Peter Krauth: Since the early 1970s, most major oil deals have been transacted in “petrodollars.”
But that system has become increasingly challenged in recent years.
The conflict in Ukraine right now has only served to exacerbate things.
As America leads the charge to impose Western sanctions on Russia, it’s a plan that’s not only backfiring, but leading to opportunities for those who understand the consequences…
The Waning Petrodollar
After Nixon infamously closed the gold window in 1971, something needed to be done to retain the U.S. dollar’s status as world reserve currency.
So Kissinger and Nixon hatched the petrodollar system, whereby the United States would provide political and security support to Saudi Arabia’s royal family.
In exchange, all oil deals would have to be transacted exclusively in dollars, so the House of Saud would buy lots of Treasuries with their greenbacks and influence other OPEC members to follow suit.
In effect, this guaranteed a constant and elevated (though artificial) demand for U.S. dollars worldwide.
But this fabricated demand is waning as trading nations question the need for a petrodollar, and even the U.S. dollar as a reserve currency.
The Impact of Playing Russian Roulette
Since Russia’s recent seizure of Crimea, the West has imposed a number of sanctions on Russians from Putin’s inner circle, such as asset freezes and travel bans.
In late March, both Visa and MasterCard temporarily suspended service with seven Russian banks without warning, since their controlling shareholders were being sanctioned.
That prompted Putin to say Russia should create its own national card payment system, much like China and Japan did years ago.
Then roughly a week later, JPMorgan blocked a payment from a Russian embassy in Kazakhstan to an affiliate of a U.S.-sanctioned bank, Sogaz Insurance Group. It was for a measly $5,000, but that was enough to make sparks fly.
An infuriated Russian foreign ministry called the decision “illegal and absurd.” The next day, JPMorgan agreed to process the payment.
Inevitably, these tactics have left Russia with a bad taste, and increasingly exploring its options.