Will Russia-China Energy Deal Have Ramifications for the US Dollar’s Reserve Currency Status and Gold?

- July 22, 2014 -

Several weeks ago, Russia announced a significant energy deal with China, a transaction considered by many as a response to Ukraine-based sanctions against Russia imposed by the West.

Briefly, the agreement involves Russian natural gas supplier Gazprom delivering the equivalent of $400 Billion US in natural gas to China over the next several decades. Many tangible asset proponents felt that this agreement would contribute to the demise of the petrodollar, which could ultimately lead to the demise of the US Dollar as the world’s reserve currency.

However, neither Russia nor China initially announced payment terms to be in any form other than US Dollars. In doing so, both countries admitted they were eager to move away from a US Dollar reserve currency, but neither country was able to provide an alternative. However, this outlook changed virtually overnight when Bloomberg.com recently ran the following headline:

‘Gazprom Ready to Settle China Contracts in Yuan or Rubles’

Thus it appears the world’s other two superpowers may be mounting a challenge to the US Dollar’s status as the world’s reserve currency. Once bilateral trade in Russian Rubles or Chinese Renminbi (Yuan) is established, the rest of the energy world could easily fall in line. Not only is Gazprom (translate: Russia) willing to accept Chinese Yuan as opposed to US petrodollars, they are now negotiating with Singapore and Hong Kong to accept their dollars.

In conclusion, it appears that the various Ukraine-based sanctions and embargoes placed on Russia by the West may ultimately backfire. If the petrodollar ultimately fades to second class status, the US Dollar’s days as the world’s reserve currency are numbered. If Russia continues to establish economic alliances with the East, specifically China, the US could be vulnerable to dire strategic and financial consequences. If this scenario plays out, a likely result would be higher gold prices. Historically, gold reacts positively to a weaker US Dollar.

What is the ‘Petrodollar’

Petrodollar refers to United States dollars earned through the sale of its petroleum (oil) to another country. In the existing system, all transactions actually are settled in U.S. dollars creating a world-wide demand for dollars (hence why it is considered the world’s ‘reserve currency’). The petrodollar system also meant that the U.S., the largest consumer of oil in the world, gained the power to buy oil with a currency it can print at will.

Source: Wikipedia