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Iran officially replaces dollar with yuan

According to the latest report by the Iranian Customs Office, cited by the Iranian Financial Tribune on 6 October, Iran’s exports increased by 61 per cent in the six months to 30 September, reaching a total value of US$21.8 billion, up 47 per cent on the same period last year.
According to an expert report on September 28, Iran and Venezuela reached an oil swap agreement to exchange Venezuelan heavy crude oil for Iranian condensate, with the first 2.1 million barrels of condensate supplied by Iran arriving in Venezuela the day before and beginning to be unloaded. It is reported that the Venezuelan and Iranian state oil companies have reached a six-month agreement to exchange Venezuelan heavy crude oil for Iranian condensate, with the possibility of an extension of the agreement period, through condensate, Venezuelan oil companies can improve the quality of their tar products.

What is happening behind the scenes is that, as the New Crown virus continues to spread, demand for oil is low, which will have a serious impact on the fiscal revenues and foreign exchange markets of both Iran and Venezuela, which are mainly dependent on oil, and according to the Iranian oil minister a week ago, despite the fact that Iran has been able to keep exporting oil through other innovative means, the country’s oil exports have fallen to their lowest value in decades and, as of September Exports fell by 84.5% to US$13.2 billion, compared to the US$100 billion a year that they used to reach.

Venezuela’s oil production also fell continuously to 520,000 barrels per day as of September, well below the 1.5 million barrels per day target set by the country, according to figures quoted by US financial website Zero Hedge a week ago. There is no doubt that Venezuela is offering a spectacle to global economic history, with a huge oil wealth of around 304 billion barrels, but according to the IMF’s latest regional economic outlook report in September, the country’s GDP per capita has fallen by 87% over the last decade, from 12,200 to $1,540 per year, which, combined with the dollar’s restrictions on settlement transactions, has kept the economy and oil industry in a chronic crisis, these external factors have severely affected economic life in Venezuela, to the extent that oil-for-food has begun to be traded.

In such a tough environment, the two major oil producers, Iran and Iran-Contra, are seeking economic reforms and an alternative monetised way out for their oil exports, with news suggesting that the economies of both countries are starting to improve and may turn from poor to rich.

According to a report cited by experts on 2 October, although the US began sanctions on the Iranian economy three years ago, which hit the country’s crude oil sales, but not petrochemicals and fuel, Iran now earns more from petroleum products than crude oil exports, fuel exports, which usually transports by truck, and is difficult to track. Trade sources and officials said, adding that despite the US sanctions, Iranian fuel and exports of petrochemicals have boomed in recent years and Iran has the ability to rapidly expand sales in Asia and Europe if the US lifts restrictions.

Also as reported by the FT, some economists believe that the Venezuelan authorities’ decision to deregulate the currency market, import restrictions and encourage informal dollarisation has breathed life into an economy that has shrunk by around 75% since 2013 and Venezuela officially start to launch a digital currency from October to simplify everyday transactions and the digital bolivar will remove six zeros from the bolivar, it is clear that Venezuela has removed eight zeros from its currency since 2008, as hyperinflation destroyed people’s savings.

What is going on at the same time is that, according to a follow-up report in the Venezuelan state newspaper, the Venezuelan authorities have ordered the official start of the sale of oil on the international market in Petro (oil coins), each unit of which is pegged to the price of a barrel of oil, as agreed in the country, and have signed a number of contracts to become an alternative financial instrument to the US dollar, which also means that by issuing Petro coins, it is hoped to quickly achieve a change from poor to wealth and out of economic distress, and to become the first country to settle commodities in cryptocurrency.

And just after Venezuela, new news shows that Iran is also going to issue a cryptocurrency by using crude oil, gold and other resources as physical collateral, and is banking on the Petro coin to break the dollar blockade. Iran is currently in talks with Germany, Switzerland, France, the UK and Russia to carry out transactions in the digital currency, while it has specifically proposed a cryptocurrency-related payment system between the Gulf states to reduce its reliance on the US dollar. And it is at this crucial moment that a number of countries have also unexpectedly announced that they will follow suit in their goal to de-dollarise with cryptocurrencies.

It was said that several Japanese banking giants were proposing to set up a committee for digital currencies and create a financial network similar to SWIFT that could be used for cryptocurrency payments and could be de-dollar-centric in the commodities sector with a number of countries, including Iran, which data shows is the main buyer of Iranian oil in Asia. And Brazil’s central bank also revealed that it was moving forward with a digital cryptocurrency project for foreign exchange transactions.

Even more, according to a news release from the authorities in El Salvador, the country has used crypto-digital currencies to become legal tender to replace some of the functions of the US dollar in order to de-dollarise its economy, and just after El Salvador, two countries, Laos and Ukraine, followed suit, announcing the legalisation of virtual currencies such as crypto-digital currencies, but unlike El Salvador, these two countries stipulate that crypto-virtual currencies cannot be used as a means of payment.

In response, veteran economist Jim Rickards also said that the world needs new cross-border settlement currencies that are independent of a particular country, and that the logic behind the dominance of the US dollar due to its extremely low interest rate policy has caused a lot of problems for oil-producing countries like Iran and Venezuela.

As explained by JP Morgan, the US monetary initiative is becoming a catalyst for long-term de-dollarisation, with the US dollar abusing its monetary dominance to prompt global markets to look for alternatives and the US dollar no longer being a normal world currency. According to a summary of historical statistics published on the websites of the Federal Reserve and the US Treasury Department, it was found that since the spread of the new crown virus in March 2020, the US has released a total of $31 trillion in various types of dollar liquidity and economic stimulus packages in just 69 weeks of printing money.

As a next step, the Iranian authorities, in addition to having officially replaced the US dollar with the Chinese yuan, which is one of the country’s main foreign exchange currencies along with the euro, the Iranian cabinet passed a motion a few weeks ago to cut the local currency, the rial, by four zeros and officially change it to the country’s new currency, the toman.

There is also news that the toman will be anchored to the yuan exchange rate, a move that experts at the IRAN national think tank say could prove successful and is part of a series of innovative economic measures taken by Iran to improve economic indicators and move revenues away from the oil sector. And it is against these backdrops that something has happened that has taken the markets by surprise.

The US Treasury and the financial industry are working to understand the risks that cryptocurrencies pose to the traditional US financial system and the US dollar, and are planning to issue a number of reports, with Federal Reserve Chairman Jerome Powell saying on 2 October that there is a sense of urgency in promoting digital currencies, which can be very popular and that we need to be careful because they are outside the scope of regulation.

Immediately afterwards, it was hinted in some new reports cited by US financial website Zero Hedge that US authorities may prompt more aggressive sanctions policies restricting digital cryptocurrencies being pushed by Iran, Venezuela, which may also mean that Iranian and Venezuelan initiatives to use cryptocurrencies to de-dollarise may face difficulties.

By Sherry Song Dhu

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