Last month, Shanaka Anslem Perera, a self-described entrepreneur and author of The Ascent Begins (“a field manual for what comes after empire”) described how Iran’s blockade of the Strait of Hormuz — and its ability to extract tolls paid in yuan principally by oil tankers carrying crude for China — “is the structural shift that outlasts the war”.
By paying in yuan, the argument goes, so the “petrodollar architecture” that has governed trade since 1974 comes under threat with a viable alternative to dollar hegemony. Is this a conspiratorial fantasy or a genuine possibility? The FM spoke to ETM Analytics founder and economist George Glynos for his view.
Do you think this ‘structural shift’ is a plausible outcome?
How they manage the payments part of it is going to be interesting, but it’s equally interesting that they’re doing it in yuan because that’s not something the US can control. If it were being done in dollars, they could prevent payments through their Swift system. Iran’s got one client, and that’s China [it buys almost 90% of Iran’s oil].
Has a sort of ‘petro-dedollarisation’ begun in earnest?
I think it began a while ago but is being kept under wraps. Countries like China play the long game; I don’t think they would purposefully disrupt the world when they know they have 2½ years left of Donald Trump, so the basic idea is an effort to undermine US hegemony.
If you get to the point where you can create a second node of power in global geopolitics, then you get to reduce the influence the US has over you, and you can continue trading. The US’s exorbitant privilege and its ability to influence geopolitics arise out of the fact that everybody uses the dollar. So even if not openly stated, it’s been on the cards to try and move away from the dollar to the extent that it’s possible.
If you can create a digital coin backed by a combination of oil and gold — and this is going to sound conspiratorial, but bear with me — then you have an alternative to the dollar that isn’t specific to one country
How does that actually happen?
This idea that you just move across to the yuan is flawed. Frankly, there’s not enough yuan in the world to accommodate everyone shifting to it. Could the Brics countries temporarily move in that direction? I think they could, but more plausible is that they would probably like to create a digital currency that isn’t jurisdictionally specific.
If you can create a digital coin backed by a combination of oil and gold — and this is going to sound conspiratorial, but bear with me — then you have an alternative to the dollar that isn’t specific to one country. And those countries that do hold oil and gold are at an obvious advantage because they would be able to create that currency and back it with real assets.
If you look at what Brics has been doing, as well as the Brics+ expansion, a lot of things start to make sense. The inclusion of countries like Iran and Saudi Arabia means you have a collection of oil producers in there, and if you look at what the central banks of India and China have been doing, they’ve been buying up gold.
But surely this is not a quick shift?
It’s going to take many years, if not decades, for it to be a realistic prospect that the dollar is going to be unseated; 85% of the world’s trade takes place through the dollar. And you’re not going to unseat that in a hurry, primarily because dollars are awash across the globe.
What about gold? Even though it hasn’t behaved the way we thought it should as a safe haven in the past six weeks, does this suggest there’s still a solid floor to the price in future?
The market got frothy and maybe a bit overextended. It’s more interesting to figure out what the base fundamental price of gold should be. Even if you strip that frothiness out of the market, you’re still going to find a gold price trending higher. Where would the fair value be? Let’s say it’s at $3,500/oz; that would still be a substantial rise over the past few years. If my theory is correct, you’ll find a natural floor that will easily get soaked up by growing central bank demand as Brics countries shift away from holding dollars.
China at one point was sitting on reserves of US treasuries close to $1.3-trillion; these have dropped to about $680bn. They’ve done it over many years, so they didn’t flood the market; they bled it in. I think it’s part of the reason US treasuries have remained so stubbornly buoyant. China has used a lot of those proceeds to purchase gold. That’s not a short-term speculative thing; that was a deliberate decision. And then you have to ask: ‘Why would they do that?’
It goes back to the question of whether this is a Chinese issue or a Brics scenario. The other interesting overlay is what this does for Brics. On the one hand, Iran is saying we will let our friends travel through the strait, but they have angered a lot of people by bombing their so-called friends. There are going to be some interesting questions posed at the next Brics summit, but at the same time there’s a broader strategy unfolding here.
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