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Iran Involved in “Junk for Oil” Trading

That is the assessment of one U.S. commentator when asked by Bloomberg whether the sanctions against Iran are working.  By trading oil for commodities from India and China such as wheat and soybean meal the countries involved are skirting the text of the sanctioning laws handed down by the Obama administration cutting off Iranian banks and their central bank from international trade. 

 

Iran is now accepting Rupees and Yuan through their state-run UCO Bank which was never a part of the global financial system in the first place and using that as a basis for bi-lateral trade.  This further entrenches the relationship between these three countries as Iran can only spend those reserves with India and China.  In essence Iran has been reduced to barter for its oil. 

“Iran cannot stabilize the value of its currency with such unorthodox payment methods, and that is why its economy is collapsing,” Katzman, an Iran sanctions specialist, said in an interview. “Iran is essentially on a junk-for-oil program.”

Given the situation in the West with both the Dollar and the Euro, it seems a bit cheeky to me for someone to be disparaging wheat, soybean meal, gold and hard consumer goods as 'junk.'  The hope on the part of the Americans is for Iran to be unable to maintain this situation for long; forcing them back into the dollar payment system for its oil. But, it didn't work with Iraq or Libya, where both countries had to be invaded in order to shut down such trade.

Moreover, as the Bloomberg article points out, the farther Iran is pushed towards 'unorthodox' trade methods for its oil the less traceable the transactions are.  And while it is obvious that the U.S. believes that any and all information that they desire should be at their fingertips it is also obvious that their own policies are creating incentives to make gaining that information harder to obtain by driving trade 'underground.'

I think at this point there is little doubt in the short term the Iranian Rial is a dead currency, as a wave of hyperinflation has hit the country since the beginning of the year due to U.S. sanctions signed by President Obama as part of the NDAA in December.  But, it is also becoming clear that Iran is prepared to accept that as a given and move forward. 

With the BRICS summit having just ended with a number of pointed statements aimed at the U.S. and pledges for more cooperation as well as a BRICS Bank to clear intra-BRICS trade this situation between Iran, India and China is temporary, as any barter scenario ultimately is.  I would be very surprised if we do not hear something new from China about the changes to their gold reserves.  There was nothing this month from the World Gold Council report

If anything this move by the U.S. to oust Iran from SWIFT looks for all the world to have strengthened the resolve of Iran's trading partners to find solutions that buy them time while other systems are built.  India has publicly said they would trade gold for oil and, as noted in the very same Bloomberg article, have just sent a group of 70 businessmen to Tehran to discuss expanding their relationship.

The world is moving towards currency blocks as the petrodollar system continues to weaken.  ASEAN's 16th Summit is beginning in Phnom Penh this week and one of the major issues on the table is how to upgrade and integrate the banking systems of the region as inter-ASEAN trade accounts for more than 25% of all of their trade.  When one adds in the ~16% from the BRICS nations that total rises to more than 40%.  None of the talk coming out of ASEAN is centered on boosting trade with the U.S. and the E.U. but rather the opposite.  As those numbers rise, the conclusion should be obvious.

The petrodollar will not end all at once in a cataclysmic event, rather it will be die a death of a thousand cuts as the transaction costs will outweigh the benefits on a case-by-case basis. As I said previously, this 'junk for oil' situation is another incentive for some other currency to become the basis for international and/or regional trade creating an opportunity for China to strengthen the position of the Yuan on the world stage.

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Peter Pham is a capital market specialist and entrepreneur.  With expertise as a Head of Institutional Sales and Trading he closely watches the market and probes for investment opportunities utilizing a unique blend of quantitative trading experience and macro trend analysis… (read more)

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