Saddam, Saud, and Sino-Petrol

The Kingdom of Saudi Arabia is hurting. Their move of increasing oil production with the goal of lowering prices in order to gain a larger market share (Saud denies this but they are trying to put US shale out of business – low interest rates in the US have contributed to staving off the death blow, for now) has hurt all net oil exporting economies worldwide, including Saud, itself. The secondary effect was to pressure Russia into leaving Assad to the jackals. Russia bit the bullet and did not yield. Strike two. The war in Yemen as well as the financing of Syrian rebels costs the kingdom a lot of money they just don’t have. Steeeerike three.

Oil represents about 80% of Saud’s revenue. With ISIS competing for market share by selling oil to Turkey at $20/barrel – thereby undercutting the market by half, their economy can simply not withstand this price point for much longer. So what can they do?

They could find other sources of income, they could cut output of oil, they could de-peg from the US dollar, or they could start selling oil in yuan. Remember what happened to Saddam Hussein when he tried to sell his oil in Euros. Everybody was a loser in that affair.

Today, the renminbi (yuan – for all intents and purposes) will likely be included in the IMF’s SDR basket of funds. There is an OPEC meeting this Friday.

*Update*

Saudi Aramco is rumoured to be going public, that is to say, privatized. An IPO is being considered. Of course the Saudis wouldn’t let this corporation fall into the wrong hands (5% for now,) so is this simply a variation on a stock-buyback scheme of epic proportion? This way they can raise their stock price without raising the price of oil. Since doing so would hurt the stock price, this would more or less guarantee low oil prices for a while. This would be a bad thing for all oil net exporters; Canada will be especially hard hit.

One wonders if they will allow Yuan transactions for their shares.

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China Secures SDR

While the world was busy watching the aftermath of the Paris attacks, the IMF just gave its recommendation to place China’s Renminbi in the global Special Drawing Rights (SDR) basket of funds.

In an ironic twist, while the IMF has historically delayed the moment of acceptance, it caved just months after China officially devalued its currency for the first time in decades to stimulate its exports, and has unleashed an unprecedented campaign (using overt and covert means) to stabilize the Yuan as capital outflows in the past several months have soared. ”

This puts pressure on the faith in the US dollar and its world reserve currency status and has many international consequences, as well.

*Update*

Today is the day. Is the beginning of the end nigh for the US dollar?

“In 2009, amid the West’s scramble for signs of recovery, Zhou Xiaochuan, the governor of the Peoples Bank of China, called for a new financial order with a global reserve currency replacing the U.S. dollar. The Financial Times noted, “If, as expected, the imf this month approves the inclusion of China’s renminbi as a reserve currency, it will mark a small step for Mr. Zhou’s 2009 vision but a big move for the renminbi.” ”

“The US Dollar might have reached the top of its strength and could see a downward correction in the next few weeks.”

With the Fed expected to raise interest rates in December, more outflows from the US dollar to the Yuan (renminbi) and some downward pressure on the dollar can be expected in the short term. Long term, the dollar still looks strong, but the renminbi is set to catch up.

It’s official, the yuan will be part of the SDR basket starting Oct. 1, 2016 with a weighting of 10.92%. Could this be a catalyst for portfolio re-allocation? If it is, and if new buyers of yuan stem the outflow of capital from China, the yuan may soar undoing all the devaluations to date and, ironically, hurt the already faultering Chinese economy. Could China’s hard landing turn into a crash?

While You Weren’t Listening

The first and current President of Kazakhstan is Nursultan Nazarbayev. In his speech to the UN today, he made several recommendations to the council. They were monumental in scope, especially considering the limited international status of his 25 year old country. Then again, based on what Putin said about the UN (or rather, didn’t say,) perhaps there are things in the works about which we don’t yet know.

“When the Soviet Union collapsed in December 1991, Kazakhstan inherited 1,410 nuclear warheads and the Semipalatinsk nuclear-weapon test site. By April 1995, Kazakhstan had returned the warheads to Russia and, by July 2000, had destroyed the nuclear testing infrastructure at Semipalatinsk.”

“On 2 December 2009, UN Secretary General Ban Ki-moon and the Republic of Kazakhstan designated 29 August as International Day against Nuclear Tests, anniversary of the date the Semipalatinsk test site closed in 1991.”

Kazakhstan is the largest landlocked country in Asia and has the strongest economy in central Asia. They have enormous oil reserves and are a leading exporter of uranium (ironic as that is.) It is also a world leader in coal, iron, and gold production.

Their elections have been largely considered to be unfair and anything but free in the eyes of international observers.

Kazakhstan is vying for a non-permanent seat on the UN Security Council in 2017. They enjoy good diplomatic relations with both Russia and the Ukraine.

He proposed five main points:

  1. That there be one global currency to replace the favoured status of a reserve currency and the unfair advantages it confers upon the country that controls it.
  2. That the IMF be folded into the UN’s mandate removing it from US control (since they won’t have the reserve currency, anyways.)
  3. That the IAEA Low Enriched Uranium (LEU) Bank in Oskemen, Kazakhstan (agreement signed this August,) which removes the need for individual countries to enrich their own uranium by centralizing the distribution thereof, be the only source for enriched uranium. A kind of central bank for fissile material. This bank would be overseen by, and indeed, folded into the UN and included in its mandate.
  4. That nuclear weapons be banned, outright.
  5. That the UN headquarters be moved out of the US and into Asia.

Given that France and Mexico et al. have proposed that the veto right of the permanent members of the UN Security Council be severely limited, It doesn’t look like the world is going to leave a lot of meat on the bone for the US to cushion its fall from grace. Could this be the impetus for WWIII which the UN was formed to avoid?

There is a short follow-up article here.

Quagmire [kwaɡˌmī(ə)r] – An Awkward, Complex, or Hazardous Situation

American Imperialism is alive but perhaps not so well in the middle-east. There are many stories about the region and its mind-boggling complexity in the news these days, but there doesn’t seem to be any over-arching analysis of the entire situation which stretches from the Crimea to the Yellow Sea. The big picture is frightening in scope and potential.

Let’s start with some basic facts:

Upon further reflection, the rest of this article will be left to the reader’s imagination. However, the main takeaway should certainly be the fact that this quagmire in Asia has (to a large extent) been engineered to protect the US Dollar. It may not work out that way, in the end.