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Why Oil Is Still Underpriced

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Russia And Iran Hit Back At The Petrodollar

Russia

Russia and Iran have launched an oil-for-goods exchange program seeking to eliminate bilateral payments in U.S. dollars and plan to keep it going for five years, RT reports citing Energy Minister Alexander Novak, who added that the first Iranian cargo of crude oil had been received by Russia.

The idea about ditching the greenback from bilateral trade was first pitched in 2014 when Iran was still under Western sanctions. Even after the notorious deal was reached, the two countries decided to go ahead with it, and the preliminary agreement was reached last year. According to it, Russia will receive 100,000 bpd of Iranian crude in exchange for US$45 billion worth of Russian goods.

Iran has been actively looking for ways to drop the dollar as an international trade currency because of the U.S. sanctions that still remain, and because of the fear that more may be on the horizon.

Earlier this month, Tehran announced it will publish all its official financial reports in euro instead of dollars in a bid to encourage a switch to euros from dollars among state agencies and businesses.

In March, Iran banned purchase orders denominated in U.S. dollars and said that any merchant using dollars in their orders will not be allowed to conduct the import trade. A senior central bank official at the time explained that, “Considering that the use of the dollar is banned for Iran and traders are literally using alternative currencies in their transactions, there is no longer any reason to proceed with invoices that use the dollar as the base rate,” noting that It’s been for a long time that Iran’s banking sector cannot use the dollar as a result of the sanctions.

Russia is also willing to reduce its dependence on the U.S. currency for similar reasons: sanctions and lack of access to Western financial markets. Iran is a natural partner, a sanction buddy of Moscow—their partnership will only deepen if the U.S. reimposes sanctions on Tehran.

By Irina Slav for Oilprice.com

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  • Phil Mirzoev on April 23 2018 said:
    Well, the transition of oil trade to other currencies could contribute to a weakening of the hegemony of US dollar but my impression many people really overestimate the influence of this factor. To really shake the monopoly of dollar a serious proportion of world trade (services and goods, a minor part of which is oil) should start to be transacted in currencies (or other account-settling tools) different from the US dollar.
    Even if there didn't exist any oil and oil trade, the domination of dollar wouldn't go away automatically because it is based on the Bretton-Woods agreement and the corresponding institutions created thereby that made the US dollar a monopolistic tool of world trade settlement.
    When China starts selling pork to Brazil say, in euro, and Brazil will be selling condoms for euro to India etc etc, then it will become reality. But for that alternative agreements and institutions are needed. China is working on this, but it is a separate thing that is not directly related to oil
  • Uri on April 20 2018 said:
    Iran will join the Russia-led Eurasian Economic Union in coming months. Its a free-trade zone that is expanding rapidly. The only looser will be Trump and its illegal sanctions against Iranian people.
  • Mamdouh G Salameh on April 20 2018 said:
    Even under the sanctions, Iran used the euro and barter trade for payment for its oil exports in order to mitigate the impact of sanctions against it.

    With the impending withdrawal of the United States from the Iran deal and the probable re-introduction of sanctions against it, Iran is already laying the groundwork for nullifying these sanctions. One such measure is the barter trade agreement announced with Russia. The other is using the petro-yuan.

    As Russia and Iran are battling against US sanctions, they have good reasons to devise ways to undermine the petrodiollar.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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