Prior to the Ukraine crisis, China stood out as the United States' main rival, with both powers locked in geopolitical, economic and currency battles.
But this has all changed with the rapid escalation of the crisis in Ukraine, where Crimea has succumbed to Russia’s annexation. Russia’s President Vladimir Putin has stepped onto the global stage wielding his iron fist, ready to take on the West, which is exploiting Ukraine for geopolitical interests.
President Barack Obama is now facing a battle on two fronts, one in eastern Europe against Russia and the other in the Pacific against China. How on Earth is he going to garner the influence and strength necessary to cope with the two emerging powers now teaming up against the United States? Can he keep his allies, particularly the European countries, in line when the confrontation reaches a critical point?
At the end of the day, the global conflict we are witnessing is all about the attempt to save the petrodollar. Failing to rein in Russia and China will result in the dumping of the US dollar both as the world’s reserve currency of choice and as the so-called petrodollar.
The emerging BRICS economies – Brazil, Russia, India, China and South Africa – have for some time been moving to set up their own global financial order away from the current order, dominated by Wall Street, the US Federal Reserve and the post-war twin institutions of the World Bank and the International Monetary Fund. The BRICS have made progress in forming international banking institutions to rival both the World Bank and the IMF. They have also agreed to explore further possibilities of using their own currencies to trade with each other.
China is now the world’s largest trading nation and also the world’s largest oil importer, surpassing the United States. It is operating yuan swaps with dozens of trading partners to promote the yuan as a currency of trade and other transactions. It also aims to create the “petroyuan”, so that China would not need to convert its currency into dollars before purchasing oil. Once the yuan is internationalised, Beijing would be in a position to buy oil with its own currency.
Russia is now engaged in a sanctions war with the West over the Ukraine crisis, though so far the sanctions remain mild. But Putin has made it clear he would like to demolish the petrodollar to make way for a petroruble. Russia is now the world’s largest oil exporting nation. It has the clout to shake up the global financial system. Europe depends on Russia for about one-third of its energy consumption, a supply that would be threatened if Europe took up a hostile position against Russia over the Ukraine issue. Russia is now demanding that Ukraine come up with $2 billion to pay its gas bill and another $5-billion up front to ensure continued supply to Europe, which receives most of its natural gas through Ukraine’s pipelines. With civil war looming in its breakaway regions, it was only a matter of time before Ukraine – which was steering a pro-West course – had to succumb to Russia’s power play.
One of the most significant moves that has come out the Ukraine crisis is Russia’s threat to sell its energy in rubles or other currencies (even gold) rather than in US dollars. If the annual $1-trillion trade in Russia’s energy is not transacted in US dollars, we will see the end of the petrodollar. Moreover, in May Russia and China will sign a major gas deal that will shake the world, as the transaction will also spurn the US dollar.
The growing challenge of these combined forces against petrodollar is threatening the US grip on global power, which comes with the reserve-currency status of the dollar. If there is less demand for the dollar, or if the dollar were to lose its reserve-currency status, the US will lose its monetary power and subsequently its political and military power, which so far have been financed simply by the free “printing” of more dollars.
The first country that would suffer if the petrodollar fell would be Saudi Arabia, which has acted as a pillar for the petrodollar in the Middle East. If the petrodollar goes, so will Saudi Arabia’s paper-dollar assets. This would see a major shift in the Middle East’s balance of power, a shift that would spread to other parts of the world. With a breakdown of the world order comes the threat of major conflict. World War III is what we all should avoid.