Crude Jolt for US as Iran Scraps Oil Trade in Dollar

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Mumbai - With Iran, the world's fourth-largest oil producer, shifting its crude trading to the euro and the yen, instead of the US dollar, treasury managers feel that this could well be the first challenge to the US dollar's dominance as currency of global trade.

On Wednesday, Iran decided to make all transactions with euros in Europe, and the Japanese yen within Asia. This was largely triggered by the tensions between Iran and Washington for the past few years and lately, due to the weakening of the dollar. Despite its weakened position against almost every currency last year, the dollar has continued to dominate as currency of trade. Traders continue to use the greenback as it was a convenient currency. While exporters stood to gain by billing in dollars, buyers did not always agree. Also, there were logistics problems in carrying out trade in multiple currencies.

However, unlike other trading countries, the inconvenience of moving away from the dollar is not enough to deter Iran. The Islamic republic's decision to reduce exposure to the dollar is more political than economic with the United States ratcheting up sanctions because of a dispute over Tehran's nuclear programme. In December, an official said 90% of its oil export earnings were outside the dollar.

"All of Iran's oil trading is being done with the euro and the yen," Hojjatollah Ghanimifard, international affairs director of the National Iranian Oil Company, told Fars News Agency. "We agreed with all the buyers of Iran's crude to trade oil in currencies other than the dollar," he said. "In Europe, Iran's crude is being sold in the euro, in Asia in the euro and the yen, and trading with the yen has not only been in Japan."

Other treasury managers said the impact on the dollar could be much more intense if other economies such as Saudi Arabia and Russia decide to follow suit. Another forex manager added that much would depend on the bilateral deals between Iran and the countries buying oil from it and the former's negotiating capabilities. In the past, Iranian officials have said oil remained priced in the US dollar, but with actual payments carried out in other currencies.

Iran said it earned $70 billion from oil exports in the year to March, windfall revenues on the back of soaring crude prices. International crude prices recently hit almost $120 a barrel while Iran media said Iranian crude had risen above $102 a barrel.

The United States, while leading efforts to isolate Tehran which it accuses of seeking nuclear weapons, has slapped sanctions on Iranian banks and other bodies, moves that prompted many foreign banks to cut dollar dealings with Iran or stop all business. The UN Security Council has also imposed limited sanctions on Iran, which insists its nuclear plans are purely peaceful efforts to master skills to generate electricity.

A senior treasury manager with a multinational bank pointed out that all other commodities continue to be quoted in dollar terms and pricing of oil for Iran would certainly be an issue. It would mean that Iran would have to continually keep track of the US dollar-euro and dollar-yen exchange rate movements for pricing purposes. Iran is a member of the Organisation of Petroleum Developing Countries (Opec) and ranks amongst the world's top three holders of proven oil and natural gas reserves. Iran has also vowed to lower the volume of dollars in its foreign trade, apart from its foreign reserves.

Iran is OPEC's second-largest exporter after Saudi Arabia, and is the fourth-largest exporter of crude oil globally after Saudi Arabia, Russia, and Norway. Natural gas accounts for half of Iran's total domestic energy consumption while the remaining half is predominately oil consumption.