Iranian oil no longer available for U.S. dollars

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MOSCOW. (Dr Igor Tomberg for RIA Novosti) - Iran has decided to abandon oil export settlements in U.S. dollars.

Our current policy is to sell crude oil for any currency but U.S. dollars, Iran's Oil Minister Gholam Hossein Nozari said in a statement, adding that all settlements in the U.S. currency had been ruled out.

Iran has been considering this move for a long time, consistently limiting the inflow of petrodollars in the past two years. Iranian officials claim that the reason behind their decision is the devaluation of the dollar. An Iranian source said that the dollar's decline was greatly harming the oil exporting nations' economies and that they had no more trust in the U.S. currency.

However, there must be a political motive here as well. Parliament speaker Gholam Ali Haddad-Adel told a news conference in Baku in late November that "making most international settlements in U.S. dollars provides the United States with a tool to pressure other countries."

OPEC representatives have also questioned the advisability of using the dollar as the currency payable for energy resources, primarily the irreconcilable opponents of the United States - Iranian President Mahmoud Ahmadinejad and Venezuela's President Hugo Chavez. Ahmadinejad called on his OPEC partners to stop using the dollar in their international oil deals and replace it with another and more reliable currency. Although Iran is OPEC's second largest oil exporter, the majority of its members have not immediately supported the idea.

In November, Saudi Arabia vetoed Iran and Venezuela's proposal to discuss OPEC's refusal to sell oil for dollars. Still, in December, six Gulf nations are planning to reassess the possibility of using other currencies for oil deals.

Incidentally, on November 30, Gazprom's Deputy CEO Alexander Medvedev said in New York that the Russian gas monopoly was considering a possibility of selling gas for rubles instead of dollars or euros. The gas giant was compelled to change its currency policy by the current situation on the global financial markets. Although he did not specify the date, Andrei Kruglov, head of Gazprom's Finance and Economics Department, said the decision would be made soon enough.

Export operations pegged to the dramatically weakening U.S. currency are certainly economically inefficient. With gas, for example, the price is often fixed by long-term contracts, and the dollar may well lose 15% to 20% over the contract's term, given its current rate of decline. In any case, the dollar has lost 10% against the currency basket since the beginning of this year. The revenues of Russian gas exporters fell accordingly.

The U.S. dollar has certainly lost much of its attractiveness worldwide, unlike the euro which is gaining popularity, even if not in all countries. This is best evidenced by the current large-scale diversification of foreign currency operations. In 2005, the share of non-core currencies (neither the euro nor the dollar) was 8.1% of the total amount of global transactions. This year, it is over 18%, and, experts say, will continue to rise.

Other monetary units are being added to the pool of the main reserve currencies. The Gulf Cooperation Council (GCC), which includes the key Middle East oil and gas exporters, has said it was planning to set up a single regional currency, the Gulf Dinar, which would be put in circulation in three years and would be as important as the dollar and the euro. The GCC includes the United Arab Emirates, Saudi Arabia, Bahrain, Kuwait, Qatar and Oman.

In late November 2007, the General Manager of Dubai World Finance Center, Dr. Omar Bin Suleiman, said in an interview with UAE's newspaper Al-Bayan that at least three of the oil-producing countries of the Arabian Peninsula planned to stop pegging their national currencies to the U.S. dollar. Although Dr. Suleiman specified neither the countries nor the time for this decision, he still mentioned that UAE Central Bank was contemplating the idea. He said the Central Bank was seriously considering the issue of unpegging the dirham from the dollar and adopting a different currency policy. Indeed, on November 15, Sultan Naser al-Suveidi, head of the UAE Central Bank, said the country would probably unpeg the dirham from the weakening dollar and adopt the currency basket scheme. It is generally believed that the dollar will continue plummeting, which is the reason for the changing attitudes toward it.

In early 2007, China made the final decision to get rid of a sizeable share of U.S. dollars in its state reserves. As of now, the dollar part of the Chinese state reserves amounts to $800 billion, mainly in U.S. Department of Finance bonds. This year, China is expected to hold $1 trillion worth of U.S. government bonds. Even if it does not undermine the dollar's standing as the principal holding of central banks, China's new policy will shift the balance of the country's foreign-exchange reserves in favor of the currencies and bonds of neighboring countries and Europe. Analysts forecast a 15% decrease in China's dollar denominated reserves, while 1% of China's reserves amounts to $14.5 billion.

Xu Jian, a vice director of the People's Bank of China, said last week that the dollar was "losing its status as the world currency," adding that it was likely to continue weakening in 2008 due to the growing U.S. trade deficit. Beijing is simultaneously trying to boost the Chinese currency's role in Asia and the world. The Chinese government is consistently trying to use it in more settlements with neighbors as well as in foreign investment.

The British pound's standing has also grown lately. It is the third most widely used currency for central banks' reserves, and pound-denominated savings worldwide have increased from 2.8% to 4.2% between 2000 and 2007.

It is obviously impossible to stop using the dollar altogether as a global reserve currency, because it might lead to a collapse of the global finance. But there are many indications that nations are willing to reform the dollar-based system. Countries which have grudges against the U.S., including Iran and Venezuela, were the first to push for the idea. Other countries, whose prosperity is directly dependent on the U.S. currency's standing, will follow suit. They include the holder of the world's largest foreign-exchange reserves (China), and oil and gas exporters (including the Arab states, Russia, Venezuela).

In the case of oil and gas, abandoning dollar quotations could generate the need to reform the whole dollar-based trade system on the New-York and London Exchanges. In this situation, oil and gas producing countries, including Russia, have no possibility to influence the price of their basic commodity. OPEC's levers of influence on oil prices have considerably weakened lately. The situation where fuel prices are dictated by the consumer countries is abnormal. With the ailing dollar and a growing psychological pressure, the suppliers are mobilizing efforts to start the offensive on the pricing system they are no longer satisfied with. The growing hydrocarbon prices and concerns about the possible depletion of their sources are only adding fuel to the fire. This is the right moment for the fuel producing nations to consolidate, and the first steps have already been taken in the gas sphere (the "gas OPEC" discussions in Doha, Qatar, in March 2007).

It is clear that shifting all oil settlements to the euro (rubles, dinars or yuans) will take time, but Iran's demarche could seriously shatter the dollar's influence on global trade, especially if other petroleum producing countries follow suit.

Dr Igor Tomberg, economist, senior research associate at the Energy Research Center of the Russian Academy of Sciences' Institute of World Economy and International Relations.

The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

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