[R-G] [BillTottenWeblog] Is it a currency war?

[Bill Totten]

by Zeenia Satti

Dawn - the Internet Edition (March 12 2008)

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
December 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.

zeenia.satti at yahoo.com

http://www.dawn.com/2008/03/12/op.htm#2

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