Biden’s ban on Russian oil imports was supposed to be a “powerful” blow to Putin’s war machine.
What if it turns out to be a devastating blow against the dollar instead?
As calculated by the US Energy Information Administration,
In 2021, imports from Russia accounted for 8% of all U.S. petroleum imports, which includes the 3% share of crude oil imports and the 20% share of petroleum product imports.
More increases in US fuel prices are expected.
But soaring fuel prices won’t be the only potential adverse effect on your wallet.
Suppose Putin and the rest of BRICS (Brazil, Russia, India, China, South Africa) decide to unhinge the dollar from global energy trade.
What happens then?
That would kill the petrodollar global reserve currency Nixon and his architect, Kissinger, created in 1975.
In a recent article at The Wire, this exact scenario is covered:
The common payment system based on local currencies has been discussed in BRICS for some years but not pursued seriously on the ground. The Ukraine crisis has given a fillip to the idea of moving away from the US dollar in regional trade…
Russia has tapped into this sentiment and is even talking about linking the ruble to gold. Putin has floated the idea of Western economies depositing gold with Russia to buy rubles, with which oil and gas can be purchased. Putin has, in fact, decided to save the ruble by linking its value to gold. By pegging 5000 rouble to 1 gram of gold, he is seeking to counter the collapse of the Russian currency with the backing of gold.
This is a very powerful and disruptive idea because at one stroke, a large part of the global energy trade could move away from the dollar. And linking a currency to gold can be seen as an economically responsible act, discouraging the wanton printing of currency, as the US has been doing for the last 15 years.
In this period, the Fed’s balance sheet has grown from $800 billion in 2008 to $8.5 trillion in 2021. A tenfold increase in the printing of currency would have been impossible if the dollar was backed by gold, as it was until Richard Nixon delinked it from bullion in 1971. Nixon closed the gold window to prevent foreign governments from selling dollars to accumulate gold as a hedge against persistent inflation in the US.
Interestingly, the US faces a similar inflationary situation today and Putin is trying to revive gold and other non-dollar payment mechanisms as a medium of exchange. It is a clever move because gold also has natural resonance with India and China, the largest importers of gold in recent decades.
As one smart mathematician observed, for every action there is an equal and opposite reaction. So while Biden is trying is trying to break Russia, Putin will try to do the same in return.
At the present, the Russian ruble has rebounded to pre-conflict levels despite sanctions from the West.
The #Russian ruble has recovered to its pre-conflict levels, closing Friday at 80.40 RUB/USD. This allowed the Central Bank of Russia’s Gov. Nabiullina to cut the key interest rate from 20% to 17%. It looks like the ruble has weathered the storm. pic.twitter.com/nvtVbCirmn
— Steve Hanke (@steve_hanke) April 9, 2022
Putin won’t be alone in his efforts to end the petrodollar. China has already taken steps to undermine the petrodollar. Saudi Arabia, according to the WSJ, is also currently in talks with China to price some of its oil sales to China in yuan.
If the petrodollar implodes, buckle up. Our Fed won’t be able to print its way out of that mess, nor will our government be able to binge on debt anymore.
Noah Christopher was again ahead of the curve on this one when he hosted a podcast with Bo Polny last month. The perilous plight of the dollar was covered as well as steps you can consider to protect yourself.
If you missed it, you can check it out below.