And there it is... the Breaking of the Saudi Riyal's peg to the USD has begun.https://t.co/1kdki19Ihe
— Tom Luongo (Head Sneetch) (@TFL1728) November 20, 2023
With Ukraine Lost, What's The Latest Neocon Strategery?
They [the Neocons] most certainly are flying by the seat of their pants, Mark [his conclusion].
What is happening now is pure desperation as they try to figure out how
to extend and pretend this war through the election cycle to maintain
the possibility of the ages-old enmity versus Russia.
But the KSA flip is real. Swap lines are a precursor to intervention. My tweet was high concept but it goes like this:
1) Announce swap lines
2) Start taking real amounts of yuan for oil
3) This breaks the peg of the Riyal to the USD when oil is relatively strong, not in crisis mode
4)
The substitution of the CNY for the USD is existential for the US who
then attacks the KSA exchange rate, pulling money out of the country…
5) SANCTIONS ON KSA.
6) Expanded swaps to convert USD encumbered assets with Riyal assets, once USD are verboten in KSA.
7) China provides them, with loans repayable in CNY.
The announcement of the swap lines is likely a pre-announcement of an Economic Hitman-style attack on Saudi Arabia by the US. It’s not really that difficult to foresee.
For historical context, Russia was hit hard in 2014/15 by the collapse in oil prices. In retaliation for “stealing Crimea” an attack on oil prices was organized by President Obama and the gaggle of usual suspects to trash the oil price.
In June of 2014 oil closed at $112.36. And the price began dropping the first trading day of July 2014 and didn’t stop until the end of 2015.
Saudi Arabia helped that process by expanding production, thinking they would take Russia’s market share as the Russian ruble collapsed and Russia’s foreign exchange reserves were drained.
The key to the anticipated win was that Russian companies, mostly the big State Owned Enterprises like Gazprom and Rosneft, had a lot of dollar-denominated debt which was about to mature and needed rolling over. So, the US sanctioned Russia such that companies like Gazprom couldn’t roll the debt over, because they couldn’t sell the bonds to US or European investors anymore. The current bondholders had to be paid off… to the tune of north of $50 billion in Q4 of 2014, and another $50 billions in Q1 2015.
This “rollover risk” would plague the Russian government’s finances for the next 18 months as the price of oil dropped relentlessly.
The Russian ruble dropped from the high 20’s/low 30’s versus the dollar rose to a high above 80 in late November, but it only happened after Putin personally ordered Bank of Russia President Elvira Nabiullina to let the ruble float. Before that there had been a soft peg to the US dollar in place, which was easy to maintain while oil was trading above $100 per barrel.
(...)
So, to summarize before I go any further:
- China is using their US Treasuries and US dollar surpluses to loan them to Emerging Market trade partners of significance to CHINA!
- They are asking for yuan in repayment.
- This stabilizes the yuan/usd exchange rates while China can and is rapidly expanding the money supply to deal with their sagging property markets as a result of the Fed’s aggressively tight monetary policy.
- In order for China to expand the yuan into the new dollar vacuum without also losing their gold (Luke Gromen’s point during the conversation), they have to create a demand cycle for their debt, keeping borrowing costs low.
- Since they have cross-currency swap lines with their SE Asian partners and offshore yuan settlement around the region, i.e. in places like Singapore, this is how they manage the expansion without creating a runaway inflation problem.
- Yuan replace dollars without a massive shift in exchange rates and/or bond yields.
The 2014/15 ruble/rollover crisis was the test run for this.
You have to see this stuff in hindsight now, but in this case I think the past is prologue for the future.
The US keeps attacking the ruble thinking it will bankrupt Russia but it won’t. Certainly now that they hold zero dollar-denominated debt and zero US treasuries as foreign exchange reserves. Attacking the ruble now is just petulance.
The KSA, on the other hand, as a riyal pegged tightly to the US dollar. Their COGS, EBITDA, everything may as well be in dollars, including labor costs, government subsidy costs, etc.
The solution, of course, is to break the peg of the riyal to the dollar.
Et voila, instant budget balancing at lower oil prices, just add foreign buyers offering not dollars.
The Saudis need/want a put under the oil price of $80 per barrel. They need that to maintain their budget (see above).
China offers the Saudis a swap line to ensure breaking the peg goes smoothly. In other words, China will loan the Kingdom dollars to be repaid in yuan, just like they did for Russia and are currently doing today for their Southeast Asian trading partners trying to defend their currencies against the Dollar’s milkshake suction.
If we look back to history with Russia and Power of Siberia guaranteeing a big flow of yuan and rubles between Russia and China, might we see something that would grease the skids of riyal/yuan flow?
(...)
This OPEC+ meeting meant that a whole lotta schmoozing by Davos through the Biden administration to break the cartel and let the price of oil drop is happening. It’ll be the same tired ploy as what they pulled with a willing KSA in 2014 and Trump worked them over for in 2018:
“We’re taking oil lower. Everyone else will suffer unless you pump like mad to us and we’ll reward you with increased market share in the US. After we let the price rise, you’ll be the new king.”
In the end all 2018’s attack did was finally get Crown Prince Mohammed bin Salman (MbS) to realize that the US is an unreliable and vindictive partner. He hitched the KSA’s and OPEC’s future on Putin and the Russians. He’s been rewarded for that choice to date.
The Saudis are preparing for an attack on the oil price to punish them for their lack of vision by the Neocons who never learn anything from their past failures.
Guess what? If Nigeria, Angola and Congo are hearing the sweet nothings of the West today I’d say they about to get rolled by Russia and China, but this time they will be joined by MbS and the Saudis, who are getting ready for the inevitable.
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