Aramco’s crude contracts are denominated in dollars. It makes sense, given that the Saudi riyal is pegged to the dollar and nearly 25% of its central bank’s $493bn of assets is US debt. Riyadh is in talks with Beijing to price it in yuan, but a sharp change of the name of its main export product could destabilize the economy and undermine Saudi Arabia’s longstanding friendship with the US.
Those ties are in question, however. Mohamed Bin Salmán (MbS) rejected Joe Biden’s requests to increase supply due to the Russian crisis, says the WSJ. On human rights, Beijing would surely ask fewer questions than Washington. Dollar sanctions on Russia are making some countries rethink the desirability of US hegemony.
Beijing buys three times more crude from Riyadh than Washington. China is the kingdom’s biggest trading partner, buying nearly 20% of its goods from it, up from 5% a decade ago. In addition, Huawei and steelmaker Baosteel are building telecommunications networks and factories in the Arab country, and Aramco will build a $10 billion refining project in China. Over the past decade, Riyadh’s trade surplus with Beijing has averaged $24 billion, Capital Economics estimates. If all trade with China were done in renminbi, this currency could generate up to 25% of Saudi official foreign exchange reserves in five years. If most of Aramco’s projected production increase (from 12 million barrels a day to 13 million in 2027) were to be sold to China, that could be exacerbated.
But a decisive turn to China is not guaranteed. Even if MbS accepts the yuan for 25% of its crude sales, another 75% would still be in dollars. Given the need to protect parity, Riyadh may only redenominate a portion of its crude. Still, Aramco’s good health may encourage MbS to sell new shares to foreign investors to finance the diversification of its economy. If China ends up being the buyer, that would affect how much Saudi crude is priced in yuan.
The authors are columnists for Reuters Breakingviews. The opinions are yours. The translation, by Carlos Gómez Abajo, is the responsibility of Five days
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