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Analysis: Iran moves to ditch U.S. dollar

disclaimer: image is for illustration purposes only
by Derek Sands
Washington (UPI) Sep 10, 2007
Faced with U.S. economic sanctions and a weak dollar, Tehran is demanding foreign energy companies do business in yen and euros, despite increasingly desperate need for investment.

In a deal announced last week, Japan's Nippon Oil agreed to buy oil from Iran using yen instead of the traditional U.S. dollars. The agreement comes after years of Iranian efforts to shift its petroleum exports away from dollars and toward yen and euros.

With refineries in need of investment and vast natural gas deposits in need of foreign companies for development, Iran is trying every avenue to extricate itself from U.S. sanctions.

"In general, a key motivation is the U.S. informal sanctions pressure that the Treasury, and Undersecretary Levey in particular, put on banks not to do financial transactions with Iran. And increasingly designating banks with ties to certain Iranian entities as unable to perform the U-turn transactions for dollar-denominated transactions," according to David Kirsch, the manager for market intelligence at the international energy consultancy PFC Energy.

U.S. Treasury Undersecretary for Terrorism and Financial Intelligence Stuart Levey has been in charge of coordinating U.S. sanctions against Iran since 2004. In recent months the U.S. Treasury has increased pressure on foreign banks not to deal with Iran, including so-called U-turn transactions, which "allow U.S. banks to process payments involving Iran that begin and end with a non-Iranian foreign bank," according to the U.S. Treasury.

Shifting to euros and yen allows Iran some relief.

"Overall it does lower some of their exposure to this successful yet informal pressure from the U.S.," Kirsch said.

Iran has the world's second-largest reserves of crude oil, is the world's fourth-largest exporter of oil, at 2.5 million barrels per day, and depends on export revenue for almost half of its government revenue, estimated at about $46.9 billion in 2006. Japan is Iran's largest customer for oil.

Iran's turn to the yen or euro may help in some ways, but U.S. sanctions are still a danger.

"For them, I think it will make it easier, simply because the banks that it deals with won't be under the threat of the U.S. prohibiting turn-around transactions. They may still be under threats. Of course, the U.S. has successfully put some pressure on some European-based banks to stop transactions with Iran. That still remains a threat," Kirsch said.

The United States began sanctions against Iran after U.S. diplomats were held hostage during the 1979 revolution and has ratcheted up sanctions in recent years due to Tehran's alleged support of terrorism, as well as its efforts to enrich uranium -- efforts that the United States sees as a covert attempt to develop nuclear weapons.

Under U.S. sanctions, American gas and oil companies are severely limited in how much they can invest in Iran, and most other companies are banned from doing business in Iran. However, the United States has little control over foreign companies, and until very recently the U.S. government has chosen not to sanction foreign companies that deal with Iran.

But this has changed. The U.S. Treasury has stepped up pressure on European banks and the State Department has taken a harder line, warning foreign companies that operate in the United States to avoid business with Iran.

The economic consequences of sanctions are not Iran's only motivation. The declining value of the dollar has also made the euro and yen attractive, if not for sales, than at least for saving.

"There is also another key issue that you are seeing, not just in Iran, but in other oil producers, especially Gulf oil producers, is given the depreciation of the dollar, it is better to hold their reserves at least in euros, it is a better store of wealth. Some of the other Gulf producers will accept payment in euros. They won't price their oil in euros or yen, and even if they are receiving payments in dollars, most likely they are converting a substantial share of that every month into other currency," Kirsch said.

Holding cash reserves in euros and yen may be a trend for the region, according to Kirsch, but a large-scale market conversion away from dollars in unlikely.

"I think the producing states are becoming increasingly sophisticated in how they hold their foreign currency. But in terms of whether, is oil formally going to be priced in yen, renminbi, or the euro, I don't think that is going to happen. Simply because you would have to establish a whole new contract and an exchange for that, and that can be quite costly. It is also, you have to find a contract that the investment community is willing to embrace, and until you need to do that, I think they will be satisfied sticking with the contracts from the NYMEX and the International Petroleum Exchange," Kirsch said.

Much of the world's oil is sold through the New York Mercantile Exchange, NYMEX, or the International Petroleum Exchange in London, both of which trade in U.S. dollars. Tehran has for years planned an oil exchange that would operate in euros but has yet to realize the scheme.

A strengthened European economy has impacted trade in other Persian Gulf countries as well.

"Throughout the Gulf, they are also seeing an increasing amount of their trade conducted with the European Union, so with increasing amounts of their imports coming from the euro zone, why not hold larger stakes in their reserves in that currency," Kirsch said.

Whether Iran's oil is sold in euros, yen or dollars, the United States will likely not be affected by Tehran's decision.

"I think it is going to have minimal impact on the dollar and minimal impact on the U.S. energy situation," Kirsch said.

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