By announcing to switch over to euro as the currency for its oil trading, Iran is treading into dangerous waters. Some say the move could be suicidal too.
Many decades ago the dominance of the greenback was often referred to as “dollar diplomacy.” Since the fall of the Soviet empire in 1989 the policy evolved into what had often been termed as “dollar hegemony.” In an era marked by robust defense of dollar by the sole super power of the world, the move by Tehran could definitely mean more instability in a region already plagued with major problems? Is another war in the region, round the corner? Interesting question indeed!
When the campaign “Shock and Awe” got under way against Baghdad, some analysts asserted it was not about Saddam’s nuclear ambitions or the alleged link of the Baghdad regime to the Al-Qaeda network, it was about defending the dollar, for Saddam had decided to switch over to euro as the currency of its oil trade. US could not have allowed Saddam’s decision go unchallenged, they argued. Years later when Iran simply threatened to go the same course, it was added to the “axis of evil”. The defense of the dollar is almost as important as oil, many underline.
The US today dominates the world economically, politically, socially and militarily and one tool used in great effect to sustain this US domination has been the greenback. Oil, the world’s largest tradable commodity, is traded in dollars. This means everyone interested in buying oil needs dollars and that too in abundance. This arrangement also means that the US effectively part-controls the global oil market: one could only buy oil if one had dollars, and only one country had the right to print them — the United States.
And the more dollars in circulation outside the US, or invested by foreign owners in American assets, the more the rest of the world has had to provide the US with goods and services in exchange for these dollars. The dollars cost the US next to nothing to produce, and thus the US is importing vast quantities of goods and services virtually for free. Since so many foreign-owned dollars are not spent on American goods and services, the US is able to run a huge trade deficit year after year without apparently any major economic consequences.
Hence, when Iran announced ordering its central bank to direct foreign transactions, including oil trade in euro and transform the state’s dollar-denominated assets held abroad to the single European currency, it would hurt this status quo.
If Tehran succeeded in its ambitions, it might push others too in the same direction — signaling the demise of dollar as the currency for energy trade. Many say it could ultimately bring to an end the era of what was has often been termed as the “American Century.”
With heightened concerns among the oil producers’ on the weakening dollar and its impact on their oil earnings, the prospect also offered an economic logic. Hence, only a day before the Iranian announcement to convert its dollar-denominated assets into euros, Sultan Nasser Al-Suweidi, the United Arab Emirates’ central bank governor, said that they were waiting for a clear trend to emerge before converting their reserves into euros or any other currency. The bank holds 98 percent of its reserves currently in greenbacks but plans reducing its dollar holdings to between 50 and 90 percent. Last month, Al-Suweidi said he was evaluating when to shift as much as 8 percent of the nation’s $24.9 billion in reserves into euros.
At the OPEC summit in September 2000, Hugo Chavez, an established nemesis to Washington, handed over to the OPEC heads of state, the report of the “International Seminar on the Future of Energy”, a conference called by Chavez earlier that year to examine the future supplies of both fossil and renewable energies. One of the two key recommendations of the report was that “OPEC take advantage of high-tech electronic barter and bi-lateral exchanges of its oil with its developing country customers”, avoiding both the dollar and the euro for many transactions.
Chavez is taking measures now to ensure that a growing share of the country’s oil profits are deposited into euros as the dollar depreciates. “The US dollar has suffered a long process of deterioration,” Domingo Maza Zavala, a board member at Venezuela’s central bank, said last week. Banco Central de Venezuela had already slashed the percentage of its reserves invested in dollars and gold to 80 percent from 95 percent a year ago, Maza Zavala said.
Meanwhile, Bank Indonesia’s senior deputy governor, Miranda Goeltom, said last week that the Jakarta-based central bank, with $39.9 billion in reserves, was boosting its euro holdings. If the trend catches up, this is a recipe of disaster for the US.
It may not be easy for Washington to swallow it. With the sidelining of the dollar, not only would the US lose a large part of its annual subsidy of effectively free goods and services, but countries switching to euro from dollar reserves would also help bring down the value of the greenback.
Imports would hence start to cost the Americans a lot more than now and as increasing numbers of those holding dollars begin to spend them the US would have to start paying its huge debts by supplying in goods and services to foreign countries, thus reducing American living standards.
Further as countries and businesses convert their dollar assets into euro assets, the US property and stock market bubbles would, without doubt, burst. The Federal Reserve would no longer be able to print more money to reflate the bubble, as it is currently openly considering doing so.
Indeed without lots of eager foreigners prepared to mop them up, a serious inflation would result which, in turn, would make foreigners even more reluctant to hold the US currency and thus heighten the crisis.
Chain of events could destabilize the US dominated economic world of today. Some analysts are however, taking the Iranian announcement with a pinch of salt. Iran has deferred many a times in past months the launching of the euro-based oil bourse, which it has been announcing setting up. Would the current announcement of switching over to euro turn out to be a political move on the global energy chess board and would be deferred in view of the realpolitik is still to be seen. Eyes are now focused on Tehran for more than one reasons?
