Persia and the Petro-euro

Economics, Geopolitical, Premium POM

Iranian Crude and the Multilateral Middle East

By JC Collins

Iran has recently announced that they will be accepting crude debt payments from foreign buyers in euros as opposed to dollars.  New crude sales will also be denominated in euros instead of dollars.  Many will remember that Iraq began selling crude in euros in the lead up to the American invasion.  This fact has been presented as the main reason for that war.

The thought process is that the US most stop other countries from selling crude in anything but the dollar so that it can continue running up budget deficits back home.  Though there is some supportive evidence for such a claim, the complexity of the second Iraq war, and any future war, would suggest a more diverse set of circumstances and casus belli for the ensuing death toll and humanitarian crisis.

If we were to follow that logic through to its ultimate conclusion, we would expect to see the US preparing an attack on Iran in the coming months.  Based on the geopolitical trend of reconciliation between America and Iran I would find any such preparations to be illogical and counterproductive to the larger mandate of monetary restructuring.

In order to grasp the fullness of this latest move by Iran, we must understand the purpose of the euro and why it was created.  The assumption has always been made that America encourages the position of the dollar as primary reserve currency and would resist any challenging currency which would force a diversification of foreign exchange reserves.

This assumption would not be correct.

The development of the common European market was the first step towards the realization of a currency for the European peninsula.  Next came the European Currency Unit, which was a basket of domestic currencies with fluctuating weighting within the ECU’s composition.  From this the actual euro currency was created and put into circulation.

This same process is being followed in Asia with the development of the ASEAN common market and its enhancement with the AEC trade agreement.  An Asian currency unit is in development just like the ECU was so many years ago.

The purpose of creating the euro was to offset the dollar monopoly, which is something America itself desired, as the effects of the Triffin Paradox forced larger budget deficits and the exporting of domestic jobs overseas.

The geopolitical challenge for the United States has always been the trade off in international security versus the benefits of sharing reserve currency responsibilities with at least one other, and preferably two other domestic currencies.  Or perhaps semi-supranational currencies, such as the euro.

Iran’s latest move to support the use of the euro in its oil sales, on the heels of negotiating with the US on sanctions and a list of other energy and monetary based matters, is suggestive of support from the American side.

If the US was overtly, and even covertly against the development of any dollar rival, we would have seen American geopolitical and socioeconomic pressure increased on its European allies.

China provides another interesting dynamic to this monetary transition.  The petro-renminbi is being developed to denominate crude sales in a third currency.  In the post The Petro-Renminbi Emerges we discussed the end of dollar pegs by both China and Saudi Arabia.  This change in the dollar’s exchange rate regime is not necessarily something which the US is against.

The start of China’s own crude benchmark index later this year is also supportive of this shifting framework.

As readers Neal and Adam have recently pointed out, there is a trend developing around the euro in regards to its ability to absorb US dollar depreciation and be used to denominate crude sales.  This fits within the multicurrency arrangement which is being developed.  While we have spent a lot of time reviewing the potential of the renminbi, the euro has been busy.  I’m glad that POM has readers that do further research and contemplate matters outside of the arguments presented.

One of the possible solutions which I have put forward to the European sovereign debt problem is for the member countries to revert back to use of their national currencies for domestic use.  The euro would still be used for trade balancing between the member nations, but each nation could than redenominate their sovereign debt in the domestic currency and write it down accordingly.

Under such a scenario the euro would need an additional external support mechanism which would ensure stable valuations against a depreciating US dollar.  The renminbi’s ability to appreciate at the levels required would take years as opposed to months.  Though those expecting a larger and continuous renminbi depreciation throughout the year will be disappointed.

The balancing monetary waltz between the dollar, euro, and renminbi will continue.  Iran’s role within the greater Middle East will continue to expand and influence regional politics and socioeconomics.  US denominated crude sales which originate from the Middle East will be reduced in the coming months.  We can expect to see an increase in both euro and renminbi denominated sales as the multilateral monetary transition continues on its course of diversification.

The Middle East will no longer be dominated by the US and its dollar.  A multilateral mandate is emerging in the region which will be supported by Iran, Russia, and China.  Saudi Arabia, who itself has made arrangements with China, has hedged both its geopolitical and socioeconomic strategies against the loss of a major strategic partner in the United States.

The diametric between Iran and Saudi Arabia is playing out in Syria.  The flash points surrounding this monetary transition has always been in Syria and Ukraine.  It would appear that the US is beginning to accept its geopolitical checkmate position in both conflicts.  The strategy of containment will have to be enacted as the US is not willingly to enter into a larger and direct war with either Russia or Iran over a monetary transition which they themselves both want and need.

The threat for Western interests is not the Islamic State, which has always been a joint American and Saudi Arabian creation used against the advancement of Shiite Iran.  The real challenge is in how to manage the emergence of a new Persian power which will unite both the Sunni and Shiite factions within Islam.   How will the common market and currency unit in the Middle East be managed?  – JC