The PetroYuan and the Rise of a New Economic Order

• 25-Mar-22
• admin

We are witnessing incredible developments in the global economy, driven by geopolitics.

 

The sanctions that have been heaped on Russia for their invasion of Ukraine seem to be quite ineffective (at least for now), and this has been shown up much sooner than expected.   All the Western measures that have been plunged into Russia’s economic heart, appear not only blunted but are bouncing back to hurt Europe and America as soon as they were executed.

 

What is happening is quite shocking.

 

This phenomenon has profound changes on the global economic landscape that will affect how each of us play our infinitesimal part in an interconnected global economy.  

 

There are several aspects of the West’s sanctions falling flat.   The first is of course in the energy trade.

 

These sanctions were expected to completely deflate Russia’s gas and oil industries, since these are where the country earns its major sources of revenues.  Crush that Russian economy!!   Emasculate Putin!  No oil and gas exports, no more money for war.   An overly simplistic strategy that blew up in the face of its proponents that made all those behind the measure look spineless and disorganized.

 

First, every West European country found out within days that they cannot execute the strategy.     In spite of the pro-Ukrainian outpour of sympathy, and the common “cancel Russia” propaganda, no one can give up Russian gas and oil.   Germany was on the brink of taking on a lot more Russian gas via NordStream 2 just before the crisis.   The pipeline has been built and was about to be certified.   What does this tell us?   That the economic need (and demand) is obviously there.   The import requirements of Western Europe, certainly by Germany, of Russian energy is insatiable.

 

The leaders of the EU countries were caught by surprise when Russian tanks first attacked.   Perhaps they did not think through the realities of their situation before stumbling over each other to support the Americans in the energy trade sanctions.  And to show the world they are doing something, anything...  They might have forgotten that they are not what the US is : the largest energy producer (though not exporter) in the world.  And these things, like finding alternative energy suppliers, take a long time to plan.    Instead, they crashed into a gaping hole in days.   

 

It leads me to think that the Americans exerted extraordinary pressure on the West Europeans to stand together to do battle against the Russian aggressors.  And the Europeans succumbed.

 

But within another week, the implications of the sanctions sank in.   Not on the Russian side.  It happened on the West European side…I am sure many EU government departments worked day and night over several days in early March to determine if alternative sources of energy can replace Russian imports, including the promise of American LNG.    At least to get through this current winter… 

 

The cold reality, forgive the pun, was indisputable.   After a week since the announcement of sanctions on Russian energy, Germany said it cannot and will not participate in further sanctions led by energy-rich America.  That sounds about right.   If you have no energy sources, you cannot threaten your only supplier.  And you don’t follow the big brother who really has no concerns about his energy requirements and won’t ever get hurt himself charging forward to quell the evil Russians.  Big Brother won’t become cannon fodder; you will… What is more important to the European public?  Gas prices or Ukrainian independence?   

 

Europe baulked.   And then ducked.

  

If that were the end of the story, it would have been fine.   The rest of the world would understand the predicament of the EU facing energy costs that would break their backs.  Talk too big without thinking it through? …fine, just stand down.  Which is what happened.   But it didn’t stop there.   

 

The Americans, while energy rich, still need to import about 10 percent of their energy.  

Maybe only 2-3 percent from the Russians.   For sure, they can do without Russian energy.   But that is not the point.   The disruption to Europe and other parts of the world, have sent energy prices soaring.  It is not a bilateral sales and purchase arrangement – there is a global market for energy affecting prices on every barrel of oil, every cu litre of gas, in the world.  This will lead to serious inflation, as prices at the gas station or heating costs will impact many ordinary citizens’ cost of living.  Biden, facing the prospect of this economic pressure continuing, is staring at the prospect of losing the midterms.   What is more important to the American public?  Gas prices or Ukrainian independence?     

 

No prizes for guessing right.

Biden panicked.   Fearing inflation, the White House sent American delegations on a worldwide search for replacements of Russian energy.  Well, there are just a limited number of places on the planet you can get it.  The results of that search are, to put it mildly, earthshattering…

 

1. The Americans could not even get a phone call in to Saudi Arabia and the UAE traditionally pro-American, to increase production.    The illusion that these countries were American protectorates willing to play ball with Washington DC was shattered in just a couple of days, when it was even said that the Saudi crown prince did not even want to know what an American President thought of the cold shoulder (forgive the pun again);  
2. The Venezuelans, slapped with huge economic penalties for years, just smirked and said, well you want our oil, remove those sanctions first;  
3. The Iranians, who came close to fighting a war when the US murdered one of their generals, General Sulaimani, by drone strike, gave the Americans a middle finger when they were asked to pump more oil into the market.   There was a missile strike near the US embassy in Kurdistan, which the Israelis said came from Iran.   While silent on the matter, the Iranians were obviously sure that they could do this while the Americans are preoccupied with the Ukrainian war and the backfiring of the economic war they launched on the Russians.    

 

These were not even the most serious consequences of the above skirmishes in the energy markets.  

 

China has announced a state visit of President Xi Jinping to Saudi Arabia.  First foreign trip by him since Covid 19 began.  This is serious stuff.   The scuttlebutt is that of the large energy trades that the two countries have signed as part of the official reason for the visit, the deals will be priced in Chinese RMB, a transaction negotiated over 6 years that is revolutionary because if true (very likely or there would not be a state visit at this time), it would break the US Dollar’s monopoly on the international oil trade.  It will be the advent of the PetroYuan.

 

It will also be the signal that Saudi Arabia has officially moved into the Chinese sphere of influence.   After all, it is already selling 25 percent of all its exports to China, the most important customer for them.     

 

This comes on top of China signing deals with Russia to buy their energy exports and for the logistical arrangements to deliver that output.   Like I said last week, don’t blame the Chinese – they already declared that sanctions against Russia are not the way to end the conflict in Ukraine.  (At least there are some smart people in the room…)  They will not support the US-led sanctions.  If even the EU cannot support these same sanctions, why look to China to do it?  

 

The next major event that has completely torpedoed the energy trade sanctions is that India is signing a deal with Russia, their long-time ally, to buy a lot of that oil at a 25 percent discount.  A 3million barrel deal is already closed.  Oh, my word!!!    Does Russia now have enough to sell?

 

And the Indians also want to settle that trade in RUPEES!!

 

If you ask me, the Americans and the EU have totally screwed themselves.   The Europeans have put themselves into the position of being a non-reliable commercial partner.    Yes, we all understand the indignation, maybe fury, as well as anguish of seeing Ukraine invaded and in the process of being dismembered.   But they have only themselves to blame for collaborating with the Americans to cut Russia down to size through efforts such as NATO eastward expansion, AND they should have known better to impose sanctions for such an important commodity as energy.   There are plenty of other countries who can easily replace their demand for Russian oil and gas.  Apparently, the EU leaders don’t know geography or the economics of international trade.   

 

Or is it just arrogance?   You know, the pompous attitude that we are the big customers who can call all the shots.   The Russians have basically replied, “f—k you”!   Yes, they have other big buyers like China and India, the two most populous countries in the world and all that stuff is transportable within a contiguous landmass in central Asia, far easier than NordStream 1 and 2 which goes under the Baltic Sea and traversing a long distance from oilfields in Siberia far to the east.  This is a monumental mistake on the part of the West.   

 

Monumental.  

 

If this intra-Asia trade becomes well established, there will never be a need for Russia to sell anywhere else.  China and India have insatiable demand for energy in the decades ahead because of population sizes and their rapidly industrializing economies.    And if the Russians don’t, or won’t, sell anywhere else, where is Europe going to get its energy? 

 

Even the Gulf countries are selling their energy to China and India, which are also far closer geographically than Western Europe.  Qatar was flatly refusing to increase their gas output to be sent westwards.  

 

And Putin was heard to say, “if NordStream 2 is closed, we might as well also close down Nordstream 1”.   Don’t know if this is true, but if true, OMG!!!

 

Western Europe is dead in the water.   They have forced the main supplier of their life blood in modern living, energy, to turn eastwards towards Asia.     I don’t mean that they should stand passively by while Russia tears Ukraine apart in a fit of rage (or is it despair?), and the Europeans should rightly be both outraged and fearful.  But they should have thought of all these consequences when for 30 years, they supported the Americans to beat up Russia, relegating the country that actually won WW2 (sacrificing 28 million casualties vs a total of 1.1 million for all the Allies combined and against Germany’s 7 million) to a defeated nation status after the fall of the Berlin Wall in 1989.    You rub a proud nation with a sterling military record the wrong way, this is what you get.  

 

They should have thought of all that when they promised the Russians, “not one step more eastwards” in terms of NATO expansion (James Baker as well as the West Germans said that and let’s not debate if that was a solemn or written promise) back in 1990, and promptly broke all these promises over the next 30 years.   Yeltsin was pissed when Clinton started to bring in the first East European countries into NATO, but he was leading a Russia that was economically weak at that time and couldn’t react.   Now, with Putin overseeing a Russia with a booming energy industry, the day of reckoning has come.     So, it’s not about Putin.   Any Russian leader in the circumstances would have reacted to NATO expansion in a similar way.  This situation of cutting off Europe from Russian oil and gas will also transcend Putin for many decades to come.

 

And so we see Putin behaving like a rock star at a 200,000 strong rally/concert in Moscow on Friday, 18 March, commemorating the annexation of the Crimea eight years ago.    He’s strutting around, to the cheers of his countrymen, as if he has already won the current war.   As a matter of fact, in the economic war, he has.  

 

The above discussion outlines a major realignment of crucial economic relationships that were assumed to be in place in the pre-Ukraine world.   

• A China without any shortages of energy (by buying from both Russia and the Middle East) would face no major impediment in ascending economically – the unipolar world is over.

 

• A PetroYuan, if it happens, will change the financial world.   The end of the PetroDollar, now neutered, will render all financial sanctions essentially useless, and the era of painless, non-military punishment of countries who don’t toe American demands in the “rules-based system” will be history.   We will see more countries challenging American insistence on “my way or no way”, since there are now alternatives. 

 

 

• India is a member of Quad (couched as the NATO of the western Pacific), but has a fiercely independent foreign policy.   Anyone watching India TV broadcasts will see this immediately.   And while China and India are not the best of friends, their border dispute in 2020 may have been resolved through peaceful negotiations that have not gained any attention in a world full of other distractions.

 

• The Gulf countries lean towards their largest customers.   We can no longer assume that they are pro-West.

 

• Russia cannot be sanctioned in the energy trade.  It is also being pushed by a naive and inept US State Dept, towards a powerful alliance to form the World Island – the heart of the Eurasia mainland.  This is a geostrategic error the Americans will come to regret.  The better strategy over the last ten years (if not thirty but no one can be faulted for not having the kind of erudite vision Prof John Mearsheimer has) would have been to westernise Russia economically and integrate it into the EU, as Putin actually desired and proposed, instead of to arrogantly ostracise them, like it was just the “gas-station of Europe”.  Now, it will never, ever happen.   It will also be to the eternal regret of Western Europe.  And worse still, for the Eastern Europeans, who will now lose forever what could have been a friend.   And yes, they should fear that. 

 

   

• The world economy cannot revert to what it was just a few weeks ago.  The Russians have been expelled from an economy dominated by the West and is unlikely to ever return.  So what, the West might say?  Well, they have a lot of oil and gas, as well as grain and fertilizers which Europe does not have.  Figure that in terms of inflation.

 

 

• The “pariah” nations of the world, assigned to that place of dishonour by the US, such as Iran and Venezuela, have vital resources that will not be in the Western camp.   We can figure out how they will lean in some future contest.  

 

 

In short, the US, in trying to maintain a unipolar world where they remain top dog, has by the confusing diplomacy of an inexperienced foreign policy team, in fact launched an abrupt strengthening of the bipolar universe, to their detriment.    All these in just a few weeks of inexcusable blunder!      

 

Back to the Ukrainian war, the catalyst of all the above developments.   Anyone still thinks anything about the claims of court jester Zellensky, who is continuing to prance around on the stage giving scripted speeches to audiences who clap and cheer him on while refusing to give real help to his country to prevent his army from getting wiped out?    Think again… As a matter of fact, the ground war in Ukraine is fast becoming irrelevant in the real superpower economic contest that is emerging from behind the scenes.   The Ukrainian war can be seen by laymen like me in these simple terms: 

 

1. In East Ukraine, where the Donbas region is located, the main Ukrainian forces are said to be surrounded around the city of Mariopol.   As of Sunday, 20 March, indications are that the city has fallen.   The elements of the forces incorporating the Azov Battalion are being captured and then executed if found with Nazi tattoos, as the Russians close in and consolidate their gains in this southern corner of Ukraine.  
2. Other cities where Ukrainian forces are also being caught in cauldrons waiting to be eliminated, include Severodonetsk and Mykolaiv.  If these also fall, Kharkiv will follow, and the entire front east of the River Dnieper will collapse.   One retired Indian general, familiar with Russian military doctrine, commented in a video that this is what they do.  Surround the cities, empty them out by providing “humanitarian corridors” for both civilians as well as deserters to weaken their defences, and when human beings are out to the way, demolish them by artillery and rockets.   That looks like what is happening in towns and cities east of the Dnieper River.   This is not a uniquely Russian playbook.   The Union army of Abraham Lincoln demolished Atlanta (and Savannah) during the American civil war in exactly that same way, thereby purportedly destroying the will to secede for another few hundred years.  
3. The western media cheers when counting the number of Russia armored vehicles destroyed by the Ukrainian forces.   Unless you watch non-western TV, you would not notice that the Russians have claimed thousands of far more important military facilities/infrastructure targets – airbases, army depots, entire tank parks, radio and intelligence centres, radar sites and so on – captured or destroyed.   There is also footage of the Donbass militia being supplied with captured Ukrainian tanks and other equipment, undamaged, who seem keen to incorporate them into the campaigns against Kyiv-led forces.  If Zellensky’s side is winning, how can this is happening?  The only thing that seems to be effective coming out of Kyiv is good propaganda, portraying success on the battlefield.  Apparently as Maripol falls, the forces there are bitterly asking, if their side is winning, how come nobody is coming to save them?   Good question.
4. Along the southern coast, the Russians seem to be leaving Odessa out of the misery.   But with the fall of Kherson, the southern coast has been secured, Crimea is now protected in its north and Ukraine has become essentially a land-locked country.  That’s not good…Russia does not have to control 600,000 sq km of land growing golden wheat under a blue sky.   It just needs to control all the ports.  Is there a thinking person on the Zellensky side? 
5. From the south, the Russian army can drive north towards Kyiv along the western side of the Dnieper River.   If, or when, that happens, the entire region around Kyiv would become one large cauldron, waiting for the noose to tighten.   Does it need to enter the city?   And incur huge casualties fighting urban guerillas?   Why bother?   Two million people needing food, water and medicine will surrender without a further shot fired in days.    
6. Western media is focused on Kyiv.   But the Russians seem to be playing on a different chess board.  They are just surrounding the city and are not doing anything else.   If the Ukrainians are winning, they should break out now before becoming locked in.   If it is not happening, then Kyiv is heading towards being completely besieged, waiting for the inevitable.   Atlanta, 1864?  Stalingrad 1942?  Worse still Leningrad, 1941 -1944.
7. The western part of Ukraine is not being attacked.  Maybe it won’t be.   Maybe it will happen only after the battle to the east has been won by the Russians.   But Russian missiles, including hypersonic ones, have struck Lviv and other airbases in the region.   The point the Russians seem to be making is that they can strike anywhere in Ukraine they wish.  At will.  With anything in their arsenal they wish.   
8. There is a question whether the weapons that have been sent by NATO and other countries to Ukraine forces and trumpeted in the Western media have reached the soldiers who do the actual fighting.  Is it possible when the Russians have total air control?  There is also the matter of the 16,000 strong mercenary army that seems to have slunk home after the rocket attack on their base near Lviv a week ago, killing some and reminding the rest that this is not the video game they were expecting.   Some of these mercenaries were heard to tell Ukrainian command, What? Send me to defend Kyiv?  Me, cannon fodder?  No way, I am outta here…   
9. The “negotiations” that are supposed to be in progress are going oh, so slowly.  All the world knows is that the Russians now have a list of 15 demands (a losing side would not increase its demands, would it?), and the Zellensky side keeps changing its mind on what it wants.   We can assume there is no progress.

 

The fog of war still hangs over Ukraine.   I don’t know any better and I am not going to be persuaded by either Russian or Western propaganda, although there is far more clarity over Eastern Ukraine than the rest of the country.   If the media defines the war to be just the battle of Kyiv, then yes, there is no Russian victory.   If non-Western media, which considers the events in East Ukraine as well as control of the air, is taken seriously, then the war will end soon.  When the Ukrainian army east of Dnieper capitulates (most regard this is already 8090 percent there), the rest of the resistance will cave.      

 

In the meantime, Zellensky is practising his acting skills on the world stage.   He seems, to the sympathetic west, the hero of the day.  In the other half of the world, where people are used to strong intellect and requisite qualifications in a president, he is not the man of the moment.  Quite the opposite, he is regarded as a dismal failure in the things that are important.   He seems likely to have a promising post-war career in Hollywood, to be the court jester that he is.   Or he can revert to being the puppet of some despicable local oligarch rather than that of Putin.   Whoever he serves, he will not be much missed as a leader of a country he naively brought to total devastation and collapse.     

 

Besides the energy trade sanctions, another sanction that also seems to be falling flat on its face is the banning of Russia from using US Dollars.    

 

Well, on Friday, interest of more than US$100million was supposed to be paid, apparently to an American pension fund, on bonds issued by a Russian state entity.  Since Russia has its dollar reserves frozen, and some of its banks cannot use SWIFT, Russia told the world, well, we have money, but we are not allowed to pay in Dollars.   We will therefore pay in roubles.           

    

This idea, circulating in the financial markets for a few days, was apparently not well received.   The Russian central bank then instructed JP Morgan to pay out of its US Dollar reserves frozen at the bank to the recipients of the interest.   JP Morgan went to ask the Fed, and well, what do you know, the Fed approved the payment!!

 

What sanctions?   US Dollars continue to be flowing through SWIFT to pay for the energy the Europeans still use.  And now we also know that the freezing of Russian reserves is also, shall we say, discretionary…

 

As such, the war won’t be stopped by economic sanctions, even though these rained down on Russia two weeks or so ago, like a nuclear storm.  (Told you all so, weeks ago).  These turned out to be technologically “advanced” financial weapons, because they can stop midway in flight and turn around to strike the ones who fired them.   But let’s stick with the fiction.   The truth is too painful to know.  

 

So much for the information war.   Full of sound and fury and no substance.  Full of retired Western generals who say the Russians have screwed up since they did not take the country in a two-day Blitzkrieg (the march on Baghdad took six months when the NATO armies were in a Sitz-Krieg).    

 

Then there is this refugee flow which is being engineered to flood the west.   This is actually the strangest thing.   It is NOT about Ukrainians fleeing to escape death and destruction.  That is again a semi-fiction.

 

Ukraine is a very big country.  More than 600,000 square kilometers.   Outside of a few hundred of these sq km, there is plenty of space just beyond the conflict zones, rustic rural space, to hide.    The refugees could have just gone there… why do people who love their country go so far west?    That’s what Chinese refugees did during the 1937 Japanese invasion.   The Ukrainians are therefore not really war refugees.  They are in fact economic refugees.   Same as the Africans and the Syrians who limped into Europe over the last decade and created the humanitarian crisis that is still hurting everyone involved.

 

The response of the Germans in the last refugee crisis has been hugely commendable.   They took in a million Syrians, as I remember, and were extremely kind.  They are still very accommodating, and in Berlin, heart-warming stories abound of Ukrainians being taken care of by the local population.   On the other hand, even as Biden says he will take in Ukrainian refugees, it is known that they are stuck on the Mexican border.  Only a few hundred have been allowed into the US.   This is pathetic.   Worse still, the Johnson government sends Ukrainian refugees who have already reached British shores back to Paris, to fill up formal application forms for visas.   That’s a clusterfuck, pure and simple.

 

There are already three million refugees who have left Ukraine and this is rising sharply.    I am not going to criticise any country not willing to take in refugees because this is indeed a humongous burden and a political problem for years to come.   But it is sheer hypocrisy to tell the media that refugees are welcome but in fact, impose all kinds of administrative barriers to stem the inflow.  That is treacherous.

 

The fact of the matter is that the refugees are going to be squeezed between their homeland, which they have abandoned for economic reasons, and the closed doors in their desired destinations.   They will likely be left in poorer East European countries such as Moldova, Poland, Romania and so on.  Will the richer countries at least send money?   Who knows? While waiting for those visas proceeding at a snail’s pace, as usual, they will eat bread made from overpriced Russian/Ukrainian wheat.   Ask the Africans and the Syrians…

 

Finally, there was the Biden-Xi teleconference to discuss the war.   Prior to the event, the Americans, trying to avoid the PR disaster of going into an unprepared meeting like they did in Alaska, let out to Western media that they were going to insist on certain things with the Chinese.  Like, if you help the Russians counter the sanctions, we will take strong action!  Or don’t you dare support the Russians with military help in their lost campaign!   This is to avoid the embarrassment of the Chinese rebutting in front of cameras that those are all lies, and yet create the impression, for the domestic American audience, that they have done all the tough things necessary to restrain the Chinese from allying with Putin in the war.

 

What naivety!   Will the Chinese likely be bulldozed into a position where they will strain a alliance with their friend, Russia, so that later, they will be whacked by the Americans, already positioned as their peer rival?  The Chinese foreign affairs team have demonstrated so much more expertise and finesse than Biden, Blinken and Sullivan have ever shown in their 1-plus year in office.  One side practices tai-chi, the other is in a boxing ring swinging out blindly at wherever they think the opponent is.   

 

In the event, the Americans came out with a tone-down version of what they were blustering to the American press.   The Chinese sidestepped the accusations, already refuted by earlier press statements, and presented their own check list of what the Americans had promised to do in terms of no interference in the Taiwan Straits, so far unfulfilled.   The final government read-outs were meaningless, signifying more work-in-progress, or a stand-off with no policy follow-throughs.

 

But what turned out to be most significant is the part in which Biden asked Xi to help pressure Putin to end the fight.  Xi’s response was, in essence : sure, we can do that but you can also help us by first talking to both the Russians and the Ukrainians because you created the problem in the first place.

 

Touche!           

 

 

Wai Cheong

Investment Committee

The writer has been in financial services for more than forty years. He graduated with First Class Honours in Economics and Statistics, winning a prize in 1976 for being top student for the whole university in his year. He also holds an MBA with Honors from the University of Chicago. He is a Chartered Financial Analyst.