Russia Just Pulled Itself Out Of The Petrodollar

Tyler Durden's picture

Back in November, before most grasped just how serious the collapse in crude was (and would become, as well as its massive implications), we wrote "How The Petrodollar Quietly Died, And Nobody Noticed", because for the first time in almost two decades, energy-exporting countries would pull their "petrodollars" out of world markets in 2015. 

This empirical death of Petrodollar followed years of windfalls for oil exporters such as Russia, Angola, Saudi Arabia and Nigeria. Much of that money found its way into financial markets, helping to boost asset prices and keep the cost of borrowing down, through so-called petrodollar recycling.

We added that in 2014 "the oil producers will effectively import capital amounting to $7.6 billion. By comparison, they exported $60 billion in 2013 and $248 billion in 2012, according to the following graphic based on BNP Paribas calculations."

The problem was compounded by its own positive feedback loop: as the last few weeks vividly demonstrated, plunging oil would lead to a further liquidation in foreign  reserves for the oil exporters who rushed to preserve their currencies, leading to even greater drops in oil as the viable producers rushed to pump out as much crude out of the ground as possible in a scramble to put the weakest producers out of business, and to crush marginal production. Call it Game Theory gone mad and on steroids.

Ironically, when the price of crude started its self-reinforcing plunge, such a death would happen whether the petrodollar participants wanted it, or, as the case may be, were dragged into the abattoir kicking and screaming.

It is the latter that seems to have taken place with the one country that many though initially would do everything in its power to have an amicable departure from the Petrodollar and yet whose divorce from the USD has quickly become a very messy affair, with lots of screaming and the occasional artillery shell.

As Bloomberg reports Russia "may unseal its $88 billion Reserve Fund and convert some of its foreign-currency holdings into rubles, the latest government effort to prop up an economy veering into its worst slump since 2009."

These are dollars which Russia would have otherwise recycled into US denominated assets. Instead, Russia will purchase even more Rubles and use the proceeds for FX and economic stabilization purposes. 

"Together with the central bank, we are selling a part of our foreign-currency reserves,” Finance Minister Anton Siluanov said in Moscow today. “We’ll get rubles and place them in deposits for banks, giving liquidity to the economy."

Call it less than amicable divorce, call it what you will: what it is, is Russia violently leaving the ranks of countries that exchange crude for US paper.

More:

Russia may convert as much as 500 billion rubles from one of the government’s two sovereign wealth funds to support the national currency, Siluanov said, calling the ruble “undervalued.” The Finance Ministry last month started selling foreign currency remaining on the Treasury’s accounts.

 

The entire 500 billion rubles or part of the amount will be converted in January-February through the central bank, according to Deputy Finance Minister Alexey Moiseev. The Bank of Russia will determine the timing and method of the operation.

 

The ruble, the world’s second-worst performing currency last year, weakened for a fourth day, losing 1.3 percent to 66.0775 against the dollar by 3:21 p.m. in Moscow. It trimmed a drop of as much as 2 percent after Siluanov’s comments. The ruble’s continued slump this year underscores the fragility of coordinated measures by Russia’s government and central bank that steered the ruble’s rebound from a record-low intraday level of 80.10 on Dec. 16. OAO Gazprom and four other state-controlled exporters were ordered last month to cut foreign-currency holdings by March 1 to levels no higher than they were on Oct. 1. The central bank sought to make it easier for banks to access dollars and euros while raising its key rate to 17 percent, the emergency level it introduced last month to arrest the ruble collapse.

 

Today’s announcement “looks ruble-supportive, as together with state-driven selling from exporters it would support FX supply on the market,” Dmitry Polevoy, chief economist for Russia and the Commonwealth of Independent States at ING Groep NV in Moscow, said by e-mail. “Also, it will be helpful for banks, while there might be some negative effects related to extra money supply and risks of using some of the money on the FX market for short-term speculations.

Bloomberg's dready summary of the US economy is generally spot on, and is to be expected when any nation finally leaves, voluntarily or otherwise, the stranglehold of a global reserve currency. What Bloomberg failed to account for is what happens to the remainder of the Petrodollar world. Here is what we said last time:

Outside from the domestic economic impact within EMs due to the downward oil price shock, we believe that the implications for financial market liquidity via the reduced recycling of petrodollars should not be underestimated. Because energy exporters do not fully invest their export receipts and effectively ‘save’ a considerable portion of their income, these surplus funds find their way back into bank deposits (fuelling the loan market) as well as into financial markets and other assets. This capital has helped fund debt among importers, helping to boost overall growth as well as other financial markets liquidity conditions.

...

[T]his year, we expect that incremental liquidity typically provided by such recycled flows will be markedly reduced, estimating that direct and other capital outflows from energy exporters will have declined by USD253bn YoY. Of course, these economies also receive inward capital, so on a net basis, the additional capital provided externally is much lower. This year, we expect that net capital flows will be negative for EM, representing the first net inflow of capital (USD8bn) for the first time in eighteen years. This compares with USD60bn last year, which itself was down from USD248bn in 2012. At its peak, recycled EM petro dollars amounted to USD511bn back in 2006. The declines seen since 2006 not only reflect the changed global environment, but also the propensity of underlying exporters to begin investing the money domestically rather than save. The implications for financial markets liquidity - not to mention related downward pressure on US Treasury yields – is negative.

Considering the wildly violent moves we have seen so far in the market confirming just how little liquidity is left in the market, and of course, the absolutely collapse in Treasury yields, with the 30 Year just hitting a record low, this prediction has been borne out precisely as expected.

And now, we await to see which other country will follow Russia out of the Petrodollar next, and what impact that will have not only on the world's reserve currency, on US Treasury rates, and on the most financialized commodity as this chart demonstrates...

... but on what is most important to developed world central planners everywhere: asset prices levels, and specifically what happens when the sellers emerge into what is rapidly shaping up as the most illiquid market in history.

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yrad's picture

Check Mate...

hedgeless_horseman's picture

 

 

I am almost finished reading this book on the Battle for Stalingrad, by Antony Beevor.  Glad I did it while it is cold outside.

It has given me some perspective on the wisdom of going to war with Russia.

SickDollar's picture

finally a move from the russian on the chess board (loooong due )

Check mate bitchez

 

hedgeless_horseman's picture

 

 

So, Europe is going to need Rubles to buy Russian oil and gas.

Can't Draghi just print Rubles?

Hitler was smart to go after the Russian oil fields in the Caucuses.  He was just stupid in how he went about it.

Soul Glow's picture

Maybe Draghi can print yuan.  Russia likes those notes.

ParkAveFlasher's picture

This isn't Chess, that's a Persian game, this is global trade war, and China, with a massive workforce, murderous political mentality, and daisy-chains to the Anglo banking structure, is indeed winning.

free_as_in_beer's picture

Why is the chart of world oil production intentionally scaled so that we cannot see any activity?  Shoddy reporting.

hedgeless_horseman's picture

 

 

Obama and Hitler are and were both supremely confident.

Will it turn out differently this time for the Western aggressors, or the same?

kowalli's picture

We have ak-47 now, so it's different, but mb you will see a trophy M16

Looney's picture

This is huge!

Usually, it takes a couple of billions a pop here and there to support the Ruble, but $88 Billion at once?

This is beyond playing chess, this is a hitting-your-opponent-over-the-head-with-the-chessboard kinda move ;-)

Looney

macholatte's picture

 

 

"Negotiating with Obama is like playing chess with a pigeon. The pigeon knocks over all the pieces, shits on the board and then struts around like it won the game."  - Vladimir Putin

10mm's picture

Like a typical inner city thug or pro athlete in the end zone.

Publicus's picture

Next step, sell oil and gas for Rubles and Yuan ONLY.

new game's picture

hmmm, and then see where the price goes. whole lotta oil for dolla? and what is that dolla worth? very interesting move. more sanctions? bullies are predictable.

ukraine stand off next(bay of pigs redux).

Manthong's picture

If Putin really wanted to lob a grenade into the western financial bunker he would set a discount price for oil paid for in gold like at post WWII / pre-Bretton Woods prices.. approximately 12-15  Barrels per ounce.

Just think about what that would do to the bank’s price suppression schemes and for Russian gold reserves.

pelican's picture

Have the nukes started to fly yet?  The owners of the world might just burn it all down.

Liberal's picture

As a staunch liberal, I strongly believe Russia contributes greatly to global warming and therefore must be taxed. 

COSMOS's picture

Why dont they, the Russians, just PRINT DOLLARS?  I mean if its the reserve Currency everyone should be able to PRINT IT.

Keyser's picture

^ Calling Kim Jung-Un, we need a few tonnes of greenbacks to rectify the balance of trade... 

It appears the western cabal has realized the error in their ways with the rebound in WTI / Brent... You can't strangle your enemies if it kills your allies too... Too little, too late as the wheels of progress are already in motion... De-dollarization to continue, despite the bleating of western sheep... 

Oracle 911's picture

The Russians are deoffshorizing (how is it correctly spelled) their economy and the side effect will be a stronger Ruble.

Less known fact due high interest rate lot of Russian companies became offshore companies because the foreign debts were cheaper. In this scheme the foreign reserves are gonna be used for paying back these loans, of course not for free, these companies will have to take a loan from the Russian STATE.

At least 2 things are helping:

-the amnesty for oligarchs: "bring back your fortune into Russian jurisdiction, no question will be asked";

-the risks of bail-ins, after Cyprus not even the Russian 5th column should fully trust their bosses.

zuuma's picture

Ho Hum.

Russia's GDP (pre oil crash) was about the same as California's -- 2T.

Besides oil, natgas & cute blonde chicks, what does Russia have to sell?

Weapons?  Got em. Dont' need theirs.

Vodka? $5 a liter around here. They need the Stoli for those car crash videos on YouTube.

 

Other than a few extra weapons laying around,  Russia is very ignorable.

Herd Redirection Committee's picture

How far from Novosibirsk to Vladivostok???  Well, its 6 hrs by plane, so you figure it out.  Where is Norilsk?

How large is the area, encompassed by Kazakhstan, Xinjiang and Mongolia (some of the least explored/pipelined areas of the world)? 

 

king leon's picture

Ask China,India,PakistanIranTurkyBrazil,SouthAfrica,Bahrain,Argentina,Finland, to name but a few. What does the US have to sell?  Bombs by the plane load.

Keyser's picture

Contrary to popular belief, the US is not the center of the universe... I bet you're one of those Merkans that has never been more than 250 miles from home and doesn't own a passport... 

Antifaschistische's picture

The irony of all ironies, would be America struggling to figure out what we're going to sell to Russia and China so we can get money to buy oil.

FYI...since all my income sources are in US Dollars, this is not a scenario I'm praying for like some "prepper i can't wait for doomsday" dude.  I'm smart enough to know...the coming doomsday may actually hurt.

Nehweh Gahnin's picture

The pain of what's coming will potentially be decreased if that "doomsday" comes sooner, rather than later.  Or not.  We may simply be fucked.  At the risk of sounding repetitive, we have 407 operating nuclear reactors around the world, and every one of them is oil-dependent.  The idiots in power, as far as I know, are completely oblivious to this.  That might want to ask TEPCO what happens when the diesel generators go offline, which, in our just-in-time-inventory systems, is bound to happen when global supply disruptions delay, re-direct or terminate deliveries.

You die, she dies, everbody dies.

LibertarianMenace's picture

Do we really "need" to buy anything from either? So the petrodollar is dethroned, meaning the domestic dollar goes down, hence the relative price of oil becomes more dear, and voila! the N. American frackers and Canadian tar sanders are economical again. No Saudi oil, Russian oil, or Chinese plastic gimracks required. Think of this event as the arrow of time flowing backwards, to what existed before the U.S. conventional supply went south in the 60's and 70's causing Nixon to ditch gold as a result. As economic time reverses, autarky, nationalism, and maybe even political incorrectness, un-Howard Beale like, become respectable again.

The only damage I see being done is to those subterraneans who dreamt of financially consolidating the global economy by manipulating one sovereign's paper to serve as their proxy. Those are they that are going to have to re-scheme their schemas. The world as yet is still too big for even their long fingers.

Buck Johnson's picture

If Putin said this he is so right.  That is exactly what Obama is like. 

 

 

One World Mafia's picture

If he didn't say it, he should have.

SRSrocco's picture

Of course this will impact the value of GOLD & SILVER in a way most in the WEST are unprepared.  With the sales of 2015 Silver Eagles finally out, we may see another RECORD YEAR:

U.S. MINT 2015 SILVER EAGLE SALES: Start Off Strong

http://srsroccoreport.com/2015-silver-eagle-sales-start-off-strong/2015-silver-eagle-sales-start-off-strong/

noben's picture

The spread between gold coins being bought and sold by dealers is widening: from 2% (in the past), to 4-5% now.

quasimodo's picture

Perhaps the bigger question, at least in my mind, is will it really affect the price that much. One would think so, but then I'm just a stupid serf.

The9thDoctor's picture

Silver Eagles have been a falling knife in the 2010s decade.

Have fun catching that.

angel_of_joy's picture

The 2010 decade is not even half way through. Tell me about it 5 years from now.

Son of Captain Nemo's picture

Kill that Babushka ya.. yah... ya.. ya..before it returns to Washington!

And while you're at it...

round up Madame Soros and Ensign Biden while you're at it!

hedgeless_horseman's picture

 

 

Things didn't turn out so well for hiwis like Hunter Biden that found themselves trapped in the kessel.

Money Boo Boo's picture

The Nazis missed their chance when they got within sight of Moscow but too late in the winter and not equipped to weather the temperatures. Dudes running around in cotton jackets and leather boots. I live in a place that's regularily -20 celsius and the thought of trying to survive in what they were dressed in is amazing they even made it through most nights. Diverting an army to the south to attack Stalingrad was the beginning of the end. The ruskies are a foul criminal breed but they know their shit when it comes to controlling their fate within their own borders.

COSMOS's picture

MBB, even if they took Moscow the Russians were still in the game, they would of lost regardless.  Napoleon took Moscow and lost.  Russia was too vast, the weather too hostile, and the Russian spirit too strong to be broken.  Germany lost the war the moment they crossed the eastern border.

Buck Johnson's picture

They gave land for time and it worked and most of Russia is vast at least 11 time zones.  How can an invading army or force manage to keep their logistics and supplies going further they went into Russia.  And the weather, the weather so many armies are never ready for in Russia.

Money Boo Boo's picture

it's all conjecture now but I've alwyas wondered if the Nazis had of captured the Command and Control Centre of the political party running the army if it would not have just collpased. Stalin had already long purged his free thinking Generals and its quite possible the entire Red army would have collapsed with the capture of Stalin?

DanDaley's picture

The 2 greatest Russian Generals: General Snow and General Mud. Land Wars in Asia are not for the faint of heart.

TahoeBilly2012's picture

"Oh, you want to steal our land do you?" I think Russian's have a deep seated Schadenfruede for idiots who try to invade them. Like a cat playing with a mouse and not letting it die. You can check in but you can't check out. Good luck Seal Team 7 have fun storming the castle!

Buck Johnson's picture

Your dead on, dead on.  Russia can't be held and they trade land for time and makes their enemies spread out to protect from a potential attack.  Everyone checks in and they have to drag themselves out dying slowly on the run from Russia, it has happened every time.  Russia is going to d things to hurt us and they aren't dumb.  They know our weaknesses and our strengths both militarily and financially and even socially.  They know that the petrodollar aka the dollar is the key ot our hegemony and by taking that out we can't not only afford to keep this extended empire hell we wil have trouble trying to keep the 50 states together and we won't.

 

Manthong's picture

“The 2 greatest Russian Generals”

I thought there was a third.. Generalnyy Freezedoylintutarski

Atomizer's picture

Another impotent leader who is married, but prefers the backdoor Microsoft metrosexual lifestyle, clicking on squares. Longhorn has been rebranded and still alive today.  

Buck Johnson's picture

Your correct, but Russia plays a very methodical way and that why is like you trying to stop a glacier.  They move slowly and don't tell what they are doing.  They don't get moved from what they are doing and don't care what the politics are just that the politics fit t he action.  I think the US really over played it's hand and we are going to pay for it.

 

cnmcdee's picture

This is a understatement!!! When Russia cut off 60% of it's natural gas to Europe they are going to bankrupt the remaining oil pillar in North America - Tar Sands.

 

How? Their plants extract a heavy tar - can't run a steam boiler and the furnaces off that - to do that you need a shit ton of Natural gas!  The price of Natural gas just exploded higher and in the face of through the floor oil prices this is a steel bar sandwich to the oil companies bottom lines.. Emergency measures will have to be activated IMMEDIATELY to rush natural gas to Europe before 300 million people run out of heat in two months when their meager stockpile runs out.

 

This is a New World Order way of laying medievel siege to the entire continent of Europe.