US Dollar : Under Pressure from Russia

Yesterday I talked about how the Iranian government was using many different levers to “disrupt and annoy” the United States. Most critically, I mentioned their move to making all their oil transactions in Euros instead of Dolllars, thus forcing any countries using their oil to hold Euros in their federal reserves instead of Greenbacks.

Admittedly, this would just be a drop in the bucket… but today I’ve heard more news that it might be much more than simply a reactionary response from a theocratic regime.

The Telegraph and the Oil Drum reported yesterday that Russia is considering a switch to Euros for their oil exports as well.

Russia is to start pricing its huge oil and gas exports in euros instead of dollars as part of a stragetic shift to forge closer ties with the European Union. The Russian central bank has been amassing euros since early 2002, increasing the euro share of its $65 billion (£40 billion) foreign reserves from 10pc to more than 25pc, according to the finance ministry.

The move has set off a chain reaction in the private sector, leading to a fourfold increase in euro deposits in Russian banks this year and sending Russian citizens scrambling to change their stashes of greenbacks into euro notes.

Russia is the second largest oil exporter in the world after Saudi Arabia (as opposed to Iran, who is the second largest in OPEC).

Most of their oil is already going to the European market… but they were also #13 and #7 for US imports of crude and petroleum respectively in September 2005.

Which means for the first time in decades (excluding a brief time from Iraq), the United States will no longer be receiving every drop of oil they use, in a sense, “for free”.. rather they’ll be buying it in Euros.

From the Telegraph (emphasis added):

A switch to euro invoicing would not affect the long-term price of oil but it could encourage Middle Eastern exporters to follow suit and have a powerful effect on market psychology at a time when the dollar is already under intense pressure. Russia boasts the world’s biggest natural gas reserves and is the number two oil exporter after Saudi Arabia.

Maxim Shein, from BrokerKreditService in Moscow, said the switch to euros makes sense for Russia since it supplies half of Europe’s energy needs.

“Abandoning the dollar is tantamount to a curtsey to the EU,” he said. For now, IMF figures show the dollar remains king, accounting for 68% of foreign reserves worldwide compared with 13% for the euro.

As the article stated, the US Dollar is still far from being dethroned, but these small moves could still have large effects on the domestic US (and Canadian) economies. Interest Rates and Long bonds are always sensitive to the pressures on the dollar. We’ll see in the coming months what, if any, effects these events have.