By Mehrdad Emadi, for Trend:
Turkey's Development Minister Cevdet Yilmaz said last week that one third of trade between Turkey and Iran is now conducted in the Turkish lira or the Iranian rial.
The statement is based on a number of economic realities as well as intended policy issues. The confluence of policy issues with economic considerations make this a sensitive if not critical issue should the adoption of national currencies in bilateral trade spread to other cases in the Central and Western Asia.
The background behind using the Turkish Lira and the Iranian Rial may be seen in the context of the increased volatility of the Turkish Lira visa-a-vis the U.S. dollar and the euro, exacerbated by political and social challenges which have surfaced in Turkey and which have increased country specific risk (risks which are pertinent to Turkey) as well as foreign policy issues which have created new divides and camps both regionally and globally. These risks have lead to a serious fall in Turkey's earnings in key currencies such as the U.S. dollar and the euro.
In Iran's case, in terms of politics of the country, even though there may be deep dissatisfaction and discontent, the root causes of disapproval are because of economic inefficiencies and endemic corruption. Politically, Iran has managed to avert some of the high-risk low-return foreign policy issues barring the nuclear program, which now has been resolved and hence making the country open to business. Still because of the institutional inertia amongst the Western banks, the country still faces limits in its access to fully convertible and globally accepted currencies like the euro and the U.S. dollar.
The reference of the Turkish Minister to the use of the national currencies, in my view, carries a hidden message. The message may be that Ankara is prepared to move away from Washington and get closer to Tehran if the economic gains of growing its trade and investment relationship with Iran outweighs the political and foreign aid cost of moving even further from Washington.
The real sting of this, though not open and explicit at this moment, may be that the closer economic ties between Tehran and Ankara based on increasing use of their national currencies not only will create a deeper bind between the economies of the two countries, but it may be considered as a new step in gradually reducing the reliance on the U.S. dollar as the world's reserve currency as well as the denominator in which crude oil is priced.
I suggest that should this use of the national currencies prove to be successful in terms of facilitating bilateral trade, we may see parallel examples in near future between Iran and India, Russia, Iran and China and Iran and Turkey and Azerbaijan and even perhaps Turkey and India.
The benefits of using national currencies are that there will be no external treat in their use and the increased acceptance of each currency in the economy of the other country will be a step further toward a floating market based system for deciding the values in the bilateral trade. In the case of Iran this means the Central Bank will have to allow the value of Rial to reflect the actual demand inside as well as outside the country.
For Turkey, being able to use the Lira to pay for at least one third of its imports from Iran will not only partially alleviate the shortage of the dollar and the euro. It also carries a meaningful message to the EU that Turkey has other policy options to develop its economy and trade and the EU is not the only show in town.
However, such a move carries additional risks with it, some of which may be quite costly if Tehran and Ankara do not follow the basic rules in managing their trade most notably avoiding competitive devaluation. We should also be reminded that between April 4th 2014 and the same day in 2016, volatility prediction of the Lira against the U.S. dollar had always been above ten percent a few times reaching as high as 25% averaging 15.8 percent (average for the British Pound against dollar has been 8.8 percent for the same period).
This is a measure of uncertainty and risk in the expected value of the currency. Based on this value Lira has been a high-risk currency. Similarly, events of September 2012 to February 2013 showed the fragility of the Iranian Rial and the extent to which the purchasing power of Iran's national currency declined following a period of chronic mismanagement and rapid spread in corruption following increased opacity in the Iranian economy.
All these facts suggest that a gradual acceptance of the national currencies as a meant to pay for some of the imports from the other country, as the Turkish Minister mentioned may be a path of managed-risk to see how such a move away from the US dollar and euro could be introduced whilst at the same time not exposing the economies of each country to additional risks if the other country is affected by unseen risks. This is a sensible and thoughtful policy measure.
I expect that if the 30 percent use show positive results, we may see a rise of up to 50 percent but not much more than that since a higher percentage will expose each country to excessive risk.
If we witness further adoptions of this approach in other cases then a number of effects are expected.
First the value of the dollar and the euro may be reduced since they no longer will be dominant absolute currencies in international trade. Should enough countries move in this direction, what we may see is a regional basket of currencies used between main trading partners. In such a basket, we still expect to see the dollar and the euro but their share will decline over time.
Secondly the dominant role of the US-based and Europe-based banks as well as the British banks in the world currency and capital markets may become less prominent. If trade between India and Iran will become dependent on their national currency at least to ceiling of 50 percent, then half of that trade will be outside the domain of dollar-euro banking consortium.
Conceivably, this will have financial as well as political ripple effects elsewhere. At the same time, we should not be tempted to underestimate the additional risks associated with such a move. Whilst it certainly reduces the control of the West over the Asian trade in the context of currency dependency, none of the economies of the region have managed to find global acceptance for their currency and its convertibility.
Henceforth, any further agreement between Iran and other countries to use their national currencies may also be seen as accepting the fact that for the currencies you receive, say, from Turkey, India, or Russia, you accept that you may have to use the currency to buy goods from that country since it is unlikely that in the short term we see for example Russia accepting and converting in its banks rupee or Rial to euro or the U.S. dollar.
There have been sound economic reasoning behind adopting a global tool of reserve, be it silver, gold, pound or the US dollar. Until we have global acceptance and full convertibility, we should tread most carefully in our choice of bilateral trade partners and acceptance of their national currency.
Mehrdad Emadi is consultant at the UK-based Betamatrix International Consultancy