Russia-Ukraine war puts US dollar under siege

American political commentator and author Thomas Friedman famously quoted “geopolitics is all about leverage. We cannot make ourselves safer abroad unless we change our behaviour at home.”

Russia’s invasion of Ukraine is strongly altering the geopolitical and global energy landscape. Approximately 11 per cent of the world’s total crude oil is extracted in Russia, making it the third-largest producer globally after the United States and Saudi Arabia.

Beyond oil and gas, their resources for export extend to wheat, fertilisers, cereals, aluminum, and other metals. With these bountiful resources, Russia has used its position as a negotiating chip in international politics.

The nation is important in the energy sector in and around Europe, chiefly for its dealings with over a dozen European countries as well as other States including China, South Korea, Japan, and Vietnam.

With an endless list of sanctions imposed on the Kremlin for war crimes against Ukraine, most of its energy clientele are now looking to hit the footbrake on their association with Russia.

In the face of competition from US oil production, Moscow has over the years collaborated with the global oil producers’ cartel OPEC to regulate the pricing of crude as well as its distribution.

Oil giants including BP and Shell have abandoned their stakes in Russian joint ventures and State gas projects in response to the Russian aggression towards Ukraine. Attacks on Ukraine have caused supply disruptions and will most likely lead to further disruptions of oil trade in the future.

Economic sanctions

The US and several nations have slapped far-reaching economic sanctions on Russia and has declared that they will stop importing crude oil from the nation altogether. With high demand, these are already leading to price inflations as nations search for alternative suppliers.

Brent crude oil prices hit $100 per barrel in February 2022 for the first time since September 2014. As a response to escalating sanctions from the West for Russia’s invasion of Ukraine, a statement from the Kremlin declared that unfriendly countries will be required to pay for Russian oil and gas in rubles or gold.

A press release from the Russian Central Bank stated “in order to balance supply and demand in the domestic market of precious metals, the bank of Russia will buy gold from credit institutions at a fixed price starting from 28 March 2022. The price will be 5,000 Russian Rubles for One gram of gold from 28th March 2022 through 30 June 2022.” 

Thereafter, the purchase price of gold can be adjusted taking into account the emerging balance of supply and demand in the domestic market. Why would Putin have pegged the Ruble to Gold? This is a very potent, disruptive action whereby a sizeable share of the global energy trade could move away from the US dollar. During this time, pegging the currency to gold is seen as an economically responsible act, discouraging the excessive printing of currency, as the United States of America has done for the last 15 years and more.

China has also been printing currency to counter inflation, which is a double-edged sword. In 2021, the People's Bank of China, the Chinese monetary authority, issued more than 9.62 trillion Yuan in a single year. Naturally, the Russian Ruble in the past has faced tremendous devaluation and printing would not be a viable option.

As the USA, EU, Japan, Australia, and Canada have sanctioned Russia, it appears the country is now moving to strengthen its Ruble by backing it with gold. The US did this for many years and once they removed the gold standard in 1971 and turned the dollar into a Fiat currency, they were able to print as much currency as they wanted, regulate its issue, and this has given the USA a huge worldwide advantage and turned the US currency into the world reserve currency.

Prior to August 15th, 1971 when US President Richard Nixon announced that the United States would no longer convert dollars to gold at a fixed value, it was earlier pegged at $35 per ounce. The gold standard was abandoned due to its tendency for volatility, and the constraints it imposed on governments.

Russian currency

French Liberal economist Frederic Bastiat is attributed to have said “when goods don’t cross borders, soldiers will.” Does the Yuan pose a threat to the US Dollar? Is the Ruble being pegged to gold going to give a further blow to the US Dollar? Will countries having one-on-one trade systems using local currencies affect the value of the US Dollar?

Member of the State Duma Pavel Zavalniy, stated “friendly countries could be allowed to pay in the crypto-currency or in their local currencies. As for the unfriendly States, if they want to buy let them pay either in gold or pay as it is convenient for us this is the national currency, the Ruble.” 

Putin told European nations that in order to keep buying Russian oil and gas they are going to have to first purchase Rubles, which is creating demand for the Russian currency and buoying its value.

The Ruble took a significant blow following the Russian invasion of Ukraine and the subsequent massive rounds of sanctions launched against Russia by the west. Since that initial drop, the Ruble is now slowly recovering. However, it is still well below the pre-invasion exchange rate so a move like this by Putin could definitely support a fledgling Ruble.

While Russia extended the offer of discounted oil, gas, coal, and other resources to China, India and select States, the requirement is that the transactions will not be in US Dollars.

Prior to the Russian invasion of Ukraine, which prompted sanctions, Saudi Arabia indicated the possibility of adopting the Chinese Yuan for Chinese oil sales giving a clear signal that the Saudis are angry over US lack of support for their intervention in the Yemeni civil war while the Biden administration attempted to strike a deal with Iran. 

With major players in oil and resources willing to transact in Yuan, Ruble, Rupees and other currencies, are we noticing nothing less than the decline of the petrodollar?

Ritesh Barot is a business and financial analyst, humanitarian, conservationist, occasional artist, recipient of OGW honor. [email protected]