A few days ago, market participants were treated to a new version of an old story.
“Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan,” The Wall Street Journal wrote, citing the ubiquitous people familiar with the matter, before suggesting such a development “would dent the US dollar’s dominance of the global petroleum market,” a dubious claim.
To be fair, Summer Said and Stephen Kalin were quick to make the only two points that matter for the vast majority of the Journal‘s audience. Such talks around yuan-priced crude have been going on for at least a half-dozen years, and to the extent they’ve taken on a new sense of urgency, it’s primarily due to frustration in Riyadh with “decades-old US security commitments to defend the Kingdom.”
The Biden administration isn’t as friendly with Mohammed Bin Salman as the Trump administration was, nor is this White House as hawkish on Iran as the last. Notwithstanding “secret” diplomatic talks in Baghdad, Riyadh and Tehran haven’t restored diplomatic ties since the Kingdom’s decision to execute a prominent Shiite cleric in 2016 pushed the regional rivals to brink of war. Ongoing attacks by the IRGC-backed Houthis against Saudi infrastructure are a constant reminder of simmering tensions, and while the US assassination of Qassem Soleimani likely degraded Iran’s willingness and capacity to orchestrate spectacular strikes against high profile targets à la Abqaiq and Khurais in September 2019, the Kingdom’s security demands of Washington aren’t always commensurate with the perceived scope of sundry threats. In short: There’s no such thing as “too much” when it comes to security guarantees. If the US wants more oil, the Kingdom wants more security.
Ideally, Mohammed Bin Salman would also like carte blanche to perpetrate the war in Yemen, not just unbothered by allegations of war crimes, but in fact abetted by US complicity. He’d also rather not be lectured by anyone in Washington when he presides over extraterritorial executions (i.e., Jamal Khashoggi’s demise in the Kingdom’s Istanbul consulate).
So, that’s the price of the petrodollar, but what I’d note immediately is that this a classic case where one side’s leverage disappears entirely in the most extreme scenarios. As long as the world is generally stable and ties between Washington and Riyadh are even a semblance of friendly, the Saudis have leverage. But in the (highly unlikely) event the relationship breaks down entirely, the US doesn’t actually need Saudi Arabia. Washington could cut the Kingdom loose tomorrow, and the vast majority of the global commodities trade would still be conducted in dollars and Americans would still have energy. The Saudis, on the other hand, would be compelled to reckon with a number of existential problems virtually overnight, including, but not limited to, a currency crisis, social unrest tied to inevitable economic upheaval and something much closer to even odds (militarily) against the IRGC.
When you consider the petroyuan discussion, you need to take account of everything said above. Note that Beijing and Tehran are strategic allies. The Saudis can’t depend on China to protect them from Iranian aggression. No amount of oil sales are sufficient to flip that equation, especially not when Iran sells oil too.
With all of that out of the way, there are myriad other reasons why the petroyuan story is just that — a story. It’s a canard, and a tired one at that. If you want to know how tired, consider that many of you have almost surely read something I’ve written on it before, and not in my current incarnation. That is: Some of my petroyuan musings were available to the public prior to the advent of this site. True, six years isn’t a long time in the grand scheme of things, but the fact that some readers have unknowingly perused my opinion on this when Barack Obama was still in the Oval Office speaks to the “here we go again” nature of the headline. As Bloomberg’s Cameron Crise wrote, “The headline that Saudi Arabia might accept yuan for its oil exports to China is a nice story that fits the current geopolitical narrative about the dismemberment of the current global financial order — such a nice story, in fact, that various iterations have floated around in 2017, 2018, 2019, 2020 and last year.”
So, it’s old news. But why can’t it work? Well, let me count the reasons. Most obviously, the riyal is pegged to the dollar, which means, among other things, that embarking down a policy path aimed at undermining the greenback is tantamount to pulling out a pistol, waving it around wildly and then shooting yourself in the foot. Additionally, just about the last thing you want to do when you preside over an isolated, one-dimensional economy where the currency is pegged to the dollar is start selling your most important export for something other than dollars. If it became obvious that the monarchy was bent on pursuing such a financial suicide mission, the market would start to doubt the durability of the peg. That’s trouble.
Far be it from me to question the wisdom of Zoltan Pozsar, but consider me skeptical of the idea that, as he wrote earlier this month, the PBoC could print yuan, buy Russian commodities and thereby establish a “Eurorenminbi,” which Pozsar suggested would mark “China’s first real step to break the hegemony of the Eurodollar market.” For one thing, nobody sane wants to see the demise of the Eurodollar market, because that would mean the demise of… well, everything, really. Global commerce and finance as we know it would cease to exist. The world would stop spinning. Almost literally, if you conceptualize of international finance and trade as goods and services circling the globe.
Beyond that, though, who, other than a desperate autocrat in Moscow, would willingly cede control of their financial future to Beijing? If you get into the yuan in size, it’s not so easy to get out. What happens to Riyadh’s CNY assets if, for example, Iran decides to start a war with the Saudis? If you think the White House is capricious, wait until you see what happens to a nation’s CNY assets in the event that nation ends up in a hot war with one of Beijing’s staunchest international allies.
And there’s more. So much more. Given the realities of the dollar peg, any oil sales the Saudis made in yuan would probably just end up being converted back into dollars, in which case the entire endeavor would amount to little more than a ridiculously circuitous charade. If the Saudis were to keep their CNY proceeds, what exactly are they going to do with them? Buy Chinese government bonds? Maybe. But that’s not straightforward either. Consider the following from Bloomberg’s Crise:
Looking at Saudi Arabia’s trade balance with China, we see that it was a surplus of roughly 20 billion yuan per month towards the end of last year. It seems reasonable to think that the total should exceed 200 billion yuan pretty easily given trends in oil prices. There are approximately 27 trillion yuan of central government bonds, so net Saudi yuan proceeds would amount to a little less than 1% of that per year. That sounds feasible, right? It seems like it, until you consider that according to Bloomberg data, the 50 largest institutional holders of government bonds — which include a lot of domestic asset managers — hold a total of just over 700 billion yuan of bonds. The Saudis could conceivably match that in less than four years. Having lots of demand for your bonds seems like a nice problem to have, but a problem it will be if there isn’t enough paper for domestic banks and investors. So the question remains: Would China be prepared to ramp up government debt and conceivably see the economy shift to a current account deficit if that’s the price required for an internationally-accepted petroyuan?
Good question. And one that speaks directly to the notion that fanciful headlines usually aren’t compatible with reality. The petroyuan story is no exception.
In a March 16 note which carried the hilarious title “Lost Rents of Arabia,” Rabobank’s Michael Every further underscored how absurd this probably is from a logistical perspective. “We’re talking $56 billion in oil and related petrochemical exports, and $27 billion in Saudi imports, taking 2019 as a base,” he wrote, on the way to noting that “$56 billion is hardly the entire $2.6 trillion global oil market, even if this is Saudi Arabia, and even if we assume all Saudi-China trade switches to CNY, that’s $320 million per working day versus the $6.6 trillion global daily FX market, and note I’m using dollars not CNY for easy comprehension here, which makes my point for me.”
That latter quip speaks to a point I’m compelled to reiterate virtually every, single day. Anytime anyone starts talking about the demise of dollar hegemony, virtually every argument that involves numbers is couched in dollar terms, an irony that’s perpetually lost on the people making the argument.
Rabo’s Every went further. “The oil market needs a base currency that’s liquid, which CNY is not, freely tradable, which CNY is not, and stable, which CNY only is because it doesn’t meet the other two criteria, and because it’s on/off soft-pegged to the US dollar,” he wrote, citing an incisive critique from Anas Alhajji, on the way to noting that,
Even a move to oil priced in a basket of currencies is hugely complex to maintain across OPEC partners, which is why it hasn’t happened yet. Saudi Arabia’s own currency is pegged to the US dollar, so it would be exchanging complete shielding from FX volatility for FX volatility, unless CNY also remains pegged to the US dollar. Saudi Arabia would end up accumulating lots of CNY, which is of no use unless everyone else makes the same shift, and CNY does not meet the criteria to expand from its current base. Indeed, with China being accused of perhaps helping Russia militarily in Ukraine, there won’t be any Western adoption of CNY. Perhaps emerging markets will do so, but that bloc would then gradually, or rapidly, detach from the US and the West. Good luck with that. Saudi Arabia would probably still price oil in dollars given its own balance sheet, and just allow (some) Chinese oil payment in CNY and the Saudis would then sell those CNY back to China for dollars immediately.
Note how all of this ends up being self-referential at every, single turn. The entire world is priced in dollars. Love it, hate it or apathetic to it, you can’t escape it.
This week, Yuga Labs decided to capitalize on the runaway success of its blue-chip, Bored Ape Yacht Club PFP project by launching its own cryptocurrency, ApeCoin. 15% of the available supply was airdropped (i.e., given away) to holders of Bored Ape Yacht Club NFTs. Many of those holders were already rich thanks to the mind-bending appreciation of the NFTs themselves, which currently list for a minimum of 100 Ethereum or, more to the point, around $300,000 at the current exchange rate.
Twitter was alive with screenshots posted by bewildered NFT holders who woke up Thursday morning to as many as 10,950 free ApeCoins for each NFT they owned. A coordinated listing of ApeCoin by nearly every major centralized cryptocurrency exchange (an unprecedented event that raised serious questions which go well beyond the scope of this article) created instantaneous demand and liquidity for the coins, which immediately traded for around $20, based on the price I was able to see for an on-chain swap just before things got going on the big exchanges. They subsequently fell to around $6 and then stabilized near $13.
Don’t lose the plot. Let this sink in: Some holders owned dozens of eligible NFTs, and were thus handed tens upon tens of thousands of free coins, redeemable in the open market for USD-pegged stable coins at an average price of around $10 each. It’s a story too ridiculous to be true, but for our purposes here, the point is just that nearly every, single screenshot I saw posted on Twitter had one thing in common: Holders were keen to show the dollar amount of their overnight riches. Why? Well, for bragging rights, obviously, but more critically, because you can’t be “rich” in ApeCoin. Nor can you be “rich” in Ethereum until the vast majority of goods and services are available to be purchased with ETH. You can only be rich in currencies which can be exchanged for things you actually need or which can be used to do things you have to do, like pay taxes.
I’m reminded of one netizen’s ill-fated attempt to score social media points by replying to Stephanie Kelton with a picture of a menu from a restaurant that had started accepting cryptocurrency for meals. “Looks like a great place!”, Kelton replied, referencing the menu items. Then, she delivered the punchline: “Why are all the dishes priced in dollars?”