Currency swaps weaken dollar hegemony

27 Nov

It’s not just Ukraine, Taiwan and Gaza. From tensions in the Horn of Africa to echoes of Baltic sabotage in the Black Sea – and from the Sahel through Bangladesh to bloody repression in Latin America – there is nothing inherently reductive in claiming that no major conflict today, be it hot or cold, can be fully understood without reference to the wider context of a shift away from US hegemony, and Washington’s efforts to counter the same.

People are like, “Yeah, always blaming the US, just because it runs a globe-spanning empire which dominates the planet with violence and coercion and works continuously to keep all the other countries subjugated to it.”

It’s like saying, “sure we’re trapped in a room with a tiger, and yes your leg is missing and you have a large bite out of your torso, but you can’t blame ALL that on the tiger.  Some of it might be Steve’s fault. Steve’s kind of a jerk.”

Caitlin Johnstone

Two interconnected realities have underwritten that hegemony. The first is America’s massive arms-spend for wars far from its shores and borders. This reality is enabled by the second: a monetary ace card, courtesy of Bretton Woods 1944 and Nixon’s 1972 decoupling of dollar from gold, creating what French premier Valéry Giscard d’Eistang called an exorbitant privilege. 1

The three countries most in the cross-hairs of the hegemon are China, Russia and Iran. All have powerful deterrents. Iran, should she be left with nothing to lose, can and would annihilate the Western beachhead which is Israel, its nuclear status notwithstanding. 2 For their part neither China nor Russia have invested in the means of wreaking destruction on far off countries but, on top of being nuclear powers, both have defence capabilities – highly sophisticated AI and clear superiority in hypersonic missiles – to make overt US attack an act of extraordinary folly. This, alas, does not rule it out but that’s a story for another time. The scope of this post is limited to Washington’s second sphere of hegemony, dollar dominance.

As noted in a September post, erosion of that last poses an existential threat not to ordinary Americans but to a rentier  oligarchy whose responses are increasingly extreme and, even on their own terms, irrational. As in a Greek Tragedy, that oligarchy’s moves to halt dollar decline serve only to expedite it. The non Western world – having noted the seizure, on pretext after risibly transparent pretext, 3 of dollars and even gold held in the West by Venezuela, Russia, Iran, Afghanistan and other states incurring Washington’s ire – is concluding that a shift from dollar dependence is an idea which has found its time.

However difficult and risky that shift.

Until recently the global south saw no viable alternative, but Western defeat in Ukraine, and a BRICS alternative nearing critical mass, 4 are changing the game. Is now the time, governments in the “developing world” are asking, to ease ourselves free of Uncle Sam?

This is the overarching context not only for global conflict but for shifting allegiances in arenas for now esoteric and easily overlooked, but laying down strong markers for the attentive. Take last week’s news of a currency swap line between China and Saudi Arabia (KSA). It follows hard on the heels of China’s brokering in March, to fury in Washington, of a rapprochement between KSA and Iran, and was analysed this week in the Indian business daily, The Financial Express:

On November 21, 2023, China and Saudi Arabia solidified their economic partnership by entering into a local-currency swap agreement amounting to approximately $7 billion. This move comes at a time when nations in the Middle East and emerging markets are actively seeking avenues to divert a greater portion of their non-oil trade away from the US dollar …

Read the full piece here … 

A swap line allows a country to borrow in one currency, while agreeing to repay in a different currency. Here it means KSA borrowing dollars from China, to be repaid in yuan.

The significance is examined in a post by Tom Luongo, a chemist turned market analyst who blogs at his Gold Goats ‘N Guns site. 5 He takes us back ten years to when China threw a lifeline to a Russia under economic assault from the Obama Administration following Crimea’s vote to leave Ukraine. Bear with me while I set the scene.

The Maidan ‘colour revolution’ of February 2014 ousted Viktor Yanukovitch from Kiev to shoe in a US-pliant regime anointed by Victoria Nuland 6 and hostile to Ukraine’s ethnic Russians. The following month Crimea (historically Russian but in 1954 assigned to Ukraine by Khrushchev for reasons unclear but of minor import when both were Soviet Republics) voted overwhelmingly to annexe with Russia. 7 This was heavily spun in the West as More Russian Aggression but we can debate that point another time. What matters for now is that the Obama Administration set out to punish Russia by strong-arming OPEC – KSA in particular – into pumping out more of the black stuff to depress world prices for Russia’s most important export.

As Tom Luongo (here lightly edited) notes:

Saudi Arabia expanded production, thinking to take Russia’s market share as the rouble fell and drained Russia’s foreign exchange reserves.

Key to such thinking is that Russia’s big State Owned Enterprises like Gazprom and Rosneft had huge dollar-denominated debt, about to mature and in need of roll over. US sanctions thwarted that. With Gazprom unable to sell Russian Treasury bonds to Western investors, current bond holders had to be paid off: $50bn in the last quarter of 2014, and a further $50bn in the first quarter of 2015.  

This “rollover risk” plagued Russian government finances for the next 18 months as the price of oil dropped relentlessly.

A ‘soft’ peg to the dollar had been easy to maintain when oil sold at $100 a barrel and above but now President Putin ordered the Bank of Russia to let the rouble float. By late November 2014 it stood at 80 to the dollar, having traded before the Crimea Referendum at high 20s/low 30s.

Beijing stepped in to halt the collapse via a swap line. China paid off Gazprom’s debt; Russia repaid China in yuan underwritten by future oil flows through the Power of Siberia pipeline.

Thwarted and furious, Washington didn’t dare sanction China for fear of huge blowback on the US economy. (The same calculation would later ensure China was not threatened with sanctions after refusing to embargo Russia in 2022 over Ukraine.)

Back to last week’s swap line agreement between China and the Saudis. Background to this is that Riyadh, MBS in particular, has grown wary of Washington for reasons both general – its trigger-happy fiscal and monetary aggressions – and specific to a KSA acutely vulnerable to US perfidy. 8 9

Using the Russian precedent, but applying it under the more favourable conditions of high oil prices, we  see the following. With the swap line announced, KSA accrues yuan credits through its (high) oil exports  to China. This draws fear and fury in Washington since, as I wrote in my September post, Broken: the implicit contract between ruler and ruled:

What if the dollar lost its ‘exorbitant privilege’? How would the US react to losing world reserve currency status even as oil began trading in yuan? The answer is rooted in the fact that its ruling class, and those of the west at large, have burned their bridges. With no way back to industrial pre-eminence their only viable course is to continue to exploit the labour and natural wealth of the global south within an imperialist world order characterised by the north to south export of monopoly capital, and south to north repatriation of profits.

One condition of that exploitation is military might. The other is dollar hegemony.

When the USA retaliates to leave KSA with dollar denominated debts it has no way of servicing, China, with its vast dollar surpluses, provides loans to be repaid in yuan. (Or to be precise, in oil priced in yuan.)

Further monetary attacks by the US will trigger expansion of the swap lines. What the crazies in Washington will then do is the $64bn question. Meanwhile, as Freewheelin’ Bob foretold sixty years ago, the times they are a-changing.

* * *

  1. Taking the dollar off the gold standard was seen at the time as a blow to US prestige and sold as a temporary measure to offset the costs (heroically and unfairly borne by the lead nation of the ‘Free World’) of its war on the Vietnamese people. It took some time for the unprecedented advantages of a floating dollar, with no attendant loss of reserve status, sank in. As a 2019 LSE paper, Weaponising the dollar, put it:

    Problems of excessive dollar dependence were recognised at Bretton Woods. The leverage of a dollar-dependent world was also recognised, [Keynes’ proposal of a neutral ‘bancour’ got short shrift from the Americans] and characterised by Valery Giscard d’Estaing in 1974 [a year or two after Nixon decoupled dollar from gold] as “an exorbitant privilege”, enabling the US to run trade and fiscal deficits virtually without limit. [Demand for fiat, “magic money tree” dollars was assured whatever the health of the US economy.]

    But efforts to punish Cuba, isolate the Soviet Union and China, and starve communist regimes of funds were an integral part of Cold War strategy, designed  to avoid war while precipating economic collapse, which happened in the Soviet sphere but not in China. The present strategy of weaponisation seems by contrast to be designed to provoke a war. (Edited)

    Those efforts to “starve communist regimes of funds”, reprehensible in their own right, did much to cement the notion – as deeply held by the politically clueless as it is widely invoked by the politically self-serving – that “socialism has been tried and doesn’t work”.  The LSE paper is a short and easy read which explains dollar weaponisation and offers prescient clues as to to why, over the four years since its publication, the global south has grown more restless in its search for an out.

  2. See former UN weapons inspector (and before that US Marine Intelligence Officer) Scott Ritter’s twenty minute podcast: Iran can destroy Israel with non nuclear weapons in a regional war. Much the same point is made by former UK diplomat Alastair Crooke at 12:40 in this video.
  3. The pretexts for US confiscations of foreign reserves are not in the main transparent to a propagandised West but the lesson – it’s not safe to hold dollars – is not lost on leaders in the global south.
  4. The Bezos owned Washington Post rubbishes such talk. BRICS raging against the dollar is an exercise in futility, it sagely informs us, while Britain’s Financial Times warns of sinister intent in Beijing. I’m minded not only of these geniuses’ resounding failure to see 2007/8 coming, and of the fifteen years they’ve spent predicting imminent economic meltdown in China, but of the 1963 retort of Mandy Rice-Davies apropos Christine Keeler and John Profumo: well they would say that, wouldn’t they?
  5. Thanks to steel city reader Jams O’Donnell for alerting me to Tom Luongo’s post.
  6. The infantilisations of Western media made it easy to zero in on Ms Nuland’s dismissive “fuck the EU”  and so side-line the more significant revelation of a US Assistant Secretary of State ruling on the acceptability or otherwise of potential replacements for Ukraine’s incumbent leader. Still, that “fuck the EU”  does shed useful light, all things considered, on the intellectual and moral stature of the Straussians.
  7. The Crimean referendum saw 97% of an 83% turnout vote to join the RF. That said, vote or no vote it is inconceivable that Moscow would let a US puppet close in on its naval base at Sevastapol. No great power, least of all the USA in comparable circumstances, could allow such a thing.
  8. US-KSA relations, often referred to on this site as a Faustian Pact, merit a dedicated post. Here it suffices that a toxic cocktail – of (a) KSA’s exceptionally high dollar exposure, (b) Washington’s long history of throwing yesterday’s allies under a bus and (c) a recent upping of its willingness to launch monetary attacks – leaves Riyadh increasingly wary. The 2017 proposal, reported in Israel’s liberal Haaretz, to buy Russia’s formidable S400 air defence system – a deal KSA ultimately withdrew from in the face of carrot and stick inducements we can only guess at – should be seen in this light. (A hedge-betting Ankara already had S400s despite Turkey being in NATO.) As should this year’s game-changing rapprochement with Iran. In no other non Western state are moves, however partial or hesitant, to loosen ties with the US empire more telling.
  9. In October 2023 a paper – Saudi Arabia: Background and U.S. Relations – by the DC based Congressional Research Service reported a 2:1 trade deficit ($23bn imports, $16bn exports) with the KSA. Sanctions by Washington – which has a way, on show recently when India declined to sanction Russia over Ukraine, of suddenly discovering human rights violations the moment a regime displeases it – could suck dollars out of the KSA overnight. While the announced swap line of $7bn is small potatoes, as a shot across the bows of Wall Street and Washington it serves as the  canary – if you’ll permit me a third metaphor – in a coal mine whose methane levels are fast rising.

2 Replies to “Currency swaps weaken dollar hegemony

  1. On the subject of financial ‘swap’ instruments I’m currently trying to make sense of ‘equity swaps’. One in particular which I came across the other day:

    The generic process of equity swaps, as described, seems easy enough to grasp. However, the above URL provides no links to follow up the details of what is presented.

    Which is the claim that two parties at some point in time entered into an equity swap contract to the amount of 1 cent short of 1 quadrillion Euros at 15% (0.15) – ie around 150 Trillion Euros – to settle on 15th December 2023.

    For some reason part of the focus of the article is on the event timestamp seen on the World Bank screenshot of 19/01/1970. Which is odd for two reasons: (a) because the Euro did not exist at that time; and (b) the Equity Swap instrument did not really take off until later in the 1970’s in the UK and the 1980’s in Europe.

    Without further context and means to verify what is presented there’s no way to go beyond the face value conclusion that (a) one of the party’s to this apparent contract – either a bank or someone else – is well up the creek; and (b) the impact on world financial markets would not be insubstantial?

    If anyone out there can make any better sense of this it would be most appreciated. For my part the only ‘solution’ would seem to be the tried and tested one of rolling this on into the future – ie kicking it into the ‘long grass’?

    Moving on, the same site has just posted this…

    …..which claims that the US is having problems selling treasury bonds:

    “Nobody wants U.S. Treasury bonds. Bond Sales are in the worst stretch since the Civil War. The federal government has run up so much debt that few if any around the world, want to lend them money anymore. This cannot end well.”

    Which adds further fuel to the gist of the central theme of the weakening of dollar hegemony.

    • The first aspect of your comment lies beyond my ken, Dave. As for US Bond prices, they are inversely related to interest rates. When interest rates are low, bonds – with their fixed rates of return – are attractive. But high interest rates mean bonds have to be sold below face value to stay competitive. This is what’s meant by the seemingly counter-intuitive truth that “high bond yields” are a Bad Thing.

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