Via Bloomberg

Jan62015

Russia is Targeting the Dollar

Investing • World

Ever since its annexation of Crimea, Russia’s actions have caught America’s attention as Russia attempts to become a more global superpower. Ignoring the many sanctions that the EU and the U.S. have imposed on it, Russia has managed to build relationships with member countries of the BRIC and OPEC nations. After understanding the deals that Russia has made with some of these countries, it is clear that Russia is trying to position itself as a global superpower by establishing relationships with the BRIC and OPEC nations in an effort to dethrone the world’s reserve currency–the U.S. dollar–by destroying the petrodollar system.

 

In September 2014, Russian energy minister Alexander Novak announced that Russia and Iran had signed a 70 billion euro deal to “develop their trade and economic ties” (PressTV). In his announcement, Novak also stated that “Russia takes an interest in Iran’s oil and gas market after US-led sanctions imposed on Iran over the country’s civilian nuclear program led to restrictions on the activities of foreign companies in Iran’s oil sector” (PressTV). His statement shows that Russia is befriending Iran to win the country over to its side and further turn it against the U.S. Not only has Russia expanded its trade with Iran but it has also signed deals with several other OPEC nations to expand its influence in the Middle East.

 

In April 2014 near when the U.S. and EU were rapidly imposing sanctions, Russia struck a deal with Bahrain. The deal was comprised of two funds: “The Bahraini fund is one of the smaller sovereign funds in the Gulf, with $7.1 billion of assets as of last September. The RDIF is a $10 billion fund created by Russia’s government to make equity investments, mainly in the Russian economy” (Reuters). That Russia was able to negotiate a deal with Bahrain in a time of such tension between itself and the West (including the EU) shows how seriously Russia is taking the sanctions and how Russia wants to capitalize on the U.S.’s poor relationship with these countries in the Middle East by solidifying relationships through trade with them.

 

Before both deals with Bahrain and Iran, Russia had also negotiated a deal with Saudi Arabia and Syria to further expand its influence with countries in the Middle East. In mid-to-late August 2013, Syria was having trouble because the Assad regime was on the brink of being toppled. Russia was concerned with its oil trade in the Middle East and how a Syrian regime, if toppled, would affect its energy exchange with Syria. This concern, however, was prevalent before issues were heating up in Syria, and so Saudi spy chief Prince Bandar bin Sultan and Russian President Vladimir Putin called a meeting discussing these issues (Evans-Pritchard). “Let us examine how to put together a unified Russian-Saudi strategy on the subject of oil. The aim is to agree on the price of oil and production quantities that keep the price stable in global oil markets,” said Prince Bandar bin Sultan (Evans-Pritchard). The Prince makes it clear that Saudi Arabia wants to establish a firmer relationship with Russia to control the global oil markets, but he also directly relates his plan as it refers to the possible overthrow of the Syrian regime: “The key to the relations between our two countries starts by understanding our approach to the Syrian issue. So you have to stop giving [the Syrian regime] political support, especially at the UN Security Council, as well as military and economic support. And we guarantee you that Russia’s interests in Syria and on the Mediterranean coast will not be affected one bit. In the future, Syria will be ruled by a moderate and democratic regime that will be directly sponsored by us and that will have an interest in understanding Russia’s interests and role in the region” (Al Monitor). This deal shows how Russia has further established its influence with the OPEC nations by negotiating with the most prominent leader of them, Saudi Arabia. That Russia was able to have Saudi Arabia’s alliance on the issues surrounding Syria shows that Russia is deliberately exerting its influence in the Middle East in an effort to gain more power globally. A few months after this meeting, Russia signed a deal with Syria permitting oil and gas exploration of 2,190 square kilometers in the Mediterranean (RT). The costs of this deal were estimated at around $90 million and Syria’s General Petroleum Company head Ali Abbas said the contract was “the first ever for oil and gas exploration in Syria’s waters” (RT).

 

But why is Russia so concerned with oil and more specifically oil trade with OPEC members like Saudi Arabia? It is because Russia is trying to dethrone the petrodollar system that was created between 1972 and 1974 with the U.S. and Saudi Arabia in order to position the dollar as a reserve currency. In the petrodollar agreement, the U.S. committed to “the survival of the House of Saud by providing a total commitment to its political and military security” (Durden), while Saudi Arabia agreed to “use its dominant influence in OPEC to ensure that all global oil transactions would be conducted only in US dollar, invest a large amount of its oil revenue in US Treasury securities and use the interest income from those securities to pay US companies to modernize the infrastructure of Saudi Arabia, [and] guarantee the price of oil within limits acceptable to the US and act to prevent another oil embargo by other OPEC members” (Durden). Although Saudi Arabia was the nation that the U.S. chose to secure the existence of the petrodollar system, its relationship with the U.S. is increasingly deteriorating, as the U.S. is not holding up to its deal. As Durden goes on to write, “[The Saudis] believe that as part of the US commitment to keep the region safe for the monarchy, the US should have attacked its regional rivals Syria and Iran by now. And they may feel they are no longer obliged to uphold their part of the deal, namely selling their oil only in US dollars.” (Durden). Thus, by establishing relations with Bahrain, Iran, Saudi Arabia, and Syria, Russia is exerting itself as a predominant superpower and ally to these nations in an attempt to turn them against America, thereby dethrone the petrodollar system and ultimately the dollar as the reserve currency. If the U.S. were ever thrown into such a position where the dollar was no longer the reserve currency, the U.S. would fall into a recession and Russia would emerge as a global superpower. The currency that would then assume the U.S.’s dollars role would then be, as renown world investor Jim Rogers pointed out in an interview with RT, a joint-currency between the BRIC nations. Although this may not happen anytime soon, this seems to be Russia’s ultimate goal.

 

Russia also notices that in order to gain such power, it is best that it align itself with one of the fastest growing nations and economies: China. In May 2014, Russia clinched a $400 billion deal with China to construct the Power of Siberia pipeline, “which will annually deliver 38 billion cubic meters (bcm) of gas to China” (RT). More recently, Russia and China have been close to reaching a second deal that would construct “[an] opening of [a] western route, the Altai, [that] would link Western China and Russia and supply an additional 30 bcm of gas [to China], nearly doubling the gas deal reached in May” (RT). Russia is set to start supplying gas to China in 2018 in a thirty-year agreement with the nation. Russia’s largest oil company, Rosneft, “offered China a share in its second-largest oil field, Vankor in the Krasnoyarsk region in Eastern Siberia” as a way to demonstrate that “energy cooperation is a two-way street” (RT). It is clear that Russia is partnering with China to fight off the sanctions from the EU and the U.S. Moreover, Russia understands how important it is to ally itself with the fastest growing Asian nation to replace the U.S. as a global superpower in the future.

 

Russia is capitalizing on its supply of oil to build relationships with the BRIC and OPEC nations to fight off the sanctions from the U.S. and the EU to ultimately dethrone the dollar in order to emerge as a more global superpower. Although Russia may not clearly be trying to build a joint-currency with the other BRIC nations, it is clear that it is trying to stand up against the U.S. and the dollar by weaving relationships with growing nations like China and oil exporters in the Middle East.

 

 

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