The U.S. has shot itself in the foot
Over the last few years, Iran has unleashed a weapon of mass destruction
of a very different kind, one that directly challenges a key underpinning of
American hegemony: the U.S. dollar as the exclusive global currency for all oil
transactions.
It began in
2005, when Iran announced it would form its own International Oil Bourse (IOB),
the first phase of which opened in 2008. The IOB is an international exchange
that allows international oil, gas, and petroleum products to be traded using a
basket of currencies other than the U.S. dollar. Then in November 2007 at a
major OPEC meeting, Iran's President Mahmoud Ahmadinejad called for a “credible
and good currency to take over U.S. dollar’s role and to serve oil trades”. He
also called the dollar “a worthless piece of paper.” The following month,
Iran—consistently ranked as either the third or fourth biggest oil producer in
the world—announced that it had requested all payments for its oil be made in
currencies other than dollars.
The latest
round of U.S. sanctions targets countries that do business with Iran's Central
Bank, which, combined with the U.S. and EU oil embargoes, should in theory shut
down Iran's ability to export oil and thus force it to abandon its nuclear
program by crippling its economy. But instead, Iran is successfully negotiating
oil sales via accepting gold, individual national currencies like China's
renmimbi, and direct bartering.
China and
India are by far the most significant players, with Russia playing a supporting
role. China is Iran's number one oil export market, followed by India. Both
have been paying for at least part of their Iranian oil imports with gold, and
according to the Financial Times, have also been
paying in their own currencies, the Chinese renmimbi and Indian rupee.[1] As neither
currency is easily convertible as international currency, they will be used to
pay for Chinese and Indian imports. And on 22 June, Russian media reported that
China imported almost 524,000 barrels per day in May, a
whopping 35% jump from the previous month.[2]
There is
only so much the U.S. can do if China continues to do business with Iran. China
holds $1 trillion dollars of U.S. debt, and the U.S. is utterly dependent on
cheap Chinese manufacturing. Significantly, just as the newest and toughest
round of U.S. sanctions kicked in at the start of July, Iran's PressTV
announced that China would be investing at least $20 billion to develop the
north and south Azadegan and Yadavaran oil fields which will produce 700,000
barrels per day. Azadegan is estimated to contain 42 billion barrels, making it
one of the world’s largest oil deposits.[3]
America has
more leverage with India, but with the “BRICs”—Brazil, Russia, India and
China—showing increasing solidarity in dealing with the U.S. and Europe, U.S.
options are still limited. In January Bloomberg reported that all Russian trade
with Iran was being conducted in Russian rubles and Iranian rials, and not U.S.
dollars.[4]
Instead of
shunning Iran as per U.S. dictate, many countries are simply finding ways
around the sanctions. On 20 June, ten days before the tougher sanctions came
into place, Turkey and Iran announced that they would trade in their local
currencies and bypass dollar transactions.[5] Turkey is
Iran's fifth largest oil market. Local currency that has little convertible
value internationally is one thing. Gold is quite another, and on 9 July, the Financial Times reported that Turkey had paid $1.4
bn in gold for Iranian oil in May.[6]
In January,
Fars, Iran's state run media, reported that all Iranian trade with Japan,
Iran's third biggest oil importer, was dollar free.[7] The Tehran Times reported in July that South Korea,
Iran's fourth largest oil market, was considering bartering manufactured goods
for Iranian oil,[8] and Reuters
reported that Indonesia was considering doing the same for palm oil.[9] Sri Lanka
and Vietnam were also considering dropping the dollar to guarantee ongoing
access to Iranian oil.[10]
How the Petrodollar System Works
In a
nutshell, any country that wants to purchase oil from an oil producing country
has to do so in U.S. dollars. This is a long standing agreement within all oil
exporting nations, aka OPEC, the Organization of Petroleum Exporting Countries.
The UK for example, cannot simply buy oil from Saudi Arabia by exchanging
British pounds. Instead, the UK must exchange its pounds for U.S. dollars. The
major exception at present is, of course, Iran.
This means
that every country in the world that imports oil—which is the vast majority of
the world's nations—has to have immense quantities of dollars in reserve. These
dollars of course are not hidden under the proverbial national mattress. They
are invested. And because they are U.S. dollars, they are invested in U.S.
Treasury bills and other interest bearing securities that can be easily
converted to purchase dollar-priced commodities like oil. This is what has
allowed the U.S. to run up trillions of dollars of debt: the rest of the world
simply buys up that debt in the form of U.S. interest bearing securities.
The
flip-side of this are the countries that produce and export oil, in particular
Saudi Arabia and the other Arab producers. The only way the system can possibly
work is if oil producers refuse to accept anything other than U.S. dollars as
payment for their oil. This they have done since the Nixon Administration's
manipulation of the OPEC oil crisis in the mid-1970's, which succeeded in
getting Saudi Arabia, traditionally the world's dominant producer, to agree to
accept only dollars for oil. The Saudis used their influence to get the rest of
OPEC to agree as well. In return, the U.S. offered to militarily defend not so
much Saudi Arabia, but the horrifically repressive monarchy that ruled it.[11]
But there
was a kicker: Nixon and his Secretary of State Henry Kissinger also got the
Saudis to agree to invest their mega oil profits in the U.S. economy. In
addition to buying interest bearing U.S. government securities, the Saudis also
invested in New York banks. Because the OPEC oil embargo had quadrupled global
oil prices, the Saudis and other Arab producers suddenly had a great deal of
money to invest. The money parked in those New York banks then became available
to be loaned to the rest of the world, which faced major financial crises due
to—yes, you guessed it—the sudden quadrupling of oil prices. By the year 2000
and Iraq's dramatic switch to selling Iraq's oil in euros, Saudi Arabia had
recycled as much as $1 trillion, primarily in the United States. Kuwait and the United Arab Emirates
recycled $200–300 billion.[12]
And because
those loans were in U.S. dollars, they had to be paid back in U.S. dollars.
When U.S. interest rates skyrocketed to 21 percent in the early 1980's,
interest on the loans also skyrocketed. This in turn precipitated a third world
debt crisis, which was mercilessly exploited by Wall Street and the U.S. In
this case, the exploitation came in the form of requiring countries to
“structurally adjust” their economies along neoliberal lines in return for
World Bank and IMF bailout loans. By 2009, the total debt owed on these
bailouts and other loans was an astounding $3.7 trillion. In 2008, they paid
over $602 billion servicing these debts to rich countries, primarily the United
States.[13]From 1980 to 2004, they paid an estimated $4.6 trillion.[14]
The history
of how this came about is fascinating, and I discuss it in detail in Making the World Safe for Capitalism. The short version
is that from the 1944 Bretton Woods agreement which set up the International
Monetary Fund and the precursors to the World Bank and World Trade
Organisation, the dollar was accepted as the international currency for all
trade. Crucially though, the dollar was backed up by gold, which was fixed at
$35 an ounce. This meant the U.S. had to have enough gold on hand to back up
any and all dollars it printed.
Faced with
escalating costs from the Vietnam War, in the early 1970s Nixon abandoned the
gold standard and replaced it with the petrodollar system described above.
Almost simultaneously, he abolished the IMF’s international capital constraints
on American domestic banks, which in turn allowed Saudi Arabia and other Arab
producers to recycle their petrodollars in New York banks.
The
petrodollar system, and U.S. ability to manipulate the dollar as the global
reserve currency and hence global debt, has been the bedrock of American
economic power. But since the global financial crisis, U.S. policy has been to
keep interest rates extremely low to stimulate borrowing. This has meant that
the rate of return on those interest bearing securities that the rest of the
world has invested in to enable them to buy oil exclusively priced in dollars
is also now extremely low. In other words, there is no longer any real
financial incentive for the rest of the world to sell its oil in dollars. Nor,
crucially, is there as much incentive for OPEC and staunch U.S. ally Saudi
Arabia to continue to kowtow to the petrodollar recycling system. After all,
the U.S. invaded Iraq and has nowde facto control
of enough oil production to render reliance on the Saudis potentially
irrelevant. And thanks to decades of American military training and hardware
procurement, the Saudi military certainly has the capacity to defend itself and
even to project its power, as it exhibited last year by invading Bahrain to
help suppress the uprising against the equally repressive Al Khalifa
monarchy.
In October
2009, veteran Middle East correspondent Robert Fisk of Britain’s Independentnewspaper broke the story that Gulf
oil-producing countries, along with China, Russia, Japan and France, were
planning a new system to replace the dollar as the de facto currency for global oil sales by 2018.
The dollar would be replaced by a basket of different currencies including a
yet-to-be-released new currency for the Gulf Co-operation Council countries of
Saudi Arabia, Kuwait, the United Arab Emirates, Oman, Qatar and Bahrain.[15] Other currencies would include the euro, the Chinese yuan [renmimbi]
and Japanese yen. Gold would also be included in the mix. That long-term allies
like Saudi Arabia and the other Arab Gulf states, along with Japan, were
involved suggests that U.S. leadership is being seriously questioned, if not
outright challenged.
U.S. Protection of Dollar Dominance
By accepting
and encouraging countries to pay for its oil in currencies other than the U.S.
dollar, Iran has deliberately taken the same action that, I argue in Making the World Safe for Capitalism, led directly to
the U.S. invasion of Iraq. In September 2000, Saddam Hussein announced that
Iraq would no longer accept the “currency of its enemy”, the U.S. dollar, and
from that time onwards any country that wanted to purchase oil from Iraq would
have to do so in euros. I further argue that the motivation for the United
States’ invasion of Iraq was to eliminate the threats a post-U.N. sanctions
Iraq posed to the key underpinnings of American economic hegemony, and to
install a pro-U.S. client state and permanent American military presence in the
region. The book examines how a post-U.N. sanctions Iraq either directly
threatened the ongoing success of American economic power, or provided enormous
opportunities to extend it.
All the same
considerations are in play with Iran, starting with Iran's direct threat to the
dollar as the dominant global reserve currency. But that is just one aspect of
the much larger issue: that Iran openly defies U.S. neoliberal hegemony. Like
Iraq pre-invasion, Iran is not a member of the WTO, has not had any dealings
with the IMF since 1984, and does not have any debt with it or the World Bank.
Like Iraq before it, and evidenced by China's oil development contracts, the
U.S. and its oil companies are cut out of any future oil development in Iran.
Like a post-sanctions Iraq, Iran has the potential to be the dominant power in
the region and to provide development assistance on a vastly different model to
that imposed by the WTO, World Bank and IMF, against which so much of the
Middle East is rebelling.
The U.S. has
shot itself in the foot. Far from isolating Iran, the sanctions are potentially
speeding up the demise of the dollar's dominance by forcing Iran to explore
alternative currencies. That so many other countries are so willing to support
Iran in direct defiance of the sanctions is what the U.S. clearly bet against.
It might end up as the biggest foreign policy blunder in American
history. Either that, or yet another war.
[1] Henny
Sender, ‘Iran accepts renminbi for crude oil’, Financial Times, 7 May 2012.
[2] ‘China's oil
imports from Iran hit records despite sanctions’, RT.com, 22 June 2012.
[3] ‘China to
invest USD 20bn to develop two Iranian oil fields: Qasemi’, PressTV, 8 July
2012.
[4] Nayla Razzouk, ‘Iran,
Russia Replace Dollar With Rial, Ruble in Trade, Fars Says’, Bloomberg.com, 7
January 2012.
[5] ‘Turkey,
Iran to trade in local currencies to replace greenback’ Hürriyet Daily News, 20
June 2012.
[6] Humay
Guliyeva and Pan Kwan Yuk, ‘What’s Iran doing with Turkish gold?’, Financial Times, 9 July 2012
[7] ‘Iran,
Russia Replace Dollar with National Currencies in Trade Exchanges’, Fars, 7
January 2012.
[8] ‘Iran to sell oil for household appliances to S.Korea’, Tehran Times, 25 July 2012.
[9] Yayat
Supriatna and Niluski Koswanage, ‘Indonesia says it would study any barter
approach from Iran’, Reuters, 11 February
2012.
[10] Sri Lanka
may drop dollar to keep importing oil from Iran, Tehran Times, 5 February 2012, and ‘Tehran, Hanoi set
to remove dollar, euro in trade’, Tehran Times, 8
January 2012.
[11] I go into
this in considerable detail in Making the World Safe for
Capitalism. I’d also recommend William Clark’s Petrodollar Warfare: Oil, Iraq and the Future of the Dollar,
and The Hidden Hand of American Hegemony: Petrodollar Recycling and
International Markets by David Spiro.
[12] William
Cleveland, A History of the Modern Middle East,
Boulder, CO: Westview Press, 2000, p. 468.
[13] Jubilee Debt
Campaign, ‘How big is the debt of poor countries?’, 2011; available at
<http://www.jubileedebtcampaign.org.uk>.
[14] David
Harvey, A Brief History of Neoliberalism, Oxford: Oxford
University Press, 2005, p. 193.
[15] Robert Fisk,
‘Arab States Launch Secret Moves to Stop Using the US Dollar for Oil Trading’,Independent, 6 October 2009.
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