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Could the China-Russia gas deal be the kiss of death for the dollar?

John Deede | Shale Plays Media Google+

After China signed a 30-year, $400 billion deal to purchase Russian natural gas last month, it appears that they will not be handling the bills in dollars. Reuters reported today that along with listing Russia’s Gazprom on Hong Kong’s stock exchange, they may be exchanging natural gas for the Chinese Yuan.

Russia has been looking for other clients to purchase the country’s main commodity after the situation in Ukraine has weakened ties with the West. Much of Europe’s gas passes through Ukraine, meaning that instability in Ukraine may shake Russia’s ability to get its gas to market. Just on Tuesday, Vladimir Putin visited Austria following the approval of a new deal for constructing a pipeline to supply Europe with gas through an alternate route. Russia hopes that it can retain Europe’s steady gas dependence while circumventing potential problems in Ukraine. The deal to sell to China seems to have solidified Russia’s energy supremacy worldwide.

The US dollar has been the worldwide standard for purchasing energy for over 40 years. The dollar has traditionally been seen as a stable, strong currency, and after World War II was used internationally as the reserve currency. After Nixon ended the dollar’s ties to gold in 1971, the dollar’s worldwide dominance was at risk. The US made deals with Saudi Arabia to support their regime in exchange for OPEC members only accepting US currency for oil purchases. This meant that any country which is not energy-independent needed to keep dollars on hand.

The dollar being dropped as the global reserve currency would unleash chaos in the US economy and cause shockwaves throughout the global economy. The dollar index, which measures the strength of the dollar vs. a basket of currencies, would drop sharply. Any country with dollars in reserve would take significant losses. The dollars would come back to the US en masse, leading to massive dollar devaluation, causing inflation to skyrocket. Since the US is no longer as dependent on Middle Eastern oil, OPEC is likely exploring other options for accepting payments in the future. Iran has been forced to skirt US sanctions by making oil-for gold or oil-for-goods trades instead of the dollar to maintain some level of income, and other countries could choose to do the same.

Related: Russia, China to create joint rating agency as ties grow


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