Baku, Azerbaijan, June 17
By Dalga Khatinoglu - Trend:
Selling oil through euro has its risks and rewards for Iran and maybe for US.
Iran's Oil Minister Bijan Namdar Zanganeh announced June 17 that the country sells its crude oil to international markets only through euro.
The continuation of the restrictions imposed by the US treasury on the use of USD by Iran and lack of progress on freeing of the dollar-denominated assets of Iran partially caused by the lackluster engagement of the Treasury on the issue are the main drivers behind Iran's decision to leave the petro-dollar transaction system, Mehrdad Emadi a consultant at the UK-based Betamatrix International Consultancy told Trend June 17.
Fereydoun Barkeshli, the National Iranian Oil Company's former general manager for OPEC and international affairs also told Trend that the leaving petro-dollar is no a new story, backs in 1974, however, the recent comments made by Iranian officials including Zangeneh is more related to the decision made by the US Treasury to block Iran's Dollar assets in US and elsewhere.
The US recently blocked $2 billion Iranian assets. The US Supreme Court ruled in April that the assets must be turned over to American families of people killed in the 1983 bombing of a U.S. Marine Corps barracks in Beirut and other attacks blamed on Iran.
Barkeshli added that back in 1974 when USD lost a great deal of its value OPEC members gathered in Geneva and designed a basket, consisting of ten currencies, then known as Geneva, that included major currencies of those years, one without the inclusion of USD called Geneva 1 and one with the inclusion of USD known as Geneva 2.
The idea of disconnecting Iran's economy from Dollar goes also back to early 1980's and during the Iran-Iraq war, he said.
Barkesli believes that from economic side, Iran feels more safe with a diversified foreign asset management. "Although this has its own costs once exchange of one currency to the other is imperative or when the value of a currency begins to fluctuate abruptly. On the other hand Iran currently envisage to engage into more business and investment relationship with Europe that having a larger Euro and Euro-based currency and portfolio is in the interest of Iran".
Iran's decision no affect on USD
Guy Caruso the former administrator of the U.S. Energy Information Administration (EIA) who serves currently as a senior adviser in the Energy and National Security Program at CSIS told Trend that Oil is priced in USD. "Whatever any seller chooses to transact in any other currency they assume a currency conversion risk. It will have no effect on the strength of the USD".
He added that almost all other oil transactions are in US dollar. "Most other oil sellers have significant assets based in USD denominated securities (ie US Treasury bonds) and therefore have no incentive to move away from the USD in oil contracts".
However Emadi believes that in the medium and long term it may be the US that bare the brunt of the costs from this switch. "This is not the first time a country has tried to leave the petro-dollar payment system in the energy market. To date, at different times, Iraq, Venezuela, Russia, Libya and outside the energy market Brazil have tested the ability of the market to support their preference for diversifying away from the dollar to other means of payment".
Risks and rewards for Iran
Emadi said that once out of the dollar payments, Iran will have a greater degree of freedom to use its revenues from the sale of the crude oil as well as using the payments in the international banking system. "Though initially the switch will introduce some additional risks for Iran because of the possible exit of the United Kingdom and still semi-fragile financial health of the weaker economies in the EU, in the medium and long term I am of the opinion that this is the right move for Iran even allowing for the additional risks of the switch from the dollar to the euro.
Iran also has been still banned from deal through USD. The country's oil export doubled during a year to more than 2 million barrels per day.
Sanctions on Iran was lifted in January. According to the EIA, Iran's net oil export stood at $11 billion in January-May, 2016. The volume was $27 billion in 2015, about $20 billion less than 2014.
Emadi said that the US government has over-politicized the use of its currency in its policy toward Iran and for that matter toward a number of other countries which are perceived in Washington to be unfriendly to the American interests.
"For sometime some economists and policy analysts have been warning that the use of the dollar as a political tool may significantly reduce the safe-haven attraction of the currency. The statement made by the Iranian Oil Minister should be seen in this context and I expect this fits with the gradual exist from the dollar deposits reported since November 2015 gaining momentum since March by other countries".
He added that the switch away from the dollar may have some costs to Iran though in the long run I expect the move to make the Iranian economy more resilient in its global trade by making the foreign trade and finance of the country less prone to become hostage to threats from the United States.
"Now that we have more than a decade of historical performance of the euros as a global currency, more countries are considering the euro as a realistic and safer instrument for their foreign reserves and a vehicle in foreign transactions. Similar to any transition, there will be some risks but in the context of the ballooning of the United States' global indebtedness, it is my view that the risks of diversifying away from the dollar to the euro are going to be measurably smaller compared with the risks of staying within the petrodollar payment system," Emadi said.
Emadi offers three reasons for this analysis:
"(a) the net indebtedness of the dollar is larger and growing faster than the indebtedness of the euro economies. This means the deb burden of the U.S. Federal Reserve Bank on behalf of the government is greater than that of the European Central Bank on behalf of the member countries,
(b) the share of global trade conducted in the U.S. dollar is on decline whilst that of the euro has been rising,
And (c) most importantly the trade account, that is the difference between the exports and imports for the United States is less favourable than that of the EU suggesting that the global acceptance and demand for the euro is growing more than that for the dollar. Especially if we exclude the petrodollar system".
He said that additionally, the formation of new trade zones in Asia and within the non-Western economies of G20 has expedited the transition from the dollar as the currency of global trade to other currencies.
"Dynamics of payments in trade between, China, India, Brazil, Venezuela, Brazil and other rising economies like Vietnam all suggest a pattern away from the dollar-denominated instruments. Recent signals emitted from Tehran, Moscow and Brasilia indicates that these economies are taking actual steps in this direction".