Does Russia Abandon The Dollar?

It seems that Russia would be increasingly keen on pricing oil sales in euros instead of dollars and thereby acknowledging that the euro is becoming more important as a world reserve currency. This view was supported by the Russian President Vladimir Putin who invited the German Chancellor Gerhard Schroeder for two days to Ekaterinburg last week. On Wednesday, Deputy Prime Minister Viktor Khristenko, confirmed the idea and called it even inevitable.
Such signals are welcome in European capitals. The European Union has for a long time expressed their interest to price energy deals with Russia in euros. Such a move would not only promote the euro but would contribute to more price stability in the European Union. Today, most energy contracts are settled in dollars, meaning that for European buyers, trade in gas and oil is subject not only to fluctuations in their market prices but also to variations in the value of the U.S. currency. With geopolitical considerations in mind, European nations have tried to challenge the US hegemony over the global economy and money supply.

If Russia, as the world?s second largest oil producer, would decide to trade crude in euros, it could start a chain reaction among other oil producers with similar intentions. Iran, the fifth largest oil exporter, has also openly considered a move into euros. And after the war in Iraq, there is growing debate in Saudi Arabia to switch, too. The Saudi?s relation with the US has cooled down over recent months after the US accused the kingdom to harbouring and financing global terrorism. However, it has to be seen how the strategic relationship between these two countries will develop. Also in Iraq under Saddam Hussein, crude was traded in euros. Some analysts suggested that this was another reason the US started a war in the Middle East. They want to prevent that more and more power is moving away from America to the European Union.

Such a move towards the euro would allow European countries to capture a significant share of the world energy market and of global trade. This would be a big success for Europe and catastrophic for the US. Dollar-based global oil trade now gives the United States every opportunity to print dollars without sparking inflation. This is necessary in order to fund the huge building up of the army and the rising domestic consumer spending, as well as to cut taxes and run up a huge trade deficit. Almost two-thirds of the world's currency reserves are kept in dollars, since oil importers pay in dollars and oil exporters keep their reserves in the currency they are paid in. This effectively provides the U.S. economy with an interest-free loan, as these dollars can be invested back into the U.S. economy with zero currency risk.

But the move could also considerably trouble the European Union as it will put upward pressure on the Euro. The whole industrial sector would further lose competitiveness and economic prosperity would be further postponed.

It just remains the question if the Russian government wants to damage the fresh established partnership with the US. Russia is still interested to strengthen its position in the Middle East and to gain lucrative oil contracts. For both, the United States still seems to be the key. However, to sweeten the deal, the European Union might offer Russia concessions, for example better condition to enter the World Trade Organization. Russian politicians have also suggested bringing the question of abandoning visa between Russia and the European Union again on the agenda.


Author: Andreas Wild