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Is it a currency war?

THE UN Security Council’s March 3 sanctions against Iran not only present a diplomatic victory for President Bush but also a major success for Washington in the first phase of its currency war with Tehran. The war began with the commencement of Iran’s oil bourse in mid-February.

Widely known as the Kish bourse, it is intended to bypass London’s IPE and New York’s Nymex, both of which are effectively controlled by Washington.

The Kish bourse is intended to eventually sell crude oil to the international market in euros. By opening its own oil bourse, Iran became the first Opec insider to attempt the further weakening of an already ailing greenback. If joined by other Opec and Caspian producers, it could serve a death blow to the American economy.

The dollar’s predominance as the world’s hegemonic currency has its genesis in the 1972/73 US-Saudi agreement to price oil exclusively in dollars in return for US protection to the House of Saud against external aggression or domestic overthrow. This arrangement led to Opec transacting oil exclusively in dollars ever since.

The ever-increasing use of oil in the world at a rising price led to an ever-rising demand for the dollar as the world’s reserved currency, enabling America to export a cheaply produced good with handsome dividends. Given the relative decline of American industrial output over time, the dollar’s hegemony has become vital for its economy.Once it was established, the Opec kingdoms never challenged the dollar’s hegemony. They put a high value on US protection which guarantees their political survival and their territorial integrity. The kingdoms’ borders are arbitrarily drawn to meet twentieth-century politico-economic needs rather than delineate ethnic patterns. The parameters of Washington’s protection include maintaining the regional status quo plus monitoring the kingdoms’ domestic fronts for rebellion. Because this deal ensures mutual survival, its tenacity remained impervious to secondary political causes.

Paradoxically, the maintenance of the status quo has been disrupted by the US itself. In 2000, Saddam Hussein demanded that Iraqi oil sale in the UN-administered Oil For Food programme be transacted in euros. The UN conceded and Saddam further declared his intention to open Iraq’s own oil bourse. Washington saw this development as dangerous and sacked Saddam by invading Iraq in 2003.Thereafter, Iraq’s oil sales reverted to the dollar. However, ‘peak oil’ concerns led to Washington’s occupation of Iraq. With continued occupation, the show of armed commitment to the greenback became counterproductive and led to the beginning of the petering out of the kingdoms’ commitment to the dollar. Instead of guarantor, Washington now appears as a threat to the status quo. Anti-US sentiment in Arab societies frightens the monarchs into believing that if Washington invades more Middle Eastern countries, this sentiment would deepen and eventually target their households.

Hence a rising notion within the royal families that if stripped of its dollar hegemony, the US could be deprived of unlimited credit for waging further wars in the Middle East. In the third Opec summit meeting in Riyadh in November 2007, the issue of the dollar’s depreciation, though not incorporated in the final declaration, was assigned to the kingdoms’ respective finance ministers to study.

Given the de facto taboo on this subject, this is a significant development that may have prompted Bush to make a journey to the Saudi kingdom later in January 2008.

Though Iraq, Iran and Petrocaribe’s (Venezuela’s) switch from the dollar is due to political vengeance, it makes economic sense. If a bourse trades oil in euros, other countries can build up their reserves of an ascendant euro instead of having to replenish the rapidly depreciating dollar. However, two interrelated developments threaten Iran’s oil bourse. One is Ahmadinejad’s rise to power and his belligerence towards Israel, a UN member state; the other is Washington’s corresponding success in building up an international consensus against Iran.

The industrial group reorganised the sanctions regime in 1996 at the behest of the US under the Wassenaar Arrangement. Functioning parallel to other treaties monitoring proliferation, Wassenaar shifted the target of technology-transfer curbs from Communism to individual states who “exhibit dangerous behaviour”. At the time of signing, Washington tried to designate the Middle East as a “destabilising region”. Other members refused as they did not want regional bias inducted into the Wassenaar regime. Their concession confines to granting Washington endorsement for its designation of Iran, Iraq, Libya and North Korea as “rogue states”.

Given the shift in the sanctions target, Iran under Khatami realised that the most serious danger it faced was American ability to deny it access to arms, technology and the hard currency necessary to procure technology. Consequently, Khatami launched a conciliatory policy from 1997-2005 called the “Dialogue of Civilisations”, the success of which greatly complicated Washington’s manoeuvres against Iran.

In an interview with CNN in January 1998, Khatami apologised to the Americans for the hurt caused by the siege of their embassy during the 1979 revolution. This softened public opinion about Iran and led to a series of athletic exchanges between Iran and the US. Khatami’s gains in the Middle East multiplied with Tehran’s hosting of the 1997 OIC summit, increased ministerial exchanges in the Gulf, and a handshake with the Israeli prime minister at the Pope’s funeral in 2005. The US was forced by its European allies to repeal the imposition of secondary sanctions over European investment in Iran’s energy sector.

Moscow abandoned the Gore-Chernomyrdin agreement between Russia and the US that limits the sale of Russian conventional arms to Iran. In 2004, Iran reached an agreement with Britain, France and Germany on nuclear cooperation for peaceful purposes. Khatami’s principles remained firm. Alongside appeasement, Khatami test-fired Tehran’s first indigenous missile that reaches Tel Aviv, inaugurated Iran’s own indigenous arsenal and announced the plan to open Iran’s oil bourse. Bereft of its anti-Iran clout, Washington remained largely ineffective in opposing these developments.

Ahmadinejad’s “dangerous behaviour” nullified Khatami’s gains. Since Dec 23, 2006, Ahmadinejad has failed to comply with successive UNSC resolutions against Iran. Correspondingly, Washington has succeeded in gaining multilateral cooperation in successively tougher sanctions against Iran that are “targeted financial measures” aimed at incapacitating key sectors of Iran’s economy. These include the amputation of Iran from the global and the Gulf’s financial infrastructure and enforcing the withdrawal of foreign investment in the development of Iran’s oil and gas sector.

UNSCR 1803 of March 3 will severely hamper the functioning of the Kish bourse. However, should the bourse malfunction, it will be deemed to have been due to sanctions instead of market forces. This means the Kish bourse’s malfunction will not deter plausible moves in this direction by other oil producers.

The writer is an energy consultant and analyst of energy geopolitics based in Washington, DC.

Editorial Notes: The DAWN is "Pakistan's most widely circulated English language newspaper." Submitted by author. Other articles by Zeenia Satti. Although the Iranian oil bourse has not attracted much attention in the world press (especially not in the U.S. press), there have been articles about it. The recent opening of the bourse in February does not seem to have rippled world markets. UPDATE (March 13): I asked Zeenia what she was referring to in the phrase: "The industrial group reorganised the sanctions regime in 1996..." She replies: "It refers to the technology suppliers group. It consists of thirty or so countries that coordinate control over the transfer of dual use technology to states that are suspect proliferators, such as Iran, Iraq, etc." -BA

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