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PetroYuan Proliferation: Russia, China To Settle "Holy Grail" Pipeline Sales In Renminbi

Tyler Durden's picture




 

Last week, in “The PetroYuan Is Born: Gazprom Now Settling All Crude Sales To China In Renminbi,” we discussed the intersection of two critically important themes which have far-reaching geopolitical and economic consequences. The first is the death of petrodollar mercantilism, the USD recycling system that has helped to buttress decades of dollar dominance and the second is the idea of yuan hegemony, a new, post-Bretton Woods world economic order characterized by the ascendancy of China-led supranational institutions. 

These themes came together recently when it became apparent that Gazprom has begun settling all crude sales to China in yuan. Here’s a summary of the prevailing dynamics: Western economic sanctions on Russia have pushed domestic oil producers to settle crude exports to China in yuan just as Russian oil is rising as a percentage of total Chinese crude imports. Meanwhile, the collapse in crude prices led to the first net outflow of petrodollars from financial markets in 18 years, and if Goldman's projections prove correct, the net supply of petrodollars could fall by nearly $900 billion over the next three years. All of this comes as China is making a concerted push to settle loans from its newly-created infrastructure funds in renminbi.

Now, it appears Russia and China will de-dollarize natural gas settlements as well.

First, a bit of history is in order.

Last month, Chinese President Xi Jinping visited Moscow, where Gazprom Chief Executive Alexei Miller and China National Petroleum Corp Vice President Wang Dongjin signed a gas export deal which paves the way for 30 bcm/y to China via a new “Western Route.”

(the Altai line)

As a reminder, the two countries ratified a "Holy Grail" gas deal last May for the delivery of up to 38 bcm/y over 30 years via an “Eastern Route.” Also known as the “Power of Siberia” pipeline, the Eastern route was billed as the largest fuel network in the world with a total contract value of around $400 billion. 

(mapping the Western and Eastern routes)

(Putin autographs a pipe at the groundbreaking ceremony for the Power of Siberia line)

Once the two pipelines are operational, China will become the largest consumer of Russian natural gas.

Last year, when the countries were still hammering out the details of the Eastern line, we said the following about the implications of Western sanctions on Moscow: 

If it was the intent of the West to bring Russia and China together - one a natural resource (if "somewhat" corrupt) superpower and the other a fixed capital / labor output (if "somewhat" capital misallocating and credit bubbleicious) powerhouse - in the process marginalizing the dollar and encouraging Ruble and Renminbi bilateral trade, then things are surely "going according to plan."

If the recent move by Gazprom to settle crude exports to China in yuan wasn't enough to prove how prescient the above cited passage truly was, then consider the following quote from Gazprom yesterday:

"As a sales contract is not signed, then, of course, the currency of payment has not yet been determined. However, the Chinese side and the Russian side are discussing today and are in intricate negotiations on the possibility of paying in yuan and rubles."

In other words, once both routes are up and running, some 68 bcm/y in natural gas exports from Russia to China will be settled in yuan amounting to hundreds of billions in renminbi settled trade over the life of the deals.

Now recall what we said last year about the "new normal" flow of funds...

  1. Gazprom delivers gas to China.
  2. China pays Gazprom in Yuan (convertible into Rubles)
  3. Gazprom funds itself increasingly in Yuan.
  4. Russia buys Chinese goods and services in Yuan (convertible into Rubles)

...and connect the dots to what Barclays recently said about the long-term benfits to Beijing of funding infrastructure projects (like the Moscow-Kazan High Speed Railway, in which China will invest nearly $6 billion) via China's new Silk Road Fund...

China could benefit in the short, medium and long term from achieving various levels of the targets outlined in YDYL. Medium-term: Raise demand for Chinese capital goods and Chinese products in general, effectively helping China transition to a consumption-driven economy. 

 


Putting this all together, China, via both the settlement of energy exports from Russia in renminbi, and yuan-donminated loans from The Silk Road fund, can effectively create its own, closed-loop yuan recycling system with Russia which should, over time, serve to facilitate China's transition away from a smokestack economy, while helping to relieve industrial overcapacity (note that earlier this month, China Railway Group won a $390 million contract for work on the Moscow-Kazan rail). 

This is not conjecture. Rather, all of the above is part of a carefully crafted plan to embed the yuan in global trade and investment just as dollar dominance dies a slow death in the face of declining US hegemony and the resurgence of a multipolar economic and political order. 

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Wed, 06/17/2015 - 15:42 | 6206680 Bill of Rights
Bill of Rights's picture

Yawn they should have used Gold.

Wed, 06/17/2015 - 15:44 | 6206687 Deathrips
Deathrips's picture

And Silver. Bimetalism.

 

Chinese have a long history with silver see charles sevoie silver stealers for full story.

http://silverstealers.net/

 

RIS

Wed, 06/17/2015 - 15:47 | 6206696 strannick
strannick's picture

Resources, meet labour

Wed, 06/17/2015 - 16:04 | 6206750 Boris Alatovkrap
Boris Alatovkrap's picture

Terms of Sino-Russia Oil Pact:

Yuan sei ling o yul tsu china, wi pei yu in china mo ni. A mei li ka no ma ta.

Wed, 06/17/2015 - 16:05 | 6206755 y3maxx
y3maxx's picture

W W #3 in 3....2....1....

Wed, 06/17/2015 - 16:09 | 6206768 angel_of_joy
angel_of_joy's picture

You need a real economy to wage real war...

Wed, 06/17/2015 - 16:19 | 6206809 Four chan
Four chan's picture

two back stabbers build a pipeline. meh

Wed, 06/17/2015 - 16:23 | 6206826 angel_of_joy
angel_of_joy's picture

Wrong ! A major supplier and a major consumer decide in doing besiness together while showing to the omnipresent Uncle Sam, the finger...

Wed, 06/17/2015 - 16:30 | 6206841 Amish FinEng
Amish FinEng's picture

Fools and their energy addictions.

The Amish way is YOUR future. Embrace it now.

Wed, 06/17/2015 - 16:42 | 6206889 Funny Money
Funny Money's picture

They're trading one master for another.  How brilliant of them.

Wed, 06/17/2015 - 16:30 | 6206850 ShorTed
ShorTed's picture

It's hardly "Petro" anything when it's only bilateral trade.  Call me when 50 other countries sign on.

Wed, 06/17/2015 - 20:08 | 6207467 agNau
agNau's picture

Simply offer first, then demand payment in Ruble. We have a little excess now, but not enough for avoidance of the Russian supply.

Wed, 06/17/2015 - 16:29 | 6206842 Bokkenrijder
Bokkenrijder's picture

So much for that "gold backed Renmimbi."

Sorry for this rude wake up call, all you goldnuts can go back to your dreams now.

Wed, 06/17/2015 - 16:43 | 6206896 Max Steel
Max Steel's picture

The only reason why they haven't revealed their gold reserves is because CHINA is profiting just  by allowing Murican Fed to continue their zimbabawe style dollar printing . 

Wed, 06/17/2015 - 17:07 | 6206961 Bokkenrijder
Bokkenrijder's picture

Dream on! They love the fiat game as much as Yellen. After all, printing money out of thin air is just the same as copying Louis Vuitton handbags!

You're making the dangerous and silly assumption that Chinese politicians are honest and do not like to have the keys to the printing press...

The only reason they buy gold is in order to blackmail the US and as a hedge against their trillions of US bonds and currency reserves. Most of that gold will NEVER see the light of day and will NOT be used to back the RMB.

Think about it: if they really liked gold or silver that much, then why did they first accumulate 3 trillion in FOREX reserves? Why didn't they start buying it 13 years ago instead of accumulating Dollars?

Wed, 06/17/2015 - 17:51 | 6207096 Consuelo
Consuelo's picture

Who says the Chinese need to 'back' the Yuan with their gold...?   Confidence in trade deals - and geo-economic business at all, does nothing but improve for the nation who is known to have a universally recognized store of value - in +++Quantity.     

Oh, and that 'confidence' also cuts the other way for the nation who can't keep it's military hardware, color revoutions, and other various in-sundry Meddling away from where it doesn't belong...

Wed, 06/17/2015 - 16:46 | 6206907 Bay of Pigs
Bay of Pigs's picture

You must be a Jon Nadler, Jeff Christian and Harry Dent fan.

Wed, 06/17/2015 - 18:31 | 6207214 Max Steel
Max Steel's picture

Harvy Dent ?

Wed, 06/17/2015 - 17:23 | 6207017 Lea
Lea's picture

"So much for that "gold backed Renmimbi." Sorry for this rude wake up call, all you goldnuts can go back to your dreams now."

Bokkenrijder, I've got good news and bad news. First, the bad news is that China could crash the dollar by pegging the yuan to gold. The good news is they can't do it right way, because that would crash the world financial thingamajob at the same time, and they don't want to drown along the USA.

http://investmentresearchdynamics.com/china-plans-yuan-denominated-gold-...

Markets and financial systems are delicate things, so they proceed with caution, transfering funds little by little, dedollarizing one day at a time. As soon as they will have secured the financial environment for themselves and their Eurasia/BRICS buddies, they'll peg their currency to gold and kaboom!

Wed, 06/17/2015 - 17:53 | 6207104 Consuelo
Consuelo's picture

In short Lea: 

Why waste resources when your enemy is doing a fine job of self-destruction all on his own...?

Wed, 06/17/2015 - 16:31 | 6206851 TungstenBars
TungstenBars's picture

Probably the most ignorant comment of the weekm. if you want to see backstabbers look at the Americans..selling their country for a few dollars fiat.

Wed, 06/17/2015 - 16:49 | 6206917 1033eruth
1033eruth's picture

Who are the THREE morons that gave you thumbs up for your comment?  THREE SHITHEADS that don't understand what SOVEREIGN NATION MEANS.  Apparently those THREE SHITHEADS (and counting) believe that the US RULES THE WORLD.  

Wed, 06/17/2015 - 16:20 | 6206817 TungstenBars
TungstenBars's picture

Only if you want your side to win. Whats better, losing hegemony due to war or having the people know you let the other team win to make a few bucks yourself?

Wed, 06/17/2015 - 19:56 | 6207432 Freddie
Freddie's picture

Bi-metalism.  What President William McKinely supported. they killed him for that reason.

https://en.wikipedia.org/wiki/William_McKinley

McKinley led the nation to victory in the Spanish–American War, raised protective tariffs to promote American industry, and maintained the nation on the gold standard in a rejection of inflationary proposals.

Overall - he seemed like a pretty good guy.  Spanish-American war was typical false flag bullshit and MIC was going all the way back then.

Wed, 06/17/2015 - 15:52 | 6206713 1000yrdstare
1000yrdstare's picture

Time to ramp up some "Freedom" to these turroristss!

Wed, 06/17/2015 - 16:12 | 6206782 Atlas Crapped
Atlas Crapped's picture

In effect they are using gold, by using gold reserve backed currencies. Which of course is the entire point. The dollar is a debt backed currency. Even if we had the 8K tons we claim to (which we don't) we'd need more like 10 times that at today's gold $price to cover all the dollar denominated debt held by central banks globally, with a small cushion for derivatives, which will mostly just default...

www.roacheforque.blogspot.com

Wed, 06/17/2015 - 17:13 | 6206997 doctor10
doctor10's picture

So while China and Russia are playing chess, the American White House and State Dept are still looking for the checkers rulebook!

Wed, 06/17/2015 - 15:43 | 6206684 LetThemEatRand
LetThemEatRand's picture

Thanks Nixon, Ford, Carter, Reagan, Bubba, W, Obama, and all of your banker and MIC puppetmasters for fucking up the best thing ever going for the U.S. (world reserve status), in order to line your pockets with printed money.

Wed, 06/17/2015 - 15:52 | 6206716 Anusocracy
Anusocracy's picture

So you are okay with fiat dollar printing stealing wealth from US workers AND foreign workers?

Nice.

Wed, 06/17/2015 - 16:08 | 6206741 Dr. Engali
Dr. Engali's picture

I can't speak for Rand, but we all know the fed is a criminal organization who steals from the common man through inflation. The point is that the politicos were bought off and gave the MIC and the bankers carte blanche to do whatever the fuck they want. 

Wed, 06/17/2015 - 16:04 | 6206747 LetThemEatRand
LetThemEatRand's picture

Nixon officially ended the gold standard in order to help fund the debts created by Vietnam and to expand U.S. military adventurism (and banker wealth).  The guys after him each doubled down, treating the dollar as a tool to control the world and enrich themselves and their masters.  I can say fuck you to everyone since 1913 if that would make you happy.

Wed, 06/17/2015 - 20:30 | 6207532 Salah
Salah's picture

Nixon acted because at WW2's end we had >45000 tons in Ft. Knox, and by 1971 it was down to under 10K.  Mostly earned back by Europe & the oil states cashing in their dollars at the gold exchange window.

We had half that WW2 gold because the allies wanted their stash back after the war, and we said , "No, here's cash dollars, keep them in your central bank vaults as 'reserves' and then earn the gold-exchange dollars by trade & commerce, rebuilding your economies"...and they did.

"And by the way, Europe & Japan, the most precious industrial commodity on Earth [oil] is only priced in dollars" 

 

Wed, 06/17/2015 - 15:53 | 6206719 Dr. Engali
Dr. Engali's picture

Don't know why you were down voted (must have been a banker) because you are right. I will say it was unavoidable. All fiat eventually dies for the same reasons. 

Wed, 06/17/2015 - 15:59 | 6206727 suteibu
suteibu's picture

There are probably over 6.5 billion people on this planet who do not feel the least bit sorry about this.

ETA:  Now you know how the rest of the world who have been subjugated by the US reserve currency status feels.

Wed, 06/17/2015 - 16:07 | 6206763 LetThemEatRand
LetThemEatRand's picture

There was a time when I was naive enough to believe that the U.S. was a much better country to have world reserve status than most others.  I think about all of the good things that could have been accomplished by a truly free nation that had the ability to influence world events in a positive way.  But those who control the U.S. have used this great power for evil, and I'm sure you are right that most of the world would happily see us go down in flames.

Wed, 06/17/2015 - 16:10 | 6206773 suteibu
suteibu's picture

It's a sad thing.  The US could have done something special in the world.  They screwed it all up.  It is probably time for someone else to try.  The US can no longer be trusted to do the right things.

Wed, 06/17/2015 - 16:32 | 6206856 strannick
strannick's picture

It's naive to believe the US or any.nation before or after, would use the corrupt exorbitant privilege of reserve money printing, to do good iin the world. You don't rip off the rest of the world via corrupt reseve currency, so you can give it away.

Wed, 06/17/2015 - 16:47 | 6206891 suteibu
suteibu's picture

There will always be a dominant currency.  The key is how it is to be used.  The US spent it on military and financial domination and the results are becoming well known.  Another approach would be to use it to build a more prosperous community of nations. 

The next nation who gains the status of reserve currency, probably China, will have to earn it through good works, unlike the US which essentially seized it from a world devastated by war.  Perhaps it is naive to think that China would learn lessons from the US mistakes, but, to be sure, the world would be much better off.

Wed, 06/17/2015 - 18:00 | 6207113 Lea
Lea's picture

"The next nation who gains the status of reserve currency, probably China, will have to earn it through good works, unlike the US which essentially seized it from a world devastated by war.  Perhaps it is naive to think that China would learn lessons from the US mistakes, but, to be sure, the world would be much better off."

China won't need to learn from the USA's mistakes. She has a history that spans 5000 years, and all she wants to know, she finds by looking back. It is a history of peaceful trade that started in the 2nd century BC with the ancient Silk Road. China also learned centralization back then, with the State monopoly their Emperor, Qin Shi Huangdi (221 B.C -206 B.C), established on salt and iron. The Chinese communist party didn't invent anything, it was all in their past.

They have never been a bellicose nation, and they will certainly not begin now. On the other hand, they are probably the most astute traders on Earth. So, from them, we can expect major investments and fruitful trade. That's what they're good at and that's what they like best.

Compared to them, the USA look as delicate, sane and educated as an elephant running amok in a china shop.

Wed, 06/17/2015 - 20:29 | 6207442 Freddie
Freddie's picture

Putin and the Russians are so refreshing compared to the scum shit lying Democrats, RINO Republicans (Jeff Sessions and a few in the House at least try) and Machurian Obola. 

They are all puppets for Soros, ZOG, Z-Fed, z-MIC, ZWO and ZATO.

Wed, 06/17/2015 - 16:53 | 6206892 Usurious
Usurious's picture

bingo........the FRN is a loaded gun pointed squarely at the face of humanity......

its amazing to me that some on this comment section view history exactly the way the banksters want them to.....

Wed, 06/17/2015 - 17:30 | 6207040 Lea
Lea's picture

"It's naive to believe the US or any.nation before or after, would use the corrupt exorbitant privilege of reserve money printing, to do good iin the world."

That's why there cannot be another world reserve currency than gold. Gold belongs to no country in particular, and you can't print it out of thin air.

Wed, 06/17/2015 - 16:37 | 6206864 two hoots
two hoots's picture

Some groups and individuals still can/do.  Collectively our hands are too sleazy/dirty/bloody to be trusted.  We still have significant hegemony (reserve currency and a state department that gives away plenty) to make stuff happen but we all see that fading.  Poland sees opportunity to gain revenue by offering bases to US/NATO.  It is an old game but Poland will milk it.

Wed, 06/17/2015 - 23:31 | 6207999 TwoHoot
TwoHoot's picture

two hoots a newbie shill. Don't be confused.

Wed, 06/17/2015 - 16:39 | 6206879 drendebe10
drendebe10's picture

1.  Gubmint:   ctrl-alt-del

2.  Elected ruling political elite turds:   sandpaper their skin off and bury them in salt vs. guillotine.... you pick

Wed, 06/17/2015 - 16:26 | 6206685 JustObserving
JustObserving's picture

If smaller nations de-dollarize then the Nobel Prize Winner will be happy to drone them.  

Not to worry, Yellen will promise to raise interest rates a zillion times in the future to keep dollar strong.

Wed, 06/17/2015 - 20:02 | 6207449 Freddie
Freddie's picture

How can Yellen raise rates when the debt is growing exponentially?   She and the rest of the Fed members and the Fed owners need a guilotine to clear their heads.

Wed, 06/17/2015 - 15:45 | 6206692 q99x2
q99x2's picture

Why don't they use a decent sounding currency like Bitcoin. I wouldn't feed my dog Renminbi.

Wed, 06/17/2015 - 16:14 | 6206787 JohninMK
JohninMK's picture

How about Renminbits

Wed, 06/17/2015 - 16:20 | 6206814 Max Steel
Max Steel's picture

Your dog eats Bitcoin ?

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