Does Putin’s announcement of charging energy bills in roubles matter?
In response to the sanctions of the Western nations on Russia, for example, removal of their banks from the SWIFT bank messaging system, and restrictions on the global assets of the Russian Central Bank and the Russian oligarchs (e.g., Roman Abramovitz, known widely for his ownership of Chelsea Football Club), President Putin retaliated with seemingly a strange but puzzling announcement on 23rd March 2022. Referring to the sanctioning countries as ‘unfriendly’, Putin mandated payment for Russian energy supplies (gas for now) in Russian currency, i.e., roubles (₽). This requirement now contradicts a long-established world trading practice in which oil producers would sell their product to the US (and the rest of the world) for dollars (USD), which they would then recycle the proceeds of in dollar-denominated assets and investment schemes.
Let me provide an example of how this system has worked all these years. For example, the U.S. made a deal with the Kingdom of Saudi Arabia (KSA) in 1974 that agreed: the former would pay for their oil imports in USD and the latter would funnel their oil export proceeds into the U.S. Treasuries, and deploy those to pay for U.S. development projects in the KSA as well as their imports of U.S. weapons. Likewise, many oil exporters have invested their petrodollars in stocks, bonds and other financial instruments through sovereign wealth funds (e.g., Norway’s sovereign wealth fund valued $1.4 trillion in 2021). In economics, this practice is called “petrodollar recycling” and this has supported the standing of the US as the world’s undisputed financial superpower, propping up the USD as the world reserve currency.
Now, following Putin’s announcement of trading its energy in Roubles, will the ‘exorbitant privilege’ (term used by Charles de Gaulle’s finance minister, Valery Giscard d’Estaing) that the USD pertained due to its century-old role as the world’s major reserve and payment currency remain unaffected?
Before I analyse the issue further, let me explain the floating exchange rate mechanism that is used by leading world economies for setting their currency exchange rate with others (e.g., Euro with USD). Like the conventional markets that exchange goods and services based on an agreed price (paid through local currency), countries exchange (trade) merchandise and services with others based on an agreed price (but not necessarily using local currency). Further, most countries from the developing world and the countries with a history of unstable or volatile currency rates (e.g., North Korean won, Venezuelan bolivar, Iranian rial) are required to buy a third currency, which is predominantly the USD, if not Euro or GBP. In the petroleum market (as explained above), exporters have conventionally preferred the USD as the pre-eminent global currency for receipt of export proceeds and making easy global investments based on this. As per the floating exchange rate system, when countries such as China, India, Brazil, etc. needed USD to pay for their imports from Russia (prior to Putin’s announcement), they had to supply (sell) their currencies such as yuan, rupees, etc. to demand (buy) USD. More and more demands like this have made the USD increasingly powerful (meaning a higher value of the USD that would require more foreign currencies to buy USD). Given that the payment to Russia is made for its sales of gas to Europe ($800m per day) in euros (58%), USD (39%) and GBP (3%) (Sky News, 25 March 2022), it is important to find how would the USD (or Euro or GBP) be affected when Russia’s ‘unfriendly’ countries such as the UK or Germany are bound to buy Roubles instead of USD (or Euro or GBP)? Also, how would this benefit Russian currency?
One of the core staples of the past five decades, and an anchor propping up the dollar’s reserve status, was a global financial system which has been heavily based on the petrodollar practice. Now, the exchange rate at which ‘unfriendly’ countries will have to supply (sell) USD, euros or pounds to make more and more demands (buy) for roubles in the forex markets worldwide (to pay for their imports of Russian gas) will be rising. A continuation of this practice will gradually weaken their currencies (due to continued sell) and strengthen rouble (due to high demand/buy). An expensive rouble in the long run will then be costly for the ‘unfriendly’ importing countries, resulting in higher energy bills for their industrial sectors and households, eventually causing higher inflation rates (countries globally are already struggling with this problem). On the contrary, for Russia, such change will pave the way for rouble to eventually gain a more prominent position as a reserve or an internationally acceptable currency (like USD, Euro or GBP). Further possibility is that following Russia, fast booming economies and world’s bulk energy consumers like China may pursue a similar approach of asking for payments in their own currencies. The possibility is high for multiple reasons: (a) due to the U.S. sanctions on Iran over its nuclear program (similar to Russia following its invasion of Ukraine), China’s use of USD became troublesome, and (b) China buys more than 25% of the oil that the KSA (Saudi) exports and it would make no sense to convert yuan into USD for making their payments when the KSA in return imports huge volume of their merchandise (petroyuan recycling). Not only this, as a projected number 1 economy in the world by 2050, China would not lose an opportunity to boost the value of its currency and help emergence of yuan as a global “petroyuan” reserve currency, like the petrodollar.
If the Russian retaliations to the sanctions of the West succeed and fast booming economies like China follow suit, this as an alternative model in conferring considerable benefits for their residents, banks, and businesses, I am afraid, it would be a matter of time for the USD to witness a crack in its rock-solid foundation of its ‘exorbitant privilege’ of being the most widely used currency. From the European perspective, having a compromised supremacy of the USD and growing acceptability of other leading currencies such as GBP, euro, etc. will create a more balanced world of finance and trading.
– Dr. Taimur Sharif, Head of Business, Newman University –
Author’s note: All interpretations and analysis of the world affairs are my own and not the views of Newman University.
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