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Putin: Why Not Price Oil in Euros?

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By Catherine Belton

Moscow Times
October 10, 2003


President Vladimir Putin said Thursday Russia could switch its trade in oil from dollars to euros, a move that could have far-reaching repercussions for the global balance of power -- potentially hurting the U.S. dollar and economy and providing a massive boost to the euro zone. "We do not rule out that it is possible. That would be interesting for our European partners," Putin said at a joint news conference with German Chancellor Gerhard Schroeder in the Urals town of Yekaterinburg, where the two leaders conducted two-day talks. "But this does not depend solely on us. We do not want to hurt prices on the market," he said. "Putin's putting a big card on the table," said Youssef Ibrahim, managing director of the Strategic Energy Investment Group in Dubai and a member of the U.S. Council on Foreign Relations, an influential body of leading world thinkers thought to help set the United States' foreign policy agenda. "In the context of what is happening worldwide, this statement is very important," he said.

Putin's words come in the wake of a protracted drive by the EU to attract more countries' trade and currency reserves into euros, in a bid to chip away at U.S. hegemony over the global economy and money supply. A move by Russia, as the world's second largest oil exporter, to trade oil in euros, could provoke a chain reaction among other oil producers currently mulling a switch and would further boost the euro's gradually growing share of global currency reserves. That would be a huge boon to the euro zone economy and potentially catastrophic for the United States. Dollar-based global oil trade now gives the United States carte blanche to print dollars without sparking inflation -- to fund huge expenses on wars, military build-ups, and consumer spending, as well as cut taxes and run up huge trade deficits.

Almost two-thirds of the world's currency reserves are kept in dollars, since oil importers pay in dollars and oil exporters keep their reserves in the currency they are paid in. This effectively provides the U.S. economy with an interest-free loan, as these dollars can be invested back into the U.S. economy with zero currency risk. If a Russian move to the euro were to prompt other oil producers to do the same, it could be a "catastrophe" for the United States, Ibrahim said. "There are already a number of countries within OPEC that would prefer to trade in euros." Iran, the world's No. 5 oil exporter, has also openly mulled a move into euros. And after the war in Iraq, there is growing debate in the United States' traditional ally Saudi Arabia on a switch too, though its government has not come down firmly on one side, Ibrahim said. "There is a revision going on of its strategic relationship with the United States. Already, they're buying more [French-made] Airbuses," he said. "The Saudi Crown Prince [Abdullah Bin Abdul Aziz Al-Saud]'s visit to Russia was of great significance and the regime is talking about closer cooperation with LUKoil and other Russian companies." Under Saddam Hussein, Iraqi oil was traded in euros. "This was another reason [why the U.S. attacked]," Ibrahim said. "There is a great political dimension to this. Slowly more power and muscle is moving from the United States to the EU, and that's mainly because of what happened in Iraq," he said.

Putin had previously brought up the proposal to switch to euros as prime minister in October 1999, at a meeting of EU leaders in Helsinki. Then, in an attempt to forge a new bloc to counterbalance the United States, he made the proposal alongside calling for closer cooperation between Russia and the EU, including on security issues. Since then, however, Russia's ties with the United States have warmed considerably -- and it is unclear whether Putin would risk damaging that relationship by going ahead with the euro move, analysts said. "Putin is very much interested in changing the structure of OPEC and he cannot do that without the United States," said Alexander Rahr, an expert on Russia at the German Council on Foreign Relations. "He can only get a foothold for Russia in the Middle East with [U.S. help]. And, he wants to get contracts for the Russian oil industry in Iraq -- for this, too, he needs the United States."

Some analysts said that the statement appeared to be aimed at boosting Russia's global clout on the world stage. "Putin is trying to create a position for Russia as an independent player. But his aim is not to undermine relations [with the United States]. He just wants to boost Russia's position up from being a junior partner," said Dmitry Trenin, geopolitical analyst at the Carnegie Moscow Center. Yevgeny Gavrilenkov, chief economist at Troika Dialog and an earlier architect of the Putin government's first economic plan, said debate is growing on a move to the euro as Russia mulls siding with the EU. "Such an idea is really possible," he said. "Why not? More than half of Russia's oil trade is with Europe. But there will be great opposition to this from the United States." He said that while a switch would have no direct impact on the Russian economy, it would give a great boost to the euro zone.

Lukoil vice president Leonid Fedun said Thursday that he saw no problem in the euro switch and that payments for such transactions would be minimal, at just 0.08 percent. "There is no problem ... If the state decides to do this, then we will support this initiative. From the point of view of the economy, there's no difference," Interfax quoted him as saying. But even Fedun could not help putting a political price tag on the move. "We are ready to move to the euro if the country will be included in a visa-free regime with Europe," he said. Rahr agreed that the timing of the statement seemed calculated to extract political concessions from the EU. "It's a bargaining chip," he said. Gavrilenkov suggested Putin was also angling for EU concessions on other issues discussed in Yekaterinburg, such as terms for Russia's WTO accession.


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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C ß 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.