Xi’s first trip in 3 years will be to Saudi Arabia, the central pillar of the petrodollar. What’s at stake? 🧵
Top of the agenda will almost certainly be establishing payment for Saudi Arabian oil in RMB instead of USD, shattering an enduring precedent that has existed since 1974.
Quick recap: the petrodollar the dominant global reserve currency that is maintained largely through Saudi Arabia’s continued willingness to only accept USD for their oil exports. The resulting global demand for USDs is how the dollar’s value is propped up.
Both China and SA hold significant USD reserves, many of which are held in the form of US treasuries. However, in recent years both countries have recently been divesting at an accelerating rate.
What’s causing this divestment? Partly, US actions in response to the Russia-Ukraine war. US sanctions signaled to the world that foreign reserves in USD aren’t as safe as before. It’s likely that both countries are performing a new calculus that mitigates against this risk.
But trade policy won’t be the only thing on the table, as SA is also China’s biggest supplier of crude oil. Securing supply routes will likely be a major topic of discussion, particularly the potential vulnerabilities that exist, such as the Strait of Malacca.
This year, China moved intentionally toward securing their energy supply by rejecting US-led sanctions and increasing imports of Russian gas. Construction of Power of Siberia 2, a major pipeline to connect China directly to Russia’s eastern nat gas network, will begin in 2024.
Given the leverage SA-oil-for-yuan grants both countries, why hasn’t it happened sooner? China has likely been biding their time. Such a move will invariably harm their significant stake in the US and initiate a tectonic shift in US relations.
SA has similarly been waiting to move, as they rely heavily on the US for defense to counter Iran. Now, they possibly perceive a leadership vacuum under Biden and see his admins’ attempts to restart the Iran nuclear deal, tossed aside under Trump, as a betrayal.
But the largest key to the puzzle is BRICS, a new trade union representing over a third of global GDP (PPP). All indications are that SA will be joining soon as part of BRICS+, forming the first bloc in history with the power to directly challenge dollar hegemony.
So what can we make of this? Is Xi’s visit part of the ‘serious consequences’ that China warned the US about for their recent Taiwan stunt? Is this move meant to be punitive or is it merely another step toward a geopolitical inevitability?
Reducing exposure to an increasingly erratic US has been part of China’s long term strategy for a while. However, the US’s recent Taiwan provocations have accelerated China’s plans to secure a future for their people in a world in which the fate of the US grows more uncertain.
