By Tom Luongo - November 24, 2023

Call the roller of big cigars
and bid him whip in kitchen cups concupiscent curds…
… the only emperor is the emperor of ice cream
- Wallace Stevens

It was announced the other day that Saudi Arabia and China are opening a $7 billion local currency swap line. It prompted the highest-trafficked tweet of mine ever.

Mark Wauck over at Meaning in History linked to it. Mark didn’t really elaborate my point so I posted a reply in his comment section.

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.

Moves that occurred 10 years ago are instructive of why we are where we are today and where we may be headed.

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.

China stepped in at the height of the ruble’s collapse to give Russia a swap line between yuan and rubles. China paid off Gazprom’s debt. Russia paid them back in yuan, which they were going to get freely because of these swap lines then and Power of Siberia in the future.

The US didn’t dare sanction China for this because of both the blowback onto our economy and would have been tantamount to declaring war. It’s also why China didn’t get even threatened with sanctions after Russia “invaded” Ukraine last year.

That sweetheart deal for the gas now flowing to them through the Power of Siberia pipeline now makes a lot more sense. Personally I had misremembered it being signed in 2015, as a response to the crisis, but it was before the crisis even broke out.

That implies a few things: 1) the combination of of events of early 2014 prompted the formulation of a coordinated attack on oil prices aimed at Russia for later that year and 2) that Putin anticipated it and opened up negotiations with Xi Jinping to get Power of Siberia built quickly.

Nearly everything that’s happened since then is downstream of the events tracing back to early 2014

Russia survived that period of ‘rollover risk’ and in doing so created the blueprint for other countries to do the same.

Now, a tweet from Eric Yeung set all of what you are about to read spinning in my head immediately . . .

[SNIP]