Will Russia's Dealings With China Rattle the Dollar's Dominance?
Ever since Russia took over Crimea, energy markets have been holding their breath. Now Russia appears set to take its battle to the dollar, which has historically been the currency used to settle energy deals. That could turn the energy market into a more volatile place, since currencies can be just as volatile as commodities at times. But this move could set in motion bigger changes, too.
The big fight
Russia's feud with the United States and its Western allies is over the annexation of Crimea and Russia's continued agitation in Ukraine. Posturing on both sides of this fight will continue for a long time. But a recent "shot across the bow" is a big one; Russia is looking to settle more contracts in Asian currencies.
That comes after Russia's state-controlled Gazprom signed a long-delayed deal with China for natural gas. The $400 billion deal isn't a win for the company financially, but strategically it's an important move. In 2013, Europe accounted for roughly 50% of Gazprom's gas sales. With the United States and Europe in a tizzy about Crimea, now is a good time for Gazprom to find new markets.
And while Gazprom has recently been talking about diversifying its delivery options to Europe, Russia's saber rattling should concern investors. That's especially true since Europe is such a large business for Gazprom today and the China deal requires construction of pipelines before material gas can flow to Asia. That's a long-term solution and a near-term problem.
So Russia is left playing a tense dance until Asian pipelines are built. That's why it's talking about a shift toward Asian currencies for its international contracts. The country is basically saying that it's serious about its Asian shift. Not surprisingly Gazprom is one of the companies talking about moving away from the dollar.
The problem with this decision is that having a common currency helps smooth trade. The U.S. dollar has been the default currency for years because of the United States' position in the world. However, everything isn't priced in dollars. So you can get a pretty good handle on what's going to happen if energy markets don't settle in dollars.
Commodities like Gazprom's natural gas trade on supply and demand. That can make prices quite volatile. The thing is, supply and demand can have a big impact on the exchange rate between currencies, too. Using the dollar for everything just made life easier in the energy patch. Adding new currencies will mean there's more to keep track of and, frankly, more factors that can hurt (or help) a company's top and bottom lines.
Is this really an issue?
To understand the impact that this can have, take a quick look at an international giant like Procter & Gamble . In the most recent quarter, negative foreign exchange rate shifts completely offset Procter & Gamble's volume growth. It was a meager three percentage points, but it was enough to leave sales flat year over year.
How big is that? Procter & Gamble's top line came in at $20.6 billion in the quarter. Three percent of $20.6 billion is roughly $600 million. That's real money. In fact, the global giant noted that the actions of just one country, Venezuela, cut its operating profit margin by 1.4 percentage points. While investors understand the impact that currencies can have, and changes often wash out over time, adding yet another unpredictable piece to the energy puzzle only complicates things.
The Asian shift
While Russia is clearly looking to send a message to the United States and its allies with talk of shifting to Asian currencies, it sets a notable precedent. Procter & Gamble can already tell you what the impact will be on commodities like Gazprom's natural gas that are pretty much universally settled in dollars today—more volatility. The big problem for the world will be if other countries and companies start to balk at using the dollar, too. That could set off a chain reaction that upends business as usual around the world.
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The article Will Russia's Dealings With China Rattle the Dollar's Dominance? originally appeared on Fool.com.Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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