The death of petrodollar and arising domination of yuan represent important factors in understanding global finance and shifting geopolitical landscape. The petrodollar represents money earned through oil transactions which is further recycled by purchasing other USD-denominated assets.
Countries like Russia, China, Iran and others, are looking for the way to distance themselves from the USD, in order to completely avoid bilateral arrangements in Petrodollar recycling chain. These countries have implemented transactions with each other avoiding the USD by conducting bilateral trade arrangements.
The death of petrodollar could have an impact on many things, from Russian geopolitics to social tensions in developing nations and many more.
The $40 billion Silk Road Fund and Asian Infrastructure Investment Bank are coming into focus as China is getting used to the idea of yuan domination. China is going to drive the yuan to become an integral part in the settlement of AIIB transactions and there is a possibility that special reserves in both the AIIB and Silk Road fund will be established in order to issue yuan-denominated loans.
According to SWIFT data, 15 new countries have become an addition to existing countries which have already been trading their deals with China in yuan.
Since November 2014, Russia and China reported that their future trade will be paid in yuan. This progress is highly welcomed by the Chinese authorities because this corresponds to their goal of internationalization of yuan and having a currency which is widely used around the world. Since Russia and China have somewhat tense relations with United States, the countries have supported the idea of sinking the role of the dollar in international trade. Limiting the role of dollar corresponds with China’s ambitions to ultimately turn yuan into a global reserve currency. Since China participates with 32% of $4 trillion foreign exchange reserves in U.S. government debt, that is the reason why China intends to control the dollar investment risk.
Russia also shares the same intention to limit the dollar’s dominance since U.S. and European governments enforced sanctions on Russia because of its support for separatist rebels in Ukraine. Since then, many Russian crude exports companies changed the currency used in transactions, from dollars to Chinese currency.
In addition to this, oil transactions with China have been settled in renminbi.
Still it is unknown how many of these transactions between Russia and China will be settled in Chinese currency. Oil Company Gazprom had been selling its oil for export in renminbi to China through the East Siberia Pacific Ocean pipeline. In april 2014, Alexander Dyukov, chief executive of Gazprom Neft stated that the company had managed to secure the agreement with 95% of its customers to settle transactions in euros rather than dollars, in case there is necessity to do so.
This increasing use of Chinese currencies in monetary transactions in oil exchange by Russian companies led to the birth of PetroYuan. The shift from dollar to renminbi settlements of oil sales had an impact on increased discussions on the same course of actions in other parts of the world.
The results are evident as number and percentage of China’s crude imports from OPEC nations show a drop, whereas imports from Russia have increased by 36% in 2014.
In conclusion, it is evident that Western economic sanctions on Russia have driven the manufacturers of domestic oil to settle crude exports to China in yuan rather than in dollar. On the other hand, the fall in crude prices could lead to fall of net supply of petrodollars by nearly $900 billion over the course of three years.
The rise of PetroYuan signifies that renminbi is slowly taking over the disappearing petrodollar.