Archive for April 21st, 2011

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Ukraine and Russia agree energy trade in Rubles not US$

April 21, 2011

Well dear readers, in what some people will think is a move against the US$, Ukraine has requested that Russia trade between the two nations for energy products and transportation be conducted in Rubles……not US$.

Quite obviously this would seem like a shock to many people who automatically think that all commodity trading is done in US$.  China and Russia dumped the US$ for Ruble and Yuan in bilateral energy trading last year.

It is very good for the USA that the majority of the world uses the US$ in international trade, especially commodities, as of course to trade in US$, you must first buy the US$ and only the USA prints the US$.  Money for nothing in effect as far as the US is concerned.

This currency shift should not come as a shock to anyone who had their eye on a small island belonging to China last week though.  For those who did,  it will not have escaped their notice that there was an economic meeting of the BRIC nations plus specially invited guests.

Outcome? – The BRICs have decided to inter-lend between themselves directly – and not in US$. Very soon there will be Chinese Yuan in India and Brazil to add to that which is already in circulation since China and Russia started trading oil and gas in Yuan and Rubles. Of course China will also be holding these nations currencies as well – rather than US$ or Government debt valued in US$.

Also at this meeting in China was South Africa.  South Africa was not there to represent just its own interests but it was representing Africa as a continent.  Quite right considering the amount of BRIC money being invested in the continent of Africa.

Now before the doom merchants start predicting the US$ is dead, it must be pointed out that US$ Government debt is actually held by all the above nations, including South Africa.  Therefore it doesn’t do them any good to kill the US$.

However this may not be all about the killing the US$…..at least not yet.

Remove the currency angle and think about pure politics and political power on a global scale going forward. With the exceptions of China and Russia who have permanent seats on the UNSC, not one of these nations has any other international clout within any international body.  Not the IMF, not the WB or any other global economic directional body.  Quite a strange state of affairs considering between them they drive the global commodity economy both in supply (Russia and Brazil) and demand (China and India) and all 4 economies are predicted to outstrip the western growth by 3 or 4 times each year going forward.

With the current leader of the IMF due to leave post soon, replacing Mr Strauss Khan with another western face is unlikely to please the BRIC nations.

The UK Prime Minister David Cameron stated only a few days ago, that the IMF should look to “another part of the world for its next leader in order to increase its global standing.  “If you think about the general principle, you’ve got the rise of India and China and South Asia, a shift in the world’s focus, and it may well be the time for the IMF to start thinking about that shift in focus.”

By inter-lending in their own currencies to one another, especially if they restrict it to commodities like oil, gas, coal, ore, metals, and minerals (I omitted to mention amongst the invited guests was the Ukrainian Prime Minister…..did I mention metals, coal and ore?) they are putting together significant economic levers to force the western world to accommodate them with leading roles and permanent seats in top global influential policy making organisations.

If that is the case, well you can’t blame them – they have all the money, the growth and the population now to warrant that argument, particularly if the African continent backs them due to the massive and continuing investment in Africa from the BRIC nations.

Now, as this non-US$ interlending was agreed between them last week, when the BRIC (plus African nations) governments start inter-nation lending and trading in currencies other than the US$, is it just a matter of time before their regional (Asia/Africa/South America) markets do between companies of the BRIC (plus guests) club, further alienating the “world reserve currency”?

They can of course stop that happening outside of government institutions, should they be offered a significant carrot, such as leading roles in powerful international organisations for example.

That is the political angle that strikes me from this meeting, whilst also removing the need to hold even more excessive amounts of US$.  Both buyers and sellers have excused themselves from the US$ commodity game at governmental level between themselves.

Of course, when they do force their way into influential  positions and no longer hold huge US$ debts, whenever that time  will come, then no doubt they will internally greatly influence the WB and IMF to dump the US$ as “the world reserve currency”, and take up SDRs for inter-government lending of which the US$ will be but a part of the currency basket used to do such things and not the only currency….eventually.

A grim outlook for the US$ as “the world reserve currency” in the very long term, and more worryingly for Washington, losing that status inherently means the technical impossibility of default by being “the world reserve currency” also disappears into the night.

The next political/economic move to watch in Ukraine relating to the US$, will be whether it removes the invisible and unofficial peg it has to the US$ and allows the UAH to freely float at some point in the future….or unofficially pegs to the currencies of its major trading partners instead.  If Ukraine no longer needs so many US$ to service its external debts and liabilities, with the USA accounting for very little import or export as far as Ukraine is concerned, at some point in the future the unofficial UAH peg to the US$ becomes pointless.

Interesting times ahead.

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