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Forget Russia Dumping U.S. Treasuries … Here’s the REAL Economic Threat Washington’s Blog

Forget Russia Dumping U.S. Treasuries … Here’s the REAL Economic Threat Washington’s Blog.

Russia Could Crush the Petrodollar

Russia threatened to dump its U.S. treasuries if America imposed sanctions regarding Russia’s action in the Crimea.

Zero Hedge argues that Russia has already done so.

But veteran investor Jim Sinclair argues that Russia has a much scarier financial attack which Russia can use against the U.S.

Specifically, Sinclair says that if Russia accepts payment for oil and gas in any currency other than the dollar – whether it’s gold, the Euro, the Ruble, the Rupee, or anything else – then the U.S. petrodollar system will collapse:

Indeed, one of the main pillars for U.S. power is the petrodollar, and the U.S. is desperate for the dollar to maintain reserve status.  Some wise commentators have argued that recent U.S. wars have really been about keeping the rest of the world on the petrodollar standard.

The theory is that – after Nixon took the U.S. off the gold standard, which had made the dollar the world’s reserve currency – America salvaged that role by adopting the petrodollar.   Specifically, the U.S. and Saudi Arabia agreed that all oil and gas would be priced in dollars, so the rest of the world had to use dollars for most transactions.

But Reuters notes that Russia may be mere months away from signing a bilateral trade deal with China, where China would buy huge quantities of Russian oil and gas.

Zero Hedge argues:

Add bilateral trade denominated in either Rubles or Renminbi (or gold), add Iran, Iraq, India, and soon the Saudis (China’s largest foreign source of crude, whose crown prince also happened to meet president Xi Jinping last week to expand trade further) and wave goodbye to the petrodollar.

As we noted last year:

The average life expectancy for a fiat currency is less than 40 years.

But what about “reserve currencies”, like the U.S. dollar?

JP Morgan noted last year that “reserve currencies” have a limited shelf-life:

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2013/10/Reserve%20Currency%20Status.png

As the table shows, U.S. reserve status has already lasted as long as Portugal and the Netherland’s reigns.  It won’t happen tomorrow, or next week … but the end of the dollar’s rein is coming nonetheless, and China and many other countries are calling for a new reserve currency.

Remember, China is entering into more and more major deals with other countries to settle trades in Yuans, instead of dollars.  This includes the European Union (the world’s largest economy) [and also Russia].

And China is quietly becoming a gold superpower

Given that China has surpassed the U.S. as the world’s largest importer of oil, Saudi Arabia is moving away from the U.S. … and towards China. (Some even argue that the world will switch from the petrodollar to the petroYUAN. We’re not convinced that will happen.)

In any event, a switch to pricing petroleum in anything other than dollars exclusively – whether a single alternative currency, gold, or even a mix of currencies or commodities – would spell the end of the dollar as the world’s reserve currency.

For that reason, Sinclair – no fan of either Russia or Putin – urges American leaders to back away from an economic confrontation with Russia, arguing that the U.S. would be the loser.

Forget Russia Dumping U.S. Treasuries … Here's the REAL Economic Threat Washington's Blog

Forget Russia Dumping U.S. Treasuries … Here’s the REAL Economic Threat Washington’s Blog.

Russia Could Crush the Petrodollar

Russia threatened to dump its U.S. treasuries if America imposed sanctions regarding Russia’s action in the Crimea.

Zero Hedge argues that Russia has already done so.

But veteran investor Jim Sinclair argues that Russia has a much scarier financial attack which Russia can use against the U.S.

Specifically, Sinclair says that if Russia accepts payment for oil and gas in any currency other than the dollar – whether it’s gold, the Euro, the Ruble, the Rupee, or anything else – then the U.S. petrodollar system will collapse:

Indeed, one of the main pillars for U.S. power is the petrodollar, and the U.S. is desperate for the dollar to maintain reserve status.  Some wise commentators have argued that recent U.S. wars have really been about keeping the rest of the world on the petrodollar standard.

The theory is that – after Nixon took the U.S. off the gold standard, which had made the dollar the world’s reserve currency – America salvaged that role by adopting the petrodollar.   Specifically, the U.S. and Saudi Arabia agreed that all oil and gas would be priced in dollars, so the rest of the world had to use dollars for most transactions.

But Reuters notes that Russia may be mere months away from signing a bilateral trade deal with China, where China would buy huge quantities of Russian oil and gas.

Zero Hedge argues:

Add bilateral trade denominated in either Rubles or Renminbi (or gold), add Iran, Iraq, India, and soon the Saudis (China’s largest foreign source of crude, whose crown prince also happened to meet president Xi Jinping last week to expand trade further) and wave goodbye to the petrodollar.

As we noted last year:

The average life expectancy for a fiat currency is less than 40 years.

But what about “reserve currencies”, like the U.S. dollar?

JP Morgan noted last year that “reserve currencies” have a limited shelf-life:

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2013/10/Reserve%20Currency%20Status.png

As the table shows, U.S. reserve status has already lasted as long as Portugal and the Netherland’s reigns.  It won’t happen tomorrow, or next week … but the end of the dollar’s rein is coming nonetheless, and China and many other countries are calling for a new reserve currency.

Remember, China is entering into more and more major deals with other countries to settle trades in Yuans, instead of dollars.  This includes the European Union (the world’s largest economy) [and also Russia].

And China is quietly becoming a gold superpower

Given that China has surpassed the U.S. as the world’s largest importer of oil, Saudi Arabia is moving away from the U.S. … and towards China. (Some even argue that the world will switch from the petrodollar to the petroYUAN. We’re not convinced that will happen.)

In any event, a switch to pricing petroleum in anything other than dollars exclusively – whether a single alternative currency, gold, or even a mix of currencies or commodities – would spell the end of the dollar as the world’s reserve currency.

For that reason, Sinclair – no fan of either Russia or Putin – urges American leaders to back away from an economic confrontation with Russia, arguing that the U.S. would be the loser.

These Countries Are At Risk If The West Sanctions Russia, BofA Warns | Zero Hedge

These Countries Are At Risk If The West Sanctions Russia, BofA Warns | Zero Hedge.

While most attention has been focused on Nat Gas, BofA notes that Russia is unlikely to unilaterally curtail its oil exports. However, Russian oil does indeed flow in large quantities through the Black Sea, making the Russian Navy station of Sevastopol as well as the whole Crimean peninsula crucial strongholds to control commerce flows. While BofA remains confident that oil-related sanctions are unlikely (as Europe cannot really afford to relapse into a third recession in six years), Brent prices could easily jump $10 on any disruption increasing the risk of recession for a number of weak economies.

 

Via BofA,

As for oil, we see temporary modest upside pressure…

As for oil, the Ukraine consumes about 300 thousand b/d, of which 220 thousand b/d comes from Russia and 80 thousand b/d is produced domestically. Unlike in the case of gas, however, the Ukraine does not have significant shale oil resources and does not pose a competitive threat to Russian dominance.

Moreover, transit volumes of Russian oil circulating through the Ukraine are rather minor, with the latest Transneft figures estimating normal flows of 300 thousand b/d through the Druzhba pipeline. However, Russian oil does indeed flow in large quantities through the Black Sea, making the Russian Navy station of Sevastopol as well as the whole Crimean peninsula crucial strongholds to control both Azov and Black Sea commerce flows.

These routes are, for now, secure and diverse. Thus, while oil has risen in sympathy with other commodities, we believe the upside risks are rather modest from here unless the conflict escalates.

…unless Western powers get involved, which is unlikely

Moreover, we believe Russia is extremely unlikely to disrupt oil exports to the world, as it would destroy its reputation as a reliable and non-cartelized supplier to the world’s largest energy market. Also, oil-related sanctions against Russia are unlikely to happen, as we believe Europe cannot really afford to relapse into a third recession in six years. As nothing meaningful in terms of sanctions came on the back of Russia’s conflict in South Ossetia and Abkhazia in 2008, it is also unlikely that anything would happen now, in our view.

If the conflict in the Ukraine turned into a full-blown war and the 1 million b/d of Russian oil flowing through the Black Sea are temporarily disrupted, oil may briefly jump by $10/bbl or more.

With EM currencies weakening by the minute, however, a spike in Brent crude oil prices above $125/bbl would likely increase the risks of recession for a number of weak economies. Consequently, we believe prices would probably reverse back down rather quickly.

These Countries Are At Risk If The West Sanctions Russia, BofA Warns | Zero Hedge

These Countries Are At Risk If The West Sanctions Russia, BofA Warns | Zero Hedge.

While most attention has been focused on Nat Gas, BofA notes that Russia is unlikely to unilaterally curtail its oil exports. However, Russian oil does indeed flow in large quantities through the Black Sea, making the Russian Navy station of Sevastopol as well as the whole Crimean peninsula crucial strongholds to control commerce flows. While BofA remains confident that oil-related sanctions are unlikely (as Europe cannot really afford to relapse into a third recession in six years), Brent prices could easily jump $10 on any disruption increasing the risk of recession for a number of weak economies.

 

Via BofA,

As for oil, we see temporary modest upside pressure…

As for oil, the Ukraine consumes about 300 thousand b/d, of which 220 thousand b/d comes from Russia and 80 thousand b/d is produced domestically. Unlike in the case of gas, however, the Ukraine does not have significant shale oil resources and does not pose a competitive threat to Russian dominance.

Moreover, transit volumes of Russian oil circulating through the Ukraine are rather minor, with the latest Transneft figures estimating normal flows of 300 thousand b/d through the Druzhba pipeline. However, Russian oil does indeed flow in large quantities through the Black Sea, making the Russian Navy station of Sevastopol as well as the whole Crimean peninsula crucial strongholds to control both Azov and Black Sea commerce flows.

These routes are, for now, secure and diverse. Thus, while oil has risen in sympathy with other commodities, we believe the upside risks are rather modest from here unless the conflict escalates.

…unless Western powers get involved, which is unlikely

Moreover, we believe Russia is extremely unlikely to disrupt oil exports to the world, as it would destroy its reputation as a reliable and non-cartelized supplier to the world’s largest energy market. Also, oil-related sanctions against Russia are unlikely to happen, as we believe Europe cannot really afford to relapse into a third recession in six years. As nothing meaningful in terms of sanctions came on the back of Russia’s conflict in South Ossetia and Abkhazia in 2008, it is also unlikely that anything would happen now, in our view.

If the conflict in the Ukraine turned into a full-blown war and the 1 million b/d of Russian oil flowing through the Black Sea are temporarily disrupted, oil may briefly jump by $10/bbl or more.

With EM currencies weakening by the minute, however, a spike in Brent crude oil prices above $125/bbl would likely increase the risks of recession for a number of weak economies. Consequently, we believe prices would probably reverse back down rather quickly.

These Countries Are At Risk If The West Sanctions Russia, BofA Warns | Zero Hedge

These Countries Are At Risk If The West Sanctions Russia, BofA Warns | Zero Hedge.

While most attention has been focused on Nat Gas, BofA notes that Russia is unlikely to unilaterally curtail its oil exports. However, Russian oil does indeed flow in large quantities through the Black Sea, making the Russian Navy station of Sevastopol as well as the whole Crimean peninsula crucial strongholds to control commerce flows. While BofA remains confident that oil-related sanctions are unlikely (as Europe cannot really afford to relapse into a third recession in six years), Brent prices could easily jump $10 on any disruption increasing the risk of recession for a number of weak economies.

 

Via BofA,

As for oil, we see temporary modest upside pressure…

As for oil, the Ukraine consumes about 300 thousand b/d, of which 220 thousand b/d comes from Russia and 80 thousand b/d is produced domestically. Unlike in the case of gas, however, the Ukraine does not have significant shale oil resources and does not pose a competitive threat to Russian dominance.

Moreover, transit volumes of Russian oil circulating through the Ukraine are rather minor, with the latest Transneft figures estimating normal flows of 300 thousand b/d through the Druzhba pipeline. However, Russian oil does indeed flow in large quantities through the Black Sea, making the Russian Navy station of Sevastopol as well as the whole Crimean peninsula crucial strongholds to control both Azov and Black Sea commerce flows.

These routes are, for now, secure and diverse. Thus, while oil has risen in sympathy with other commodities, we believe the upside risks are rather modest from here unless the conflict escalates.

…unless Western powers get involved, which is unlikely

Moreover, we believe Russia is extremely unlikely to disrupt oil exports to the world, as it would destroy its reputation as a reliable and non-cartelized supplier to the world’s largest energy market. Also, oil-related sanctions against Russia are unlikely to happen, as we believe Europe cannot really afford to relapse into a third recession in six years. As nothing meaningful in terms of sanctions came on the back of Russia’s conflict in South Ossetia and Abkhazia in 2008, it is also unlikely that anything would happen now, in our view.

If the conflict in the Ukraine turned into a full-blown war and the 1 million b/d of Russian oil flowing through the Black Sea are temporarily disrupted, oil may briefly jump by $10/bbl or more.

With EM currencies weakening by the minute, however, a spike in Brent crude oil prices above $125/bbl would likely increase the risks of recession for a number of weak economies. Consequently, we believe prices would probably reverse back down rather quickly.

These Countries Are At Risk If The West Sanctions Russia, BofA Warns | Zero Hedge

These Countries Are At Risk If The West Sanctions Russia, BofA Warns | Zero Hedge.

While most attention has been focused on Nat Gas, BofA notes that Russia is unlikely to unilaterally curtail its oil exports. However, Russian oil does indeed flow in large quantities through the Black Sea, making the Russian Navy station of Sevastopol as well as the whole Crimean peninsula crucial strongholds to control commerce flows. While BofA remains confident that oil-related sanctions are unlikely (as Europe cannot really afford to relapse into a third recession in six years), Brent prices could easily jump $10 on any disruption increasing the risk of recession for a number of weak economies.

 

Via BofA,

As for oil, we see temporary modest upside pressure…

As for oil, the Ukraine consumes about 300 thousand b/d, of which 220 thousand b/d comes from Russia and 80 thousand b/d is produced domestically. Unlike in the case of gas, however, the Ukraine does not have significant shale oil resources and does not pose a competitive threat to Russian dominance.

Moreover, transit volumes of Russian oil circulating through the Ukraine are rather minor, with the latest Transneft figures estimating normal flows of 300 thousand b/d through the Druzhba pipeline. However, Russian oil does indeed flow in large quantities through the Black Sea, making the Russian Navy station of Sevastopol as well as the whole Crimean peninsula crucial strongholds to control both Azov and Black Sea commerce flows.

These routes are, for now, secure and diverse. Thus, while oil has risen in sympathy with other commodities, we believe the upside risks are rather modest from here unless the conflict escalates.

…unless Western powers get involved, which is unlikely

Moreover, we believe Russia is extremely unlikely to disrupt oil exports to the world, as it would destroy its reputation as a reliable and non-cartelized supplier to the world’s largest energy market. Also, oil-related sanctions against Russia are unlikely to happen, as we believe Europe cannot really afford to relapse into a third recession in six years. As nothing meaningful in terms of sanctions came on the back of Russia’s conflict in South Ossetia and Abkhazia in 2008, it is also unlikely that anything would happen now, in our view.

If the conflict in the Ukraine turned into a full-blown war and the 1 million b/d of Russian oil flowing through the Black Sea are temporarily disrupted, oil may briefly jump by $10/bbl or more.

With EM currencies weakening by the minute, however, a spike in Brent crude oil prices above $125/bbl would likely increase the risks of recession for a number of weak economies. Consequently, we believe prices would probably reverse back down rather quickly.

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