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The G7 Debtor's League Demotes Putin

Politics / GeoPolitics Mar 24, 2014 - 03:32 PM GMT

By: Andrew_McKillop


The Group of 7 Most Insolvent Nations
Angela Merkel has officially cast out and demoted Russia from the G8, reverting it to G7. This highly-charged political act also reflects a major global economic reality – G8 included Russia which has avoided, or been unable to pursue the G7 path of massive sovereign debt growth, only compensated by the G7's monetary chiefs – the US, Japan, Germany, France and UK – having the ability to print “reserve currency” fiat money, led by the USD and EUR but also including the JPY and GBP.

The rising and politically-sparked threat by Russia also focuses the petrodollar system and the now open threat to “reserve currency fiat” has huge implications for both gold and oil, direct and indirect.

The political spark igniting the powder keg has been glowing ever brighter since the G7 countries bungled their Syrian intervention attempt, and reacted with barely concealed hysteria to the bloodless Russian annexation of Crimea. One collateral impact is that a massive dent in the petrodollar and petroeuro system and its gas counterpart, and gold pricing, is looming. While “the west” is focused on day to day developments in Ukraine as it shores up the unelected Kiev Flash Mob government, its theatrical antics and strange 19th century Imperialist kneejerk behavior has hardened the resolve of Russia, China and India - three-quarters of the fabled BRICs quartet - to use their own currencies, commodity and manufactured product swaps, trade offsets and other ways of eliminating their need to buy or use the USD and EUR, especially for oil and gas buying and settlements.

To be sure, as I have noted in several recent articles, EU claims that it can or might “eliminate or strongly reduce” dependence on Russian energy exports to Europe, anytime soon, are devoid of any sense, except by intense energy saving austerity measures as used in the postwar 1945-1948 period. In other words energy rationing. However, the politically-motivated European desire to sever its energy dependence on Russia sends one clear signal to Russia.

Find other customers – and other ways to bill and pay for oil and gas exports and imports.

While Europe is engaging its unreal and impossible “quest for energy security”, which means only energy from Russia - and does not target energy independence from Saudi Arabia, Norway, Algeria and a string of other supplier countries - Russia and China are edging closer to a massive energy-and-finance deal to squeeze out Europe, and replace the USD and EUR for energy-related buy-sell operations. One major signal, misinterpreted by journalists and commentators as simply a spinoff from the EU-Russia divide on Ukraine and Crimea, is the recent statement by Russian Finance minister Anton Siluanov that Russia may refrain from any foreign borrowing for the rest of this year.

Instead of selling oil or gas to China for US dollars also used for western purchases of Russian debt, itself funded by Chinese purchases of American debt in the form of US Treasury notes, Russia will sell oil and gas direct to China for Yuan or Rubles. It will use a large number of counterparty and trade offset mechanisms completely avoiding the petrodollar trap. The petroeuro will also lose out.

One Russian economic historian interviewed by the US Capitol political site Moyers & Company, last week, said it reminded him of the last days of the Roman Empire.

He cited the 1853 essay by Winwood Reade titled 'The Martyrdom of Man', where Reade said that the “financialized” Roman Empire, which had lost all its industry was in its last days symbolized by the main Ostia road into and out of Rome.

“By day the Ostia road was crowded with carts and muleteers, carrying to the great city the silks and spices of the East, the marble of Asia Minor, the timber of the Atlas, the grain of Africa and Egypt; in the evening the carts brought out nothing but loads of dung. That was their return cargo”.

 The latter-day Petrodollar Empire only exports cartloads of chaff money in return for the real goods and raw materials it sucks in from the rest of the world. Its supreme arrogance is to imagine the scam is – to use the favored slogan of the climate crazies and green boomers – sustainable. As I have explained in articles on the petrodollar system, this process for shoring up the US dollar and enabling more US debt to be funded, has outlived its usefulness to its two architects, the USA and Saudi Arabia and is now, to use another key term, dysfunctional.

Petrodollar Fact and Fiction

Fabled commodities and stock market speculator Jim Sinclair is laying the petrodollar to rest. In a series of interviews, starting March 16 with USA, he claimed that Russia now has a “nuclear economic bomb”. This is additional to its fissile military-type bombs and Russia's geolocation of all civil-type, Chernobyl and Fukushima-type nuclear power plants located in actual or potential enemy states, for possible or potential missile attack by Russia.

Sinclair said that if sufficiently goaded, Russia will likely take the emerging preferred route of China and India for oil or gas buying and purchase settlement – anything but dollars. He also suggested that China and Russia, and probably India are now inevitably on board together in a de facto final assault on the petrodollar system.

He asked: “Why in the world would anyone want to pay in dollars if they can pay in their own currency?”

Sinclair added:  “Russia could retaliate in a way that would have phenomenal impact on the US dollar (and) Russia has the upper hand... There is no question whatsoever.  Putin doesn’t need a nuclear bomb. He has a nuclear economic bomb that he can set off at any time.”  

He went on to explain that “Something has to happen” in the usually ignored, but real gold-oil demand and price relationship. The telltale indicator that something is awry, to say the least, is that we have on one hand the riotous and willed take off of the “paper gold” market system led by actors (and manipulators) including Goldman Sachs and the “bullion banks”, notably JP Morgan. On the other hand, physical gold is being rapidly drawn down from warehouse inventories. Also awry, not alright, we have constant oil market intervention, by several key actors to keep oil prices high – while the same actors, and their partners, act to push down gold prices.

The possible sudden and politically-sparked shift away from US dollars for oil settlements will have a major impact on gold. In Sinclair's view, this will not mean the US COMEX gold market system is going to default, “but I believe quite certainly that the Comex will go from settling in gold to settling in cash.”  This will brutally lay bare the crude manipulation of gold prices, downward, for more than 2 years, as non-dollar cash chases real and physical gold – not paper gold settled in Janet Yellen's printed money. Gold prices can and will only rise as the dollar depreciates but whether oil prices inflate to the same extent, or as fast, is a different question.

Pump Up the Jam

Announced jointly by Russia's Finance ministry and State-owned Gazprom, the gas giant hopes to pump 38 billion cubic meters of natural gas per year to China by 2018 via the first pipeline between the world's largest producer of conventional gas and Asia's fastest-growing major consumer. Final agreement of the deal – including financial and monetary provisions – is set for May, during Putin's state visit to China. Russian Finance ministry officials note that China overtook Germany as Russia's biggest buyer of crude oil in early 2014, thanks to Rosneft securing deals to boost oil supplies via the East Siberia-Pacific Ocean pipeline, and another crossing Kazakhstan. With coming investment in rail transport infrastructures for oil and gas, Russia-China energy export capabilities will further rise.

Removing the wooden clog of petrodollars and petroeuros, especially if Russia is isolated by a new round of Western sanctions – moving on and up from symbolic-only affecting a few oligarchs' and officials' assets abroad - Russia and China will likely also step up cooperation in areas apart from energy. Military analysts suggest that the prospects of Russia delivering Sukhoi SU-35 fighter jets to China, which has been under discussion since 2010, are now brighter than ever. Focusing back to the energy sector, China is very interested in investing in energy infrastructures across the board, and a decline in business with the West could force Moscow to drop some of its reservations about Chinese investment in strategic infrastructures.

The link with gold is also very clear. Some figures are telling. Through year 2013, according to a Reuters report of 27 January 2014, China doubled its total imports of physical gold, to reach 1158 tons for the year with a value near $70 billion. But gold prices overall declined. The same year, China averaged 5.9 million barrels a day of oil imports, with a year value of about $180 billion, but at a growth rate which had slowed to about 2.25% annual. This oil import demand growth was nevertheless an essential and basic prop used by Goldman Sachs (which has this month repeated its claim that gold prices “must crash”) for maintaining oil prices high – very high.

Petrodollars and its system helps explain this. Its last version, presently operating, acts to depress gold prices while it pumps up oil prices – which in any case profits Russia as well as the intended historical beneficiaries – Saudi Arabia and the US Treasury. The reverse of this paradigm is the programmed sequel from the demise of the system, which is likely soon coming.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


25 Mar 14, 12:51
U.S Gold reserves

None of the above, even if it happens, will matter to the U.S if they have as they are supposed to the largest gold reserves in the world.

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