Washington’s tactic to contain emerging powers trying to break free from the US’s decades long control on the world’s economy could in fact provoke an opposite effect.
Increasingly, US-sanctioned states and their allies have reinforced bilateral cooperation and started conducting oil and other trades in their national currencies. In doing so they are turning their back on the sacrosanct petrodollar on which the US has built its economic, military and political clout.
So far, few leaders have attempted to bypass the rules and Washington has unfailingly managed to stop them dead in their tracks.
In 2000, Iraq started to sell its oil as part of the UN humanitarian oil for food program, and received all payments through its escrow deposits in New York. The UN had agreed to Bagdad’s request to hold these accounts in euros rather than in dollars, which Saddam Hussein saw as ‘the currency of the enemy.”
A couple of years later, the US accused Iraq of secretly possessing weapons of mass destruction and invaded the country. Years later, when Chilcot’s Iraq Inquiry was published, it became clear that the US waged a war against Iraq not because of the country possibly having developed WMD but rather W$D. Indeed, the potential economic independence of the country that then sat on the world’s largest proven oil reserves was not looked upon favourably in Washington.
During the Libyan presidency of the African Union, Muammar Gaddafi proposed members states to switch to a new pan-African that was actually made from gold.
If the union had adopted Libya’s proposed golden dinar, the wealth of the entire African continent would have depended on how much gold its 55 states held and no longer on how many US dollars they owned. As African states would have shifted to the golden dinar, the petrodollar would no longer be needed and the Federal Reserve would have been flooded with it. The value of the dollar would have shrunk dramatically and the repercussions for the US economy would have been catastrophic.
The economic independency of the African continent for which the Libyan leader strived never materialised. Instead, the two ambitious Iraqi and Libyan leaders were killed, and their countries invaded. Now two failed states, Iraq and Libya serve as reminders to oil-rich states of the fate of whoever wants to emancipate from the petrodollar yoke.
Today new energy heavyweights have entered the global arena, and they have much more economic, political and military clout than Iraq and Libya ever had. These growing powers have been drawn closer together, ironically by sanctions which aimed at isolating some of them. In their renewed Cold War tactic, the US have in fact accelerated the political, economic and military rapprochement between their eternal foe and China, Iran and Venezuela.
Washington’s worst fears are slowly materialising: the world’s biggest energy producer and the world’s biggest energy consumer are tying the knot.
US sanctions have pushed the Kremlin to turn to its old Asian ally, China. And Moscow has barked up the right tree. Currently the world’s second largest economy, China is set to overtake the US by 2050. The Asian dragon also owns over 5 percent of the US debt ($1.168 trillion), which gives it great freedom of manoeuvre.
Since 2014, the Sino-Soviet Treaty of Friendship, Alliance and Mutual Assistance seems to have unofficially resurfaced. The two neighbours have increased their cooperation in the energy, military, and economic sectors.
Indeed, Beijing and Moscow have similar interests and goals. Both are trying to impose their national currencies as alternatives to the dollar, and thus dethrone it. But how could they succeed where others have already tried and failed?
Firstly, both giants have been keen on backing their national currencies with large reserves of gold. Buying gold helps diversify governments’ reserves and increase traders’ confidence in national currencies. Unlike the dollar, the precious metal is country-less. Its neutrality prevents the American government from controlling the value of Russia and China’s holdings.
In 2017, the Russian Central Bank’s gold purchases “accounted for 38 percent of all gold purchased by central banks,” as reported by Bloomberg, and the rouble became the world’s most gold-backed currency. Russia also enjoys one of the lowest national debts among industrial countries, as opposed to the US which figured among the top 15 countries with the largest national debt in 2017.
Secondly, China’s gold buying spree has enabled the country to launch a gold-backed petroyuan in late March 2018. A decisive move that could sign the end of the greenback’s supremacy, reshape the global economy and geopolitical dynamics.
Thirdly, states targeted by Washington mutually support each other and have a high potential to form an alternative economic pole.
Moscow led the way and created the Eurasian Economic Union which aims at counterbalancing the EU and US economic and political influence. The free-trade zone allows the free movement of goods, services, capital and workers between Russia, Kazakhstan, Belarus, Armenia, Kyrgyzstan, and Vietnam, and some 40 other states are contemplating a bilateral free trade agreement with the union. After several years of negotiations, Iran is set to become a temporary member by next month. With this latest addition the union will represent a common market of more than 263 million citizens.
Geographically isolated from the other outsiders, Venezuela has still been able to count on their financial support. Russian and Chinese state-owned banks have repeatedly saved Venezuela from defaulting. As Caracas’ largest creditor, China has already lent an estimated $62 billion to Venezuela, which the latter repays with oil shipments.
The Chinese-Venezuelan agreement fully illustrates the perfect cocktail that US sanctions have created. The world’s biggest energy consumer is working hand in hand with a group of countries that hold 34 percent of the world’s proven oil reserves and more than 60 percent of the world’s proven gas reserves. The world’s top energy suppliers -Saudi Arabia excluded- have seen their access to the dollar cut, and therefore have been forced to use national currencies for their greater benefit.
Today the outsiders club counts premium members only and applications will remain open so long as Washington extends its sanctions to new sectors and new countries. Are the US ready to keep sanctions that could eventually put an end to their supremacy? Or is it too late already?
Diane Pallardy studied an MA in Politics and International Relations at the University of Kent, and MA in World Politics and Fossil Energy at the Higher School of Economics, in Moscow.