Petrol economic theories, warning long post
"Who controls the food supply controls the people; who controls the energy can control whole continents; who controls money can control the world."
Henry Kissinger
"This notion that the United States is getting ready to attack Iran is simply ridiculous. . . Having said that, all options are on the table."The Guardian 7 June, 2006
How much longer
can the dollar reign supreme?
Linda Heard
Saddam Hussein stopped trading his oil for dollars before Iraq was invaded. Iran gets set to open a new oil bourse and futures market that will trade in euros, while Venezuela is said to be mulling over whether to follow suit.
Now Russia has joined the bandwagon. On May 10, President Vladimir Putin announced the creation of a Russian oil and gas bourse along with his intention to convert the ruble into a convertible currency that would be used for the trade.
Russia has recently swapped some of its dollar reserves for euros.
Together Iran, Venezuela and Russia corner some 25 percent of the export market in oil. If the three countries do away with the petrodollar, this could seriously buffet the US currency, forcing up interest rates, increasing the cost of imports into the US and contributing to an inflationary economy or a recession.
William Clark writing in the Energy Bulletin says, "What we are witnessing is a battle for oil currency supremacy. If Iran’s oil bourse becomes a successful alternative for international oil trades, it would challenge the hegemony currently enjoyed by the financial centers in both London (IPE) and New York (NYMEX)..."
At the same time, nations in this region have been exchanging percentages of their dollar reserves for other currencies.
In March, following the Dubai Ports World debacle, the United Arab Emirates (UAE) Central Bank said it was considering converting 10 percent of its dollar reserves to euros. Kuwait and Qatar have hinted that they might do the same.
The Commercial Bank of Syria has exchanged all its dollar devise for euros following a call from Washington urging US banks to cease acting as correspondents for Syrian financial institutions, ostensibly because of money-laundering concerns.
Last month, Sweden cut the dollar share of its $21 billion foreign reserves from 37 percent down to 20 percent, causing the dollar to tumble almost two percent in one week.
Sweden’s central bank said the switch to euros was an effort to stabilise its foreign currency reserves and reduce volatile currencies.
Iran, Venezuela and Russia are hardly on warm terms with the US Government and their proposed flight from dollars is thought to be partially, if not wholly, politically motivated. However, if the dollar value plunges as a result, then central banks around the world will be left with devalued reserves, and may have to start switching as well.
According to David Smith, economic editor for the Times, much of the dollar plunge is further "prompted by America’s $800 billion current-account deficit". This deficit isn’t surprising when a whopping $280 billion has gone to fund the war in Iraq and the Bush administration is bent on its policy of tax cuts, which mostly benefit mega corporations and the wealthy.
Gulf nations, in particular the UAE and Qatar, are said to be suffering inflationary pressures due to the weakened dollar and there is discussion as to whether the dirham and the riyal should be released from their long-time hinge to the greenback.
Some economists are making the case for Gulf currencies to be linked to a basket of foreign currencies instead.
In May, Kuwait revalued its dollar-pegged dinar up one percent. According to the Kuwaiti Finance Minister, the revaluation was meant to offset the impact of the dollar’s slide on investments and inflation.
An article posted on the Emirates Bank website penned by its general manager believes there is a more important question up for discussion than the pegging of Gulf Cooperation Council (GCC) currencies.
"A more important question therefore, may be whether oil exports should continue to be denominated in US dollars", he writes. "This might well be something that Organisation of Petroleum Exporting Countries (OPEC) or OEAPC can consider as to the pros and cons but is a matter that is best decided by a dialogue between the importers of oil and the exporters."
Washington’s erratic and aggressive foreign policies have also contributed to the rise in oil prices. In the event of a military strike on Iran or attempts to interfere in the internal affairs of Venezuela, oil could top the $100 dollar mark with severe repercussions on the US and other first world economies.
Indeed, Iran’s President Mahmoud Ahmadinejad has threatened to stop the flow of oil through the Straits of Hormuz, while Venezuelan leader Hugo Chávez says he will quit selling oil to the US if threatened with invasion.
As we know when Washington sneezes the rest of the world catches a cold and this is certainly true when related to the weakness of the US currency. Last week London Blue Chips dived on news of the dollar’s dive coupled with concerns about inflation, while Asian stocks also felt the pinch.
Washington seems unconcerned and is sending out confusing signals. For instance, Beijing was badgered to un-peg the yuan from the dollar, and to revalue the currency so as to give US exports a competitive pricing edge, but since, US Treasury Secretary John Snow has stated that a strong dollar is in the nation’s interests.
In the meantime, China is buying up Washington’s debt in the form of T-bills; some $200 billion worth.
If Beijing decided to dump US T-bills perhaps in response to a row over Iran, or more likely Taiwan, the US could find itself in trouble.
The question is how far will the dollar dive? If it ever goes into freefall, we may be all in for a bumpy ride ahead.
President George W. Bush, February 2005
“War continues in Iraq. They're calling it Operation Iraqi Freedom. They were going to call it Operation Iraqi Liberation until they realized that spells 'OIL.'"”
Who's Afraid Of The Euro ?
Paul Krugman
I once attended a conference at which a senior Japanese official made an impassioned speech about the need to establish the yen as an international reserve currency. When my turn came, I explained that this was silly; even if the yen did become a reserve currency, it would make virtually no difference to Japan or to anyone else. At the end of the session, the moderator thanked me for my contribution--which, he said, emphasized once again the crucial importance of the yen's role as a reserve currency. I never figured out whether this was a case of the translator having trouble with my accent, or whether it was a polite way of telling me I had said something unacceptable. But I do know that people almost always attach far more importance to the issue of reserve currencies--the role of the dollar and its rivals in international trade and finance- -than the subject deserves.
And so it was inevitable that the coming of the euro --the common European currency that seems set to be introduced next year, and that may eventually challenge the dollar's dominance--would inspire irrational fear. Sure enough, a few weeks ago the intellectual fashion victims at one of those other business magazines ran an editorial entitled "The euro makes trade a new game." "Thanks to the dollar's role as reserve currency in world financial markets," they opined, "the U.S. has been able to do what no other country can-- consistently import more goods than it exports.... The U.S. owes some $5 trillion to dollar holders abroad, thanks to three decades of trade deficits." Gosh, what happens if those people switch to euros?
Well, not to worry. It just isn't true that America's ability to import more than it exports is unique. Since 1980 the U.S. current- account deficit (which includes services and investment income as well as goods) has averaged 1.5% of GDP. That's about the same as Britain's average, less than Canada's 2.2%, and nothing like Australia's 4.2%. These countries paid for their excess imports the same way we did: by selling foreigners stocks, bonds, real estate, and so on. The only difference is that because their deficits were bigger, their debts are also bigger as a share of GDP. Ours, it turns out, aren't that large--at least on a net basis. While it's true we owe foreigners about $5 trillion, they owe us more than $4 trillion; the difference is about $800 billion, or 10% of GDP.
But doesn't the dollar's special role give us some advantage? Most of the international role of the dollar comes from its use as a "unit of account"--the measuring stick for international business. When a Japanese refiner buys Kuwaiti oil, say, the contracts are in dollars. This is a testament to U.S. economic influence, but flattery aside, it's hard to see what we get out of it.
What about our ability to borrow in dollars, to sell dollar- denominated bonds to foreigners? Hey, other countries do that too. But our debts are in our own currency! So? We still pay interest on them. True, we could inflate away our foreign debt. But we won't--and if investors thought we would, they would demand higher interest rates.
Well, then, you may say, surely the international role of the dollar forces people out there to hold dollars for transaction purposes. Yes, but not so you'd notice. When Daewoo repays a dollar loan from Sanwa, it writes a check on its account with some international bank. True, that bank itself surely maintains an account in New York, backed in part by non-interest-bearing reserves held at the Fed. So the U.S. does in effect get a zero-interest loan out of the dollar's international role--but it probably amounts to only a few billion dollars, small change for an $8 trillion economy.
Where the U.S. does get a significant free ride is from the willingness of foreigners to accept our currency--actual bills. Foreigners hold more than $200 billion of American money. Guess what kind of business requires payments of large sums in cash, by people unconstrained by official restrictions on possession of foreign exchange? That's right: the dollar is the world's premier medium of illicit exchange. Every year the U.S. ships foreigners $15 billion in cash (about 0.2% of GDP), and gets real goods and services in return. Better not ask what kind.
So the threat to the U.S. from the rise of the euro is this: five years from now, when wise guys in Vladivostok make offers you can't refuse, the payoffs may be in 100- euro notes instead of $100 bills. The loss of such business might cost the U.S. economy as much as 0.1% of GDP. Somehow, I think we can live with that.
Jay Leno quotes
Strange ideas about the Iranian oil bourse
The internet can be a good source of information about issues that aren't adequately covered by the mainstream media. It can also be a font of considerable kookiness.
Tyler Cowen as well as several Econbrowser readers have called attention to Iranian intentions of creating an exchange in which oil would be traded for euros rather than dollars. Krassimir Petrov's excited account gives a flavor of what you can find out there:
one of the Federal Reserve's nightmares may begin to unfold in the spring of 2006, when it appears that international buyers will have a choice of buying a barrel of oil for 60 dollars on the NYMEX and IPE-- or purchase a barrel of oil for 45-50 euros via the Iranian Bourse. This assumes the euro maintains its current 20-25% appreciated value relative to the dollar-- and assumes that some sort of US "intervention" is not launched against Iran. The upcoming bourse will introduce petrodollar versus petroeuro currency hedging, and fundamentally new dynamics to the biggest market in the world-- global oil and gas trades. In essence, the U.S. will no longer be able to effortlessly expand credit via U.S. Treasury bills, and the dollar's demand/liquidity value will fall.
How exactly will that have any effect at all on the Federal Reserve or the demand for dollars? Petrov explains:
The economic essence of this [post Bretton Woods] arrangement was that the dollar was now backed by oil. As long as that was the case, the world had to accumulate increasing amounts of dollars, because they needed those dollars to buy oil. As long as the dollar was the only acceptable payment for oil, its dominance in the world was assured, and the American Empire could continue to tax the rest of the world. If, for any reason, the dollar lost its oil backing, the American Empire would cease to exist. Thus, Imperial survival dictated that oil be sold only for dollars.
Elias Akleh sees this oil bourse, rather than nuclear bombs, as the thing that Bush fears most about Iran, while Soj writing at Daily Kos finds a conspiratorial connection between all this and the Federal Reserve's intention to discontinue publication of the monetary aggregate M3.
Where shall I begin? Well, for starters, you don't need to acquire any U.S. assets in order to purchase a barrel of oil that is priced in dollars. You could pay with eurodollars, which are dollar-denominated accounts that could be issued by any bank anywhere in the world.
And even if the oil were purchased with dollars drawn on a U.S. bank, there is no reason at all that the seller needs to retain the proceeds in that form. Those selling oil could convert those dollars back to euros or Japanese yen or whatever their hearts desired, and likewise could convert euros obtained through sales on an Iranian bourse back into dollars, if they wished. What ultimately determines the demand for dollars is not the unit of account for the transaction, but rather the desired asset holdings of those who are accumulating the wealth.
You could buy gold right now in New York for dollars or in London for pounds. Which one is cheaper? Guess what-- you'll pay exactly the same price either place once you make the currency conversion at the current exchange rate. The same will surely hold for crude oil.
And the notion that the U.S. dollar is currently "backed by oil" is so nonsensical that it is difficult even to fathom what that phrase is intended to convey. When we say that under a gold standard, the dollar is backed by gold, I know exactly what that means-- it means you can surrender dollars at any time to obtain a fixed amount of gold promised by the government. But if you surrender dollars on any given day in January 2006, how much oil are you going to get back? It varies literally by the minute, and the rate at which dollars get exchanged for oil has nothing to do with the promises made by any government and everything to do with market fluctuations in supply and demand.
Which is also my explanation for the prevalence of these theories on the internet-- there is a demand for a deeply conspiratorial interpretation of world events, and always someone willing to supply such.
A switch to Euros for oil trading will not happen in my lifetime. Governments can make any statements they want but thats commerce.
Bruce Miasamore, chief financial officer of Yukos
"More sanctions would be serious but would not kill Iran's economy, which is capable of rendering the sanctions unsuccessful," said prominent analyst Saeed Laylaz. "Iran, with its huge imports market, is nothing that can be ignored easily. Iran's share in the world's economy is also growing, therefore it is really difficult to impose sanctions. And if so, it will be step by step."Petrodollar warfare is a hypothesis that many international manœuvres in recent decades are taken to support the current dollar hegemony over other currencies. Supporters of this hypothesis believe that the U.S. dollar international value is determined by the fact that many key commodities (like energy in the form of oil and gas) are denominated in dollars. Supporters believe that if the denomination changes to another currency, for example the Euro, many countries would sell dollars and cause the banks to shift their reserves because they would no longer need dollars to buy oil and gas. This would weaken the dollar compared with the Euro in accordance with the law of supply and demand. The term oil currency wars is also used for the concept.
William R. Clark coined the term in his articles and it is now the title of his book, he is however, not the originator of the theory.
Congressman Ron Paul (R-Tex.) advocates the idea that empires have been upheld by continuing expansions and exploitations, and when they no longer could do that they collapsed. The U.S., he says, does the same by issuing dollars to the world that are not tied to a commodity such as gold. He foresees a collapse for the U.S. economy if the Dollar Hegemony is not upheld, like the empires of old, and proposes to return the dollar to what he sees as its constitutional form and value. According to Congressman Paul, wars and coups in oil producing states are happening partly to support the Dollar Hegemony.
This hypothesis does not seem to account for the fact that a declining dollar would lead to increased U.S. exports and decreased imports, which would decrease the United States trade deficit. On the other hand, the U.S. is highly reliant on import of oil, and a declining dollar would make oil imports more expensive for the U.S. Also, with the massive loss of US manufacturing jobs overseas, reliance upon exports would not be a sustainable economic base. It is disputed as to whether or not a falling dollar would actually hurt the American economy.
Since 1971, when the U.S. dollar ceased to be redeemable in gold, its value has not been explicitly linked to any commodity.
In 2000, Iraq converted all its oil transaction under Oil for Food program to Euros. When U.S. invaded Iraq in 2003 one of the first things it did was to return oil sales from the euro to the U.S. dollar.
Iran is planning to open an oil bourse denominated in euros. It was planned to open in March 20, 2006, but the opening was postponed without future date set. Proponents of this theory fear that it will give added reason for the U.S. to topple the Iranian regime and close the bourse or revert its transaction currency to dollars.
When analyzing such matters as the vulnerability of the US economy and the chances of its collapse, it is vital to avoid the two extremes of "calamity howling" on one hand and investing blind faith in the status quo on the other. Unforeseen and unexpected attack-induced collapses of grand proportions can and do occur. The sudden collapse of both towers of New York's World Trade Center, for example, took everyone by surprise - who could have foreseen that the two towers, which survived the massive lateral impact of two huge planes, would, only minutes later, collapse vertically upon themselves, their own massive weight ensuring their demise?
Structurally, the two towers were impressive indeed. They had actually been designed to take a lateral and direct impact of a Boeing 747 jumbo jet and survive without collapsing. Nonetheless, certain fundamental structural vulnerabilities did exist in the towers. These were not entirely evident before September 11, 2001, but were hidden beneath their massive and stable outward appearance. When those vulnerabilities were carefully targeted and exploited, down the massive towers came within mere minutes of the attack.
Do similar deep structural vulnerabilities exist within the US economy? Are these currently being exploited by the al-Qaeda and others to cause a US economic collapse? Are the apparent strength, stability and imposing size of the US economy deceptively masking an imminent collapse, as the Twin Towers did? Have the initial stages of an attack on the towering US economy, which might bring about a vertical collapse, already begun?
Faulty Towers
The collapse of the Twin Towers was a harsh lesson in the realities of the vulnerability of US infrastructure. In the case of the attack on the towers, the planes struck near the top of the structures. Had they struck nearer to the street level, there might have been a chance to extinguish the resulting fires before the primary steel structural beams weakened. Had they struck the top, the vertical collapses that ensued would have been highly unlikely as the primary steel structural beams wouldn't have been possible.
Fundamental vulnerabilities exist in the US economy too. But there also exists a widespread consensus that there is little real chance of a collapse, no matter what the attack might be. Even most contrarian experts dismiss the possibility of an actual collapse. They generally speak only of a prolonged "bear" period for the economy, not a collapse. The towers also enjoyed such widespread confidence before September 11. The previous targeting of the towers in 1993 and their survival only reinforced this misplaced confidence.
Vertical collapse
Just before September 11, 2001, the US economy was also extremely unlikely to be susceptible to a sideways hit. It did show its resilience in the immediate aftermath of the attacks on its economic infrastructure. But the key to the success of the attacks, from al-Qaeda's perspective, was the igniting of the jet fuel and its impact on the primary steel support girders. Hence it was not the immediate result of the impact itself, but rather the delayed result of the fire that counted. The steel girders were the actual framework of the towers, around which the structures were constructed. When the flames softened the framework, the whole structure caved in.
The US economy is also constructed around a fundamental framework - its currency, the almighty dollar, and the apparently firm and virtually unbreakable international support it enjoys. Similar to the framework of the Twin Towers that supported their massive weight, the dollar supports a massive load of debt, now totaling well over US$7 trillion in the public sector alone. Much of this debt load is, in effect, tenuously suspended at the upper portions of the US economic structure, where it places an undue load upon the lower, traditionally more stable part of the economic framework. This is true for a number of reasons.
Federal Reserve Board and government policies over the past 20 years or so have been extremely shortsighted, leveraging the economy's future stability and strength by means of large and perpetual deficit spending. The US government, and its citizens as well, have acted as if there would never come a day of accounting for the immense debt being amassed, that somehow the amassing of such debt didn't matter. Nothing could be further from the truth. And since the economic slowdown of 2000, Fed and administrative policies have caused a pointed and massive ballooning of very risky forms of public and private debt, all built upon the structural framework we call the dollar. One such form of debt is the massive selling of treasury notes to foreign central banks - most notably to the big Asian economies. Another is the Fed policy of "prolonged monetary accommodation", meaning keeping interest rates at artificially low levels, printing new money at the rate of nearly $1.5 trillion per year and the massive creation of easy credit.
In the past three to four years, debt encouraged by such policies has mushroomed almost beyond imagination. So, in effect, there now exists a mountainous load of debt concentrated within the upper sections of the US economy, where it cannot easily be neutralized to the ground level in an orderly fashion. How much of such massive weight can the framework, the dollar, carry and support before the structure caves in?
Is there already a fire in the immediate vicinity of that framework and are the steel girders already beginning to soften? The traditional international support for the dollar and the US government's foreign and economic policies is beginning to waver. Why? Because al-Qaeda has lighted a fire of sorts in the vicinity of the dollar framework. It has succeeded in instigating the US to take economic and foreign policy measures that have resulted in a loosening of the firm "girders" of international support for dollar and US policies. Al-Qaeda has indirectly lit the fires of controversy over the rightfulness and permanence, and even the desirability, of continued US global dominance in the diplomatic, economic and military spheres.
Now that fire is raging, and ferociously eating into the girders. Controversial and ill-advised unilateral US economic and foreign policies since September 11 are only fueling that fire. In the immediate aftermath of the re-election of President George W Bush, international support for the dollar and for related US economic and foreign policies is noticeably weakening, at a time when it is most needed to support an unprecedented and mushrooming mountain load of debt. Recently, voices from within the government of Norway have called for a switch from the dollar toward the euro for international petro-transactions. The governor of the Bank of Japan has recently stated that having the dollar as the sole global currency is a marked disadvantage and danger, and recommended moving toward adopting the euro as a global currency alongside the dollar. The appetite of the big Asian economies to continue buying dollar assets is waning - last month the US barely achieved the $60 billion of foreign cash inflow required each month to keep it afloat. Hence the possibility of a Twin Towers-like vertical collapse of the US economy is becoming greater, not lesser.
The following highlight the extent of the mounting debt and the risk involved:
The total US public national debt now exceeds $7 trillion.
When Social Security, Medicare, Medicaid, military and government pensions are added in, the total national debt exceeds $51 trillion, according to Fortune magazine - that's nearly five times the gross domestic product (GDP) .
The current year's deficit alone approaches $1 trillion when you add the off-budget items.
Derivatives (highly leveraged and enormously risky instruments such as interest-rate futures, options and swaps) now total $180 trillion, 17 times the GDP. Warren Buffet calls derivatives "instruments of mass destruction". Many financial institutions have become highly invested in derivatives. Government-sponsored enterprises such as Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corp) use derivatives heavily. Because of the inherent nature of derivatives, these instruments and those using them are extremely sensitive even to small and moderate interest-rate increases.
The total US consumer debt is more than $8 trillion.
The Japan Times recently stated, "Stephen Roach, Morgan Stanley's perceptive economist, drew attention to the fact that some of the numbers are nothing short of frightening. The US currently has $38 trillion in debts, and there is a $54 trillion federal funding gap - the difference between what the government is committed to pay out and what it will receive in tax revenues."
The Fed has kept interest rates artificially low for long, thereby creating enormous amounts of cheap and easy money and has also pursued a policy of "monetary inflation" (declining the value of the dollar) by printing nearly $1.5 trillion a year. These prolonged policies have artificially created huge and growing (1) credit, (2) real-estate and other asset and (3) stock-market bubbles. However, with interest rates rising, the bubbles are about to burst.
The price:earnings ratio is at historic highs - a sure sign of a general stock market bubble. "Smart Money" Warren Buffet has mostly pulled out of the US stock market because stocks are so greatly overpriced. What goes up must come down, and the US stock market is way up, far higher than can be justified by reason and facts.
The troubled dollar
Is international support for the dollar and for US policies eroding? Yes, it most certainly is. A powerful case can be made that it has been US policies and actions since September 11 that have resulted in a powerful upswing in terrorism worldwide along with an equally powerful elevation in Middle East instability resulting in sustained crude oil price hike and a resulting dollar decline, both of which are threatening to render serious damage to the big Asian economies. Firm international support for the dollar is certainly flagging. The largest Asian central banks have gone on record that they are curbing their purchases of US debt. And they are also diversifying their huge reserves, steadily moving away from the dollar. The risks have simply become too many and too serious.
International fears of a disorderly, or possibly even a catastrophic, decline in the dollar have been pointedly heightened. Asian central banks are being forced by the varied and serious risks to hedge their bets, not wanting to be ill-prepared in the event of a disorderly decline in the dollar. Russia is also steadily decreasing the percentage of its reserves denominated in dollars, moving toward a level of 50:50 split between dollars and euros. Russia is the key player here, the one the entire world is intently watching. It alone can play the key role in either restoring the flagging international support for the dollar, or completely undermine its remaining support, precipitating a vertical collapse.
President Vladimir Putin has stated both publicly and privately that invoicing Russia's crude-oil and gas exports to the European Union in euros instead of in dollars makes very good sense for both Russia and the EU. Putin is known to have very close relations with "old Europe", primarily Germany and France. His statements and those of German and French leaders have even on occasion drawn attention to the fact that US global dominance fundamentally rests on the fact that the dollar is the international currency, and that if an exit from the dollar were to occur in the sphere of global petro-transactions, the effect would be seriously to undermine that global dominance. Furthermore, a number of oil-exporting countries have already gone on public record as to their preference to make an exit from petro-dollars in favor of petro-euros. They have indicated that if Russia begins such a move to petro-euros, they will rapidly follow Russia's lead. The net effect would be a rapid international abandonment of the dollar as the international currency, which would in turn "bring down the towers" of the heavily debt-ridden US economy.
Al-Qaeda has recently mounted a second attack on the fundamental framework of the US economy. Its clear strategy of attacking oil-exporting infrastructure around the globe to tighten global supply and drive up crude-oil prices is a further act of instigating a raging fire in the immediate vicinity of the US economic girders. Al-Qaeda knows crude oil is the economic lifeblood of industrialized economies. And it also knows the fundamental fragility and deep imbalances that exist in the US economy in particular. It fully understands that international support for the dollar is weakening and that a sustained elevated crude-oil price is the key to producing a set of circumstances in which persistent inflation returns, requiring a set of interest-rate hikes, which in turn will act like a needle to burst the credit, real-estate and stock-market bubbles. The resulting decline of the dollar will be steep and persistent, undermining what is left of international support for dollar.
However, one huge problem that has been noted on the subject of executing an exit from the dollar is the current enormous reserves held by the big Asian economies - those reserves are largely denominated in the US dollar. How can any of these Asian central banks or Russia, which still holds a percentage of its $112 billion in total reserves in dollar-denominated assets, execute an exit from the dollar without simultaneously wiping out the immense value of their own dollar reserves? On the surface, that problem seems virtually insurmountable. But is it really?
If we look at Russia as an example, we learn that its central bank has been moving rapidly over the past 15 months from a 75% holding of dollars in its reserves to a 50% holding, significantly decreasing the proportion of its reserves denominated in dollar. Significantly, it is also well along in an effort to de-dollarize itself domestically in favor of the euro, buying up its domestic dollars with windfalls coming as a result of the elevated price of crude oil, and by that means it is progressing steadily toward its stated goal of "diversification" of its reserves away from the dollar. The rest of the world is forced to watch what Russia does in that regard.
If Russia is perhaps positioning itself to make even a partial exit from the dollar in the pricing of its petro-transactions, then the Asian and other economies don't want to risk being left out in the cold, unprepared, seeing the value of their own huge dollar reserves undermined by a steep or chaotic decline in the value of the dollar. They cannot afford to ignore Russia's moves. Hence as Russia moves to decrease the percentage of its own holdings of dollars, so are the big Asian economies, as well as many other economies around the globe. No one wants to get burned in the event Russia moves to the euro. Additionally, as the dollar continues to weaken and crude oil continues to rise in price, having the dollar as the preferred international currency for petro-transactions will become more of a liability, especially for the big Asian economies, which are heavy importers of crude oil. This fact will tend to further undermine Asian, as well as the rest of international support for the dollar.
This is really cheap but I've taken a fair few hours to collate and read various sources. So I'm finishing this tomorrow or Sunday. Feel free to pitch in but bear in mind I haven't posted an opinion one way or another just posted some of the sources I have read tonight.
So sorry folks but got half way through and a killer cold bug stopped me in my tracks.
Peter
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