The Iranian currency shuffle continued again this week as Tehran announced it would take the Chinese yuan as payment for crude oil deliveries from its trading partner in Beijing. While the U.S. secretary of state was in New Delhi convincing one of Tehran's more faithful clients to back away from Iranian crude, Iranian officials were warming to the yuan to process the roughly $20 billion worth of crude oil it sells to China every year. Deadlines for Iranian sanctions are fast approaching, but in a global economy still fueled by petroleum, customers may turn to gold if they need to in order to keep Iranian crude oil flowing.
U.S. and European sanctions targeting Iran go into force this summer. Earlier, in March, Washington gave exemptions to 10 members of the European Union and Japan for their decisions to cut back on Iranian crude oil. Secretary of State Hillary Clinton, during her visit to India this week, welcomed a move by India to reduce its crude oil purchases from Iran. India gets about 80 percent of its crude oil through imports and, with its economy expanding by a rate of roughly 7 percent, moving away from any source of oil is a significant move.
"We believe that if the international community eases the pressure or wavers in our resolve, Iran will have less incentive to negotiate in good faith or to take the necessary actions to address the international community’s concerns about its nuclear program," said Clinton.
India, the No. 3 in Asia in terms of oil imports, has already had a tough go at processing payments, working to shuffle the rupee through various international accounts. The country had racked up a multi-billion credit for Iranian crude oil purchases, though it seems Tehran had no problem floating that so long as the trade relationship stayed intact. Clinton said, however, that she wanted more from India in terms cut backs and was ready to help. Washington has made similar pledges in an effort to coax India and Pakistan to walk away from an Iranian natural gas pipeline, though, and Iran just keeps knocking on the door.
While Clinton was grinning about her accomplishments in New Delhi, however, Beijing was greeting the Iranians with a fistful of yuan. Most oil transactions are settled in U.S. dollars or in euros, but sanctions targeting Iran's Central Bank has made it difficult to process payments through conventional channels. As the No. 1 purchaser of Iranian crude oil, however, and an economy that's rivalling that of the United States, Beijing said it was ready to buy oil using its own currency.
Iran, despite growing pressure from the U.S. and European governments, still ranks among the top five oil-producing nations in the Organization of Petroleum Exporting Countries. Sanctions can't change that. Clinton, during her visit, felt certain India could make up for the difference elsewhere. Given the Chinese ability to separate economic affairs from geopolitical concerns, however, that likely means Beijing will happily take on more Iranian crude if the rest of the market players fall under Clinton's spell.
During the beginning of the year, when oil prices reached historic highs because of Iranian threats to close the Strait of Hormuz, the International Energy Agency said there weren't any physical disruptions in the oil market. Sanctions do seem to be having an impact on Iran's economy but, given the global nature of the commodities market, much of that impact could just be on paper if Beijing gets its way. With Iranian pride on the line, and the move toward self-reliance, Tehran might be able to handle the economic hammer once it falls this summer.
By. Daniel Graeber of Oilprice.com