left in Western hands can be seized at any time, for any reason. The message is clear: don’t trust Western banks, don’t fall for Western stocks which are volatile and can evaporate in a second; instead, go for the safe bet, the solid investment in gold – or now in roubles.

“Standards” always fail

While this can be a smart move in the short term in response to sanctions, this could be a bad operation in the long term.

In popular culture, there is this opposition between a currency “worth nothing”, “printed at will”, versus “hard value”, generally represented by gold. Unfortunately, pegging the value of anything to that of anything else is always a dead end.

We remember what happened to the “gold standard” with the US dollar. It caused the oil crisis in the 1970s when it was forcefully abandoned by Nixon in 1971. In the 19th century and the beginning of the 20th century, it caused a lot of misery. And Venezuela pegging the bolivar to the US dollar caused the downward spiral of hyperinflation.

I believe this “rouble for gold” is just for show, mostly a message to Western countries, a reminder that building one’s economy on debt might prove very dangerous.

A recipe against war

This is taken from a French group that works on our constitutional rights… to write the Constitution ourselves. Indeed, letting politicians write the Constitution, the very text that is supposed to restrain them, is like appointing your dog to guard your sandwich. Sorry for the dogs out there, I know you’re already wagging your tail.

Here is a simple recipe to avoid war all over the world. If all countries agreed to this, we would certainly live in a more peaceful world.

  1. No war can be started by a country without an open referendum.
  2. In the event of a “yes” to war, anyone who has voted “yes” is given a gun and goes directly to the front lines. No obligation is set on those who voted “no”.
  3. Once everyone in the first batch has been killed, initiate a new referendum to see if anyone new is willing to go on with the war.
  4. Rinse and repeat.

The Yom Kippur War did not Cause the 1970s Oil Crisis (in fact, it’s the other way around)

In my book, “Money: What You Don’t Know”, I write that Nixon ditching the Gold Standard was the trigger for the “oil crisis” of the 1970s. But when you read this, you obviously think: “That can’t be true. We all know that the bad OPEC guys caused the Oil Crisis and that the Yom Kippur War was the culprit.”

I certainly won’t deny that some political reasons may have played some role in the crisis. However, I claim that they are not the main factor. Want proof? Here it comes.

Rather than believing what we are told, we should always look at the numbers from every perspective.

Oil price surge

Here is what they present us: the Saudis with their OPEC friends started an embargo on oil in 1973. The reason given for the embargo was to protest against countries that were supporting Israel in the Yom Kippur War. Or in the worst case, we’re told it was the OPEC guys who got really greedy. As a result, the prices of oil skyrocketed for good:

Yes, indeed, when looking at prices in real dollar (the blue curve), there is a very big price surge. We are even given the price in “constant dollars” (the yellow one), and yes there is also a big step there.

We actually have to ask two questions:

  • was it the war that caused the embargo?
  • is the “real dollar” a correct and appropriate reference?

Let’s answer those two questions.

The Saudis: Kings of the Oil

First of all, the Saudis were Kings of the Oil at the time. In fact, they were at the same production levels than the US:

But this is not exactly what matters most. The Saudis were not only one of the top producers. They actually relied on oil exportation to fuel their entire economy.

Let’s check how much they depended on oil:

So they were getting 30% of their revenue from oil in 1970. It jumped to 70% in 1974. Maybe they were greedy, after all!

But maybe they just exported more of it? Let’s double-check:

Well, indeed, they exported more of it for sure. They multiplied their exports by 4 between 1965 and 1975. So if it was greed, that greed wasn’t really reflected on the price, but rather on the volume.

As a side note, do you see a huge fall in production in 1973? The small fall dwarfs the rise in price at the same period. Could there be another reason? Let’s dig further.

US and World Production

Now let’s have a look at the world production.

The production didn’t really stop at all in 1973. At most we have a less than 10% decrease in the Middle-East. Surprisingly enough, there is also a decrease at the same period in North America. How could the US produce less oil when they were under an oil embargo??? Let’s have a closer look:

Well yes, that’s exactly what it looks like: US production started slowing down after 1970 and did not go up during the embargo. It only resumed in the late 1970s when most of the crisis had already passed. Isn’t that like shooting your own leg? Maybe we should look at other charts?

Okay, it’s confirmed. While we see the 1973 very small slowdown in imports, the US reduced its production. The rationale being: “let’s consume all the oil from everywhere else and keep some reserves for ourselves”. Which it eventually succeeded in doing. The Oil Crisis was the price to be paid for it.

Cultural Biases

The Arab world, like many other places in the world, is a very traditional one. It relies on ancestral stability. It relies on hard values like gold. Even today, the Arabian Peninsula is world famous for its extravagance around gold… among other things.

Besides, gold is traditionally a very important part of showing your riches to society.

The Gold Standard

As I explained in my book, the Bretton Woods Agreement in 1945 settled the gold standard and the USD as an international currency. However, because the US printed too many dollars, President Nixon had to give up the gold standard in 1971.

As a result, the USD plummeted compared to gold:

On the other hand, all international trade was still done in USD. So buying oil was still done worldwide in USD. Until recently, it was still the case. Everyone who has tried to come out from the petrodollar went down. Saddam Hussein. Qaddafi. Only the Russians and the Chinese have been challenging this in the last years, and they are setting the pace.

Now let’s go back to 1973. Place yourself in the shoes of a Saudi. You value gold very dearly. In the meantime you are paid with worthless banknotes you could use as toilet paper. You really don’t care about dollars, you care about real value – gold. And what you see is that your Golden Oil has been quite stable for the last decade, but in the last years, it plummets if compared to gold:

What can you do? You know that your last embargo did take the price back up in 1968, it is quite visible in the chart above. And anyway, this fall in price is too much to take. You must find an excuse to raise the price back to where it was, around 0.08.

The Yom Kippur War was the perfect excuse.

Comparing Oil and Gold

Let’s go on with the analysis and see how Oil behaved compared to Gold, maybe we’ll find some stability there. In that period, don’t forget that the world is going through massive currency devaluations, crises and such.

Well there IS some kind of stability there. Until 1985, even if there are waves, the global trend is quite stable. As if something was trying to pull oil back to a given price in gold, around 0.08, whatever else happened.

Let’s analyze this new chart with the historical events in mind. Suddenly, everything makes sense.

It is quite clear here that the Saudis and others actually protested the falling price of oil. They simply didn’t want to get cheated by the fall of the US dollar. With the embargo, they forced the price relative to gold back up. In fact, they even raised the price to levels higher than before the crisis. Apparently, someone else was following that chart too at the time and the physical attack against OPEC leaders was launched as the price of oil forced its way toward 0.1 in gold.

Five years later, the oil price had plummeted again when compared to gold. The Saudis launched a long term embargo by cutting their exports drastically. They were forced to finally give up around 1985: new competitors came in the oil sector and they were losing some ground. They switched back to volume to earn some money. Bye bye, Oil-Gold standard!

If you still believe that there is no connection between oil and gold in that period, give me a shout! Since then, other events have occurred and may blur this vision. But at that time, I strongly believe this last chart explains everything.

As for the chart in “constant dollars”, it is obvious that the way the “constant dollar” is calculated is flawed. Saudis didn’t care about “constant dollars” or “inflation” calculated by some obscure panel somewhere in the world. They cared about hard gold that they could harvest in their vaults. And build cars with.

The Yom Kippur War was just an excuse, and Westerners knew very well what they were doing with oil prices, trying to grab some cheap oil as the dollar was going down. Of course, the media told a totally different story to the public.