Several Middle Eastern countries, such as Turkey and Iran, have been recently shifting into international currencies or local currencies, instead of the US dollar, in their foreign trade. This shift comes amid the US economic sanctions on Iran in tandem with its souring relations with Turkey. What is striking in this regard is that there is an international acceptance of other currencies, especially the Chinese yuan, with the pricing of some oil contracts in the same currency. This move seems to have a particular political significance, namely rejecting the impact of the US dollar on the trade of these countries rather than its economic feasibility, amid the sharp fluctuations in the local currencies of Iran, Turkey, and India in the past period.
Various Developments
International and regional developments have prompted several countries in the Middle East to conduct part of their business dealings in local currencies instead of the dollar, the most notable indicators are the following:
1- Economic sanctions: Economic sanctions have become one of the key features of the present time on the regional and international arenas, as the US is set to impose a new batch of economic sanctions on Iran in November, which encompasses all economic activities with restrictions on Iran’s access to the US dollar to force it to accept a renegotiation of the nuclear deal.
Moreover, the US the EU have imposed sanctions on Russia since 2014 for its military intervention in Crimea, along with sanctions against Venezuela, especially on the oil sector. Relations between Washington and some of its allies in the Middle East are witnessing unprecedented tension, particularly Turkey, against the backdrop of the American pastor Andrew Brunson case. That is why all these countries believe that doing trade in their local currencies or other currencies may be one of the instruments to break the dollar’s monopoly on international trade, and by extension to reduce the US pressure.
2- Alternative currencies: In addition to the US dollar, the world’s dominant currency, there is another basket of currencies that gains increasing international confidence for use in international trade and boost foreign reserves, foremost among them the euro, the Japanese yen, the British pound and the Chinese yuan. For the Chinese yuan in particular, its share of the world’s currency reserve base rose to about 1.4% in the first quarter of 2018.
Despite that small percentage, China’s partners, countries and global companies, are increasingly interested in conducting financial and trade transactions with it in the yuan instead of the dollar. This comes in parallel with China’s local currency exchange agreements with many countries around the world, including some in the Middle East, such as Turkey, establishing a stable exchange rate for the yuan against currencies of some Middle Eastern countries.
3- Oil trade in other currencies: The economic sanctions imposed on Russia since 2014 have led it to conduct trade transactions with its partners in currencies other than the dollar, a trend which was strongly supported by President Vladimir Putin during the Eastern Economic Forum held in Russia in September, on the belief that its importance lies in reducing Russian dependence on the West and breaking the dollar’s monopoly on the country’s trade, including energy.
Since the imposition of the US and European sanctions on Russia in 2014, Russian companion, Gazprom for example, has concluded some of its deals to sell crude oil to its customers in the Russian ruble and euro. In addition, the company has reached agreements with many of its customers allowing it to shift into other currencies other than the dollar at any time.
As China has become the world’s largest oil importer, i.e. in a position to influence the global demand and supply of oil, it has made a shift towards pricing oil contracts in yuan. In March, it launched the yuan-denominated oil futures contracts on the Shanghai Futures Exchange, an initial step that would give it more sway over the pricing of crude oil sold to Asia.
Regional Trends
In the light of the above-mentioned regional and international developments, some Middle Eastern countries have moved to use local currencies in their trade with the outside world, chiefly Turkey and Iran. Turkey announced in September the possibility of using local currencies in its trade with other countries, including Venezuela, considering that this step would eliminate the pressure ensuing from using the US dollar, according to its Foreign Minister Mevlut Cavusoglu in the same month. This coincides with Turkey’s plans to issue yuan-denominated bonds for the first time, in a move designed to diversify the sources of its public budget funding.
In a bid to circumvent the new US sanctions, Iran has decided to ditch the US dollar exchange deal in its trade with Iraq, one of its key partners, and use the euro, the Iranian rial and the Iraqi dinar, according to the president of the Iranian-Iraqi Chamber of Commerce, Yahya al-Ishaq on September 1.
Besides, the central bank of Iran is also holding discussions with Russia and Turkey on the issue of trade using local currencies. The Iranian authorities have already encouraged the use of the euro instead of the dollar as part of their long-standing efforts to reduce dependence on the US dollar amid the ongoing conflict with Washington and the economic sanctions imposed on the country from 2012 to 2015.
According to some estimates, India is expected to make Iranian crude payments in the Indian rupee through local banks starting next November, as it will be difficult to make the oil trade through banks due to the US sanctions on Tehran, which may encourage other countries to conduct their dealings with Iran in their local currencies.
Potential Hurdles
Certainly, the Turkish and Iranian shift into the use of local currencies in their foreign trade is not driven by economic viability, but by the current geopolitical situation. The stated shift is seen as a negative signal for the regional and international rejection to the influence of the US dollar in the international payment system, which the US may exploit in its favour in handling the crises of the Middle East.
However, as far as economic viability is concerned, despite the importance of this move -which may take a long time- in circumventing economic sanctions for Iran, for example, it carries considerable risks due to the volatility of emerging and developing market currencies in recent times.
For instance, the Iranian rial has been in a free-fall recently due to the US sanctions, shedding more than 50% of its value, while the Indian rupee has become volatile in the recent period, which cast doubts on the viability of doing trade in the Indian or Iranian currency. In addition, neither of the two currencies has the universal acceptance of the US dollar in international trade, making it most likely to use internationally accepted currencies, such as the euro or the Chinese yuan.
