Russia’s Reading China’s Playbook
Feeling uncomfortably vulnerable from these and other aggressive financial sanctions, Russia has begun looking to its Southern neighbor, China, for alternative trade routes.
Already Rosneft, Russia’s largest oil company, has recently inked a number of large oil contracts for export to China, and apparently a “mega-deal” is nearing completion with Indian firms.
What’s notable here is that, in both cases, not a single U.S. dollar will change hands.
But Russia’s circumventing the petrodollar won’t end there.
Since January Iran has been discussing the possibility of a barter deal, with Rosneft taking up to 500,000 barrels/day of Iranian oil to sell into world markets. In return, Russia would provide Iran with a number of Russian goods that it needs.
This kind of trade deal is being explored due to sanctions against Iran over its nuclear program. It could be worth an extra $1.5 billion per month for Tehran, once again outside the petrodollar.
Back in January, I told you how China was sidestepping the U.S. dollar. In The Golden Yuan Is Coming – Here’s How to Play It, I spoke of how China has been establishing currency swaps with other countries to settle trade. They now have as many as 25 such swap agreements in place with various nations, estimated to be worth nearly $1 trillion.
Meanwhile Igor Sechin, CEO of Rosneft, has been named chairman of the Saint Petersburg Commodity Exchange, which is focused on commodity trading. Sechin told the World Energy Congress in October, referring to the natural gas markets, that “it was advisable to create an international exchange for the participating countries, where transactions could be registered with the use of regional currencies.” Very similar indeed to China’s approach.
What bearing will the migration away from the dollar in terms of a reserve currency and petrodollar usage impact you as a citizen and investor?
How It Should Play Out… And How to Beat It
The tectonic shift away from the petrodollar portends a weaker greenback in the future.
And since oil – arguably the most important actively traded commodity on the planet – is priced in U.S. dollars (for now), it’s easy to see world oil prices continue their steady climb higher.
The downside is that it will likely cost you more at the gas pump. The United States is producing a lot more oil, but the prospects of exporting it will support high prices. Still, this doesn’t have to be a losing proposition.
Subscribers to Real Asset Returns have already befitted from holding two mega-cap integrated oil companies. One has returned nearly 19% in two years, and the other nearly 70% over four years.
One way to fight back is by betting on higher oil prices. Consider the Energy Select Sector SPDR ETF (NYSEARCA:XLE), which holds some of the biggest players in this sector, including major oil producers, shale producers, and exploration services companies.
It’s up 14% in the past year, but still trades at a reasonable P/E of 14 while yielding a 1.79% dividend.
The key takeaway here is that the petrodollar is on its way down, and eventually out.
That pressure is going to lead to higher prices for oil in U.S. dollars.
And higher prices at the pump, which is all the more reason to hit back hard with a bolstered portfolio…
We’re in the midst of the greatest investing boom in almost 60 years. And rest assured – this boom is not about to end anytime soon. You see, the flattening of the world continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially; and a technological revolution even in the most distant markets on the planet.And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.