The Demise of the Petrodollar and the New Multipolar World

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3 July 2017

The last two or three years have seen a fundamental shift in the global monetary system, the full implications of which will take some time to emerge. There are a number of symptoms of this global shift, but Australian commentators persist in reviewing each of these symptoms without recognizing their relationships.

One of the financial pillars of the post world war 2 economic structure has been the role of the United States dollar, which since the Bretton Woods agreement of 1944 has effectively been the world’s sole reserve currency.

Initially, the dollar’s role was underpinned by US gold holdings, until Nixon removed the convertibility of the dollar to gold in 1971. That should have spelt the end of US financial power, but instead a new unit assumed a central role, and that was the creation of the petrodollar. In what was at the time a secret agreement, Nixon’s National Security Adviser Henry Kissinger negotiated with the Saudis an agreement whereby, in exchange for US arms and security commitments, oil would henceforth be traded only in US dollars.

The second pillar of post-war US political power was its willingness to use military force to crush any opposition to its dominance, and in particular to counter any moves that threatened the dollar’s status and the central role of the petrodollar as enabling an economy that otherwise defied economic logic to maintain a pre-eminent position.

Both these pillars are now crumbling at a rapid rate, and it is the reaction to that diminishing status that is the key to understanding much of contemporary US geopolitical behaviour, particularly in the Middle East and Asia.

The first major cracks in the petrodollar system appeared under Saddam Hussein’s Iraq in the early 21st century. Saddam announced in November 2001 that Iraq was switching from the US dollar to the Euro for its oil sales. Iraq was at the time one of the world’s top oil producers.

It was not a coincidence that the Bush administration immediately began its massive demonization of Iraq, and its alleged possession of and intended use of, weapons of mass destruction. The phrase, ‘a brutal dictator who kills his own people’ was repeated ad nauseum. That same phrase is currently directed at Syria’s Bashar al Assad.

The propaganda campaign against Iraq and its leader was followed by the invasion of 2003 in which Australia was a willing accomplice. The appalling consequences of that invasion persist to the present day. None of its major architects, Bush, Blair and Howard have been held accountable in any court of law.

Libya suffered a similar fate in 2011 when its leader (another ‘brutal dictator who killed his own people’) Muammar Gadhafi announced that he would no longer sell Libya’s oil in dollars (as Africa’s largest producer) but instead use gold backed dinars. That would have caused chaos to the dollar-based system. Libya was therefore attacked and destroyed. Again, the tragic consequences of that invasion reverberate to the present day with, as Hersh pointed out (The Red Line and the Rat Line, London Review of Books 17 April 2014) thereby creating direct linkages to the Syrian war that commenced in the same year.

In Assad’s case (another ‘brutal dictator who kills his own people’) it was the refusal to allow the transit of Qatari gas to Europe, where it was intended by American planners to be used to supplant Russia as the principal supplier. (R.F. Kennedy Jr. Syria: Another Pipeline War www.ecowatch.com 25 February 2016.)

Another huge crack in American dominance can be traced to Chinese President Xi Jinping’s speech in Kazakhstan in September 2013 when he announced his grand strategy of what has variously been called the New Silk Roads, One Belt, One Road (OBOR) and the Belt and Road Initiative (BRI).

The transformational nature of this huge infrastructure project has been discussed elsewhere (W. Engdahl Eurasia Silk Road Economic Transformation www.journal-neo.org 25 April 2016). Its importance in this context is that part of the overall strategy is that there are a number of sub-components. They include the progressive interlinkages with the Shanghai Cooperation Organisation (SCO), which India and Pakistan joined this year as full members; the Eurasian Economic Union (EEU); and BRICS (Brazil, Russia, India, China and South Africa). Each of the three organisations has important overlapping memberships.

China, in terms of parity purchasing power, is now the world’s largest economy. It is the largest trading partner of 124 of the world’s nations. In early 2017 it surpassed the US for the first time as the world’s largest consumer of crude oil.

That gives China enormous economic power and with it the ability to determine, among other things, the monetary basis of its trading activities. It has now reached agreement with more than 100 countries to conduct their mutual trade in Yuan rather than the dollar. ( www.wsj.com 27 October 2016). Russia is now the world’s largest producer of crude oil and in 2016 overtook Saudi Arabia as China’s largest supplier.

A side benefit of receiving oil and gas from Russia rather than the Middle East is that it can be transported through one of the massive pipeline development that the two countries are developing (www.ft.com 21 May 2014) rather than via the Straits of Malacca, which is vulnerable to a naval blockade, by the US and its allies including Australia. Just this past week the US and Australia began their annual exercise Operation Talisman Sabre which practices just such a blocking manoeuvre.

Admiral Harry Harris, head of the US Pacific command was quoted as saying that he was pleased about the “signal” the exercise would send “potential adversaries” i.e. China. The US sees the exercise as countering “Chinese assertiveness” in the South China Sea. (C. Packham www.reuters.com 29 June 2017). That the Chinese might see the exercises, added as they are to the 400 US military bases that encircle China as something other than ‘countering Chinese assertiveness’ is not something that appears to enter the heads of either American or Australian strategists.

For obvious reasons, neither Russia nor China have any motive to underwrite the petrodollar and is linkages to US economic and military power. Since 2015 trade between the two countries has increasingly been denominated in either Rubles or Yuan, the latter currency joining the IMF’s basket of reserve currencies in October 2016.

What has achieved almost no attention in the western media is that in June 2017 China and Saudi Arabia began negotiations to end the petrodollar as far as their two countries trade was concerned, and that henceforth China would purchase Saudi oil with Yuan. It would be an unlikely coincidence that Trump’s first foreign foray in June 2017 was to Saudi Arabia with announcement of huge arms deals. It would be surprising if an unpublicized element of the trip was not an attempt to shore up the petrodollar in the face of what are now overwhelming pressures for its eclipse.

That same trip saw Trump denounce Qatar as a ‘sponsor of terrorism’ and for Saudi Arabia to announce a list of demands that Qatar should meet. Putting aside the irony of Saudi Arabia and the US denouncing anyone as a ‘sponsor of terrorism’ the real reason for Qatar’s sudden demonization has wider roots.

Over the past two years, Qatar has signed gas supply deals with China worth $86 billion. That trade is being conducted in Yuan. Qatar has also taken steps to improve relations with Iran, with whom it shares the world’s largest natural gas field. When Saudi Arabia and other Gulf States announced sanctions on Qatar, it was Iran that offered civilian supplies in aid, and the use of its ports. In a further significant move, Turkey sent 40,000 troops to Qatar to assist with its defence in the event of any move by Saudi Arabia to try and militarily enforce its demands.

In 2017 Iran also dropped the dollar as the medium of its oil and gas related trade. Apart from being one of the world’s largest producers of natural gas, Iran is also an associate member of the SCO (with full membership likely this year of next) and is a vital link in the North South Transportation Corridor linking India with Russia via Azerbaijan. Iran is also playing a major role in helping Russia and Syria defeat ISIS terrorism in the region.

Again, it is no surprise that Iran was on General Wesley Clark’s list of seven countries targeted by the Bush administration for regime change (J. Conason ‘Seven Countries in Five Years’ www.salon.com 13 October 2007. Libya, Iraq and Syria were also on the list.

It is similarly no surprise that Trump has publically targeted Iran and despite the nuclear deal brokered by Russia in 2015 has, rather than easing tensions, exacerbated them by threats and further sanctions.   Iran’s real “crime” since at least 1979 has been to refuse to kowtow to American demands.

What Russia and China have done, in short, together with important allies such as Iran, is to begin to systematically dismantle both the economic and the military basis upon which US hegemony has been built over the past 70 years. As has been their traditional response, the US has reacted militarily to this undermining of their hegemony, either by direct military intervention, as in the above examples, or by waging proxy war in a variety of theatres.

As Tony Cartalucci notes (ISIS “Coincidentally” Appears Along China’s One Belt One Road www.journal-neo.org 1 July 2017) sowing dissent and disruption as a means of challenging and preventing China’s rise as a geopolitical power is a well documented and long standing tool of US foreign policy. (W. Engdahl Target China, Progressive Press 2014).  Fomenting trouble in the South and East China Sea and on the Korean peninsula fits the same pattern as does the coup in Ukraine in February 2014 serve to disrupt and demonize Russia.

Such policies are bound to fail in the longer term, although the potential for disastrous consequences in the shorter term is an ever-present danger. Traditional American allies such as Australia need to decide where their true national interests lie. Do they cling to the dangerous skirts of a dying empire, or will they grasp the opportunities offered by the transition to a multipolar world.

*Barrister at Law and geopolitical analyst. He may be contacted at joneill@qldbar.asn.au

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