Iran to Shun Euro, Dollar in Oil Deals

Filed 24 July 2010 — Tehran

Iran's vice president said this week that the country is free to choose any currency for its crude sales and that the important thing is to exclude euros and dollars from the transactions. He was speaking at the launch of a United Nations trade and development report, which gave the remark an institutional setting rather than a purely rhetorical one.

Iran produced an estimated 3.74 million barrels a day in June. At that volume the announcement is not symbolic in the way a similar statement from a marginal producer would be. But it is also not the rupture in the oil market that the framing invites, and the distinction is worth being precise about.

What "priced in dollars" actually means

The convention that oil is quoted in dollars is a matter of benchmark pricing, not of settlement. A cargo can be quoted against a dollar benchmark and paid for in any currency the two parties agree on, at the exchange rate of the day. Producers have been settling in non-dollar currencies for years without disturbing the benchmark at all.

So a decision to stop accepting dollars is, mechanically, a decision about which banks handle the payment and which currency sits on the balance sheet afterwards. It changes the plumbing. It does not change the price.

Why the plumbing matters here

For Iran in 2010, the plumbing is the point. Dollar-denominated payments clear through the American banking system, which puts every transaction within reach of American financial measures. A producer under an expanding sanctions regime that settles in dollars is settling on the territory of the state applying the sanctions. Moving to other currencies is an attempt to move the transaction out of that jurisdiction.

The euro presents a version of the same problem, which is why the statement excludes both. What remains is a set of currencies that are either not freely convertible, or belong to economies small enough that accumulating large balances in them creates its own exposure — you can be paid, but you may not be able to spend it where you want to.

The wider de-dollarisation conversation

The remark did not come from nowhere. Since 2009 several producers had floated replacing the dollar as the currency of oil trade, and the proposal has been discussed among exporting states. It reappears reliably whenever the dollar weakens or whenever financial measures are used as an instrument of foreign policy — which is to say, most years.

What has not happened, in any of those years, is a durable alternative arrangement. The reason is not sentiment about the dollar. It is that the currency of trade needs deep, liquid markets in which a producer can park revenue, hedge, and borrow against it. No candidate currency has offered that at scale, and until one does, announcements of this kind describe an intention rather than a mechanism.

The buyer's position

A currency decision made by a seller is only half a transaction. The refiners who take Iranian crude are concentrated in Asia, and each of them faces its own arithmetic: the discount available on the cargo against the risk of losing access to dollar clearing for the rest of its business, which is usually far larger.

That asymmetry explains why announcements of this kind produce less movement than they promise. A refiner buying a few hundred thousand barrels a day will not restructure its entire treasury operation for one supplier, and the practical outcome is usually a workaround at the margin — payment through a smaller bank in a third country, or settlement against goods rather than cash — rather than a wholesale change in how the trade is denominated.

The precedent question

The longer-term issue is not what one producer does but what the accumulation of these decisions teaches. Every time financial infrastructure is used as an instrument of policy, the states on the receiving end acquire a reason to build alternatives, and the states watching acquire a reason to hedge. Those alternatives are expensive and slow, and for two decades they have not materially displaced anything. Whether that continues is one of the genuinely open questions in international economics.

What to watch next

Watch the counterparties rather than the statement: which refiners in which countries actually change settlement terms, whether intermediary banks in third countries take on the clearing, and whether the discount Iranian crude trades at widens. Production and export data by country are published by the US Energy Information Administration, and member production policy is documented by OPEC.