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Foreign critics have long chafed at the exorbitant privilege of the U.S. dollar as a global reserve currency. The U.S. can issue this currency backed by nothing but the ‘full faith and credit of the United States.
Foreign governments, needing dollars, not only accept them in trade but buy U.S. securities with them, effectively funding the U.S. government and its foreign wars. But no government has been powerful enough to break that arrangement, until now. How did that happen and what will it mean for the U.S. and global economies?
First, some history: The U.S. dollar was adopted as the global reserve currency at the Bretton Woods Conference in 1944 when the dollar was still backed by gold on global markets. The agreement was that gold and the dollar would be accepted interchangeably as global reserves, the dollars to be redeemable in gold on demand at $35 an ounce. Exchange rates of other currencies were fixed against the dollar.
But that deal was broken after President Lyndon Johnson’s ‘guns and butter’ policy bankrupted the U.S. kitty by funding war in Vietnam along with his ‘Great Society’ social programs at home. French President Charles de Gaulle, suspecting the U.S. was running out of money, cashed in a major portion of France’s dollars for gold and threatened to cash in the rest; and other countries followed suit or threatened to.
In 1971, President Richard Nixon ended the convertibility of the dollar to gold internationally (known as ‘closing the gold window), in order to avoid draining U.S. gold reserves. The value of the dollar then plummeted relative to other currencies on global exchanges.
To prop it up, Nixon and Secretary of State Henry Kissinger made a deal with Saudi Arabia and the OPEC countries that OPEC would sell oil only in dollars, and that the dollars would be deposited in Wall Street and City of London banks. In return, the U.S. would defend the OPEC countries militarily. Economic researcher William Engdahl also presents evidence of a promise that the price of war would be quadrupled. An oil crisis triggered by a brief Middle Eastern American-inspired war did cause the price of oil to quadruple, and the OPEC agreement was finalized in 1974.
The deal held firm until 2000, when Saddam Hussein broke it by selling Iraqi oil in euros. Libyan president Omar Qaddafi followed suit. Both presidents wound up assassinated, and their countries were decimated in a war which the U.S. Canadian researcher Matthew Ehret reveals.
We should not forget that the Sudan-Libya-Egypt alliance under the combined leadership of Mubarak, Qadhafi and Bashir, had moved to establish a new gold-backed financial system outside of the IMF/World Bank to fund large scale development in Africa. Had this program not been undermined by NATO-led destruction of Libya, the carving up of Sudan and regime change in Egypt, then the world would have seen the emergence of a major regional block of African states shaping their own destinies outside of the rigged game of Anglo-American controlled finance for the first time in history.
The first challenge by a major power to what became known as the petrodollar has come in 2022. In the month after the Ukraine conflict began, the U.S. and its European allies imposed heavy financial sanctions on Russia in response to the pre-emptive attack on Ukraine. The Western measures included freezing nearly half of the Russian central bank’s 640 billion U.S. dollars in financial reserves, expelling several of Russia’s largest banks from the SWIFT global payment system, imposing export controls aimed at limiting Russia’s access to advanced technologies, closing down their airspace and ports to Russian planes and ships, and instituting personal sanctions against senior Russian officials and high-profile tycoons. Worried Russians rushed to withdraw rubles from their banks, and the value of the ruble plunged on global markets just as the U.S. dollar had in the early 1970s.
The trust placed in the U.S. dollar as a global reserve currency, backed by ‘the full faith and credit of the United States,’ had finally been fully broken. Russian President Putin said in a speech on March 16 that the U.S. and EU had defaulted on their obligations, and that freezing Russia’s reserves marks the end of the reliability of so-called first-class assets. On March 23, Putin announced that Russia’s natural gas would be sold to ‘unfriendly countries’ only in Russian rubles, rather than the euros or dollars currently used. Forty-eight nations are counted by Russia as ‘unfriendly,’ including the United States, Britain, Ukraine, Switzerland, South Korea, Singapore, Norway, Canada and Japan.
However, the wily Putin noted that more than half the global population remains ‘friendly’ to Russia. Countries not voting to support the sanctions include two major powers, China and India, along with major oil producers Venezuela, Turkey, and other countries in the Global South. Friendly countries, said Putin, could now buy from Russia in various currencies.
On March 24, Russian lawmaker Pavel Zavalny said at a news conference that gas could be sold to the West for rubles or gold, and to friendly countries for either national currency or bitcoin.
Energy ministers from the G7 nations rejected Putin’s demand, claiming it violated gas contract terms requiring sale in euros or dollars. But on March 28, Kremlin spokesman Dmitry Peskov replied Russia was ‘not engaged in charity’ and won’t supply gas to Europe for free (which it would be doing if sales were in euros or dollars, it cannot currently use in trade). Sanctions themselves are a breach of the agreement to honour the currencies on global markets.
Bloomberg reports that on March 30, Vyacheslav Volodin, speaker of the lower Russian house of parliament, suggested in a Telegram post that Russia may expand the list of commodities for which it demands payment from the West in rubles (or gold) to include grain, oil, metals and more. Russia’s economy is much smaller than that of the U.S. and the European Union, but Russia is a major global supplier of key commodities, including not just oil, natural gas and grains, but timber, fertilizers, nickel, titanium, palladium, coal, nitrogen, and rare earth metals used in the production of computer chips, electric vehicles and aeroplanes.
On April 2, Russian gas giant Gazprom official halted all deliveries to Europe via the Yamal-Europe pipeline, a critical artery for European energy supplies.
U.K. professor of economics, a replay of what the U.S. did in the 1970s. To get Russian commodities, unfriendly countries will have to buy rubles, driving up the value of the ruble on global exchanges just as the need for petrodollars propped up the U.S. dollar after 1973. Indeed, by March 30, the ruble had already risen to where it was a month earlier.
Russia is following the U.S. not just in hitching its national currency to sales of a critical commodity but in an earlier protocol, what 19th-century American leaders called the American System of sovereign money and credit.
Russia is discovering (or is on the verge of discovering) that it does not need U.S. dollars as backing for the rubles exchange rate. Its central bank can create the rubles needed to pay domestic wages and finance capital formation.
What foreign countries have not done for themselves, replacing the IMF, World Bank and other arms of U.S. diplomacy, American politicians are forcing them to do. Instead of European, Near Eastern and Global South countries breaking away out of their own calculation of their long-term economic interests, America is driving them away, as it has done with Russia and China.
Russia has agreed to sell oil to India in India’s own sovereign currency, the rupee; to China in yuan; and to Turkey in lire. These national currencies can then be spent on the goods and services sold by those countries. But that sort of global barter system would break down just as local barter systems do if one party to the trade did not want the goods or services of the other party. In that case, some intermediate reserve currency would be necessary to serve as a medium of exchange. Glazyev and his counterparts are working on that.
Russia and China have both developed alternatives to the SWIFT messaging system from which certain Russian banks have been blocked. A London-based commentator Alexander Mercouris makes the interesting observation that going outside SWIFT means Western banks cannot track Russian and Chinese trades.
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The Eurasian system will be based on a new international currency, most probably with the yuan as a reference, calculated as an index of the national currencies of the participating countries, as well as commodity prices. The Eurasian system is bound to become a serious alternative to the US dollar.
It could well mean the end of the petrodollar as sole global reserve currency, and the end of the devastating petroleum wars it has funded to maintain its dominance.
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