One of the world’s top energy importers, China, is set to roll out a yuan-denominated oil contract as early as this year. Analysts call the plan, announced by Beijing in September, a huge move against the dollar's global dominance.
The so-called petro-yuan is a “wake up call” for investors who haven’t paid attention to the Chinese plans, according to the head of Graticule Asset Management Asia Adam Levinson, as quoted by Bloomberg.
Petrodollar end looming as China & allies dump it in oil trading - Jim Rogers
Earlier this year, the Chinese government announced plans to start a crude oil futures contract priced in yuan and convertible into gold. The contract will enable the country's trading partners to pay with gold or to convert yuan into gold without the necessity to keep money in Chinese assets or turn it into US dollars.
The new benchmark will reportedly allow exporters, such as Russia, Iran or Venezuela to avoid US sanctions by trading oil in yuan.
Caracas has ordered oil traders to convert crude oil contracts into euro and not to pay or be paid in US dollars anymore, according to sources close to the matter as quoted by WSJ. The measure is aimed at bypassing US sanctions against the country.
Venezuelan state oil company PDVSA reportedly asked joint venture partners to open euro accounts and to convert existing holdings into the European currency, the sources said.
Last month, the White House sanctioned Venezuelan President Nicolas Maduro and other senior Venezuelan officials after the election of a new legislative body to rewrite the country’s constitution.
The measure bans both US businesses and citizens from buying Venezuelan debt as well as from making any deals with PDVSA.
Caracas claimed the step as an attempt to embargo Venezuela, which is currently in the middle of an economic crisis.
“To fight against the economic blockade there will be a basket of currencies to liberate us from the dollar,” said the country’s Vice President Tareck El Aissami, as quoted by the media.
The US is Venezuela's largest trading partner with 95 percent of the state’s revenues coming from oil exports, mostly to the US. Thus, switching the dominating currency may lead to increased transaction costs, according to analysts.
FILE PHOTO A general view of the Amuay refinery complex which belongs to the Venezuelan state oil company PDVSA in Punto Fijo, Venezuela © Carlos Garcia / Reuters.
US Senators from oil-refining states have called on the president to avoid a blockade of the Venezuelan oil sector, fearing it may harm the US economy, open economic doors for Russia and China... and take away America's “leverage for delivering democracy.”
Four US Republican senators, Bill Cassidy (Louisiana), John Cornyn (Texas), Thad Cochran (Mississippi) and Roger Wicker (Mississippi) sent a letter to President Donald Trump on Thursday.
“Domestically, we are concerned that unilateral sanctions could harm the US economy, impair the global competitiveness of our businesses, and raise costs for our consumers,” the letter said, reminding that oil refineries along the US Gulf Coast that process Venezuelan crude represent “a significant portion, nearly 10 percent, of US imports.”
According to the letter, it is “critical” to consider “the role that the US energy industry and refining sector play in our economic and national security interest.”
“Blockading [US] imports could inflict great harm on this industry and burden US taxpayers with the cost…. the US energy industry and American citizens will bear the economic consequences of the sanctions.”
Towards the end of the two-page letter, the senators mention the issue of Venezuelan democracy. According to the four Republicans, imports from Venezuela are an even better tool for securing that than sanctions.
“It is in the best interest of the US and the Venezuelan people to maintain our economic ties as leverage for delivering a democratic government back to the people,” the letter reads – not before listing how Russia and China could rush in to the Venezuelan oil market should the US cut its ties.
Russia, according to the senators, would hurry to exchange shares in Venezuelan oil refiner Citgo for interests in an oilfield and a supply deal. China, they believe, will have its influence in the Western hemisphere strengthened by the oil supplies Venezuela diverts to it after exports to the US are blocked.
In the meantime, the senators said that they “applaud” Trump’s “recent decision to take targeted action against the [Venezuelan President] Maduro regime” in general.
“We urge a coordinated, multi-lateral approach that deprives the Maduro regime of all funding options, rather than simply closing the door to the United States’ market,” the letter concludes.
The analyst said the new contract would be able to serve as a hedging tool for Chinese corporations, as well as support the government’s broader plans to extend the use of the national currency in trade settlement.
According to Levinson, Chinese companies might grow into anchor investors in Saudi Arabia’s initial public offering of its national oil giant, Saudi Aramco.
At the same time, some analysts are skeptical of China’s ambitious plan to create its own benchmark.
“Game changer it is not — at least not yet. But it is another indicator of the beginning of the glacial, and I emphasize the word glacial, decline of the dollar,” said Gal Luft, co-director of the Institute for the Analysis of Global Security, as quoted by CNBC.
The end of US dollar hegemony has been a consistent message from Russian President Vladimir Putin.
“Russia shares the BRICS countries’ concerns over the unfairness of the global financial and economic architecture, which does not give due regard to the growing weight of the emerging economies. We are ready to work together with our partners to promote international financial regulatory reforms and to overcome the excessive domination of the limited number of reserve currencies,” Putin said two months ago during the BRICs summit in Xiamen.