Eroding U.S. Dollar Hegemony

We all know some of the most acute causes of the fall of the Roman Empire. Along with the massive numbers of enslaved and captured peoples now under their dominion, the spreading thin of military capabilities was another main propellant. With our currency economic sanctions and cascade of war drums calling for attacks on Iran for its purely alleged nuclear weapons program, conduction of drone warfare in Afghanistan, Yemen, Pakistan, Somalia, and who knows where else, it is becoming a disturbing trend that this has spurred movement on areas in which we are vulnerable. This is the U.S. dollar’s status as the intermediate currency for global economies.

What we have done in Iran has seemingly forced their hand in seeking bilateral agreements with Eastern nations to sidestep the effects of the sanctions. Getting European Union members to agree to the sanctions only cuts off a portion of Iranian oil exports that can be easily averted to other nations. It is becoming a more and more high stakes allegiance test. It is unclear who will win the political game of chicken.  U.S. influence still has incredible power over other nations, seen as Japan and South Korea vacillate over what to do in the standoff between Washington and Tehran. According to the WSJ, South Africa has begun diverting its oil imports away from Iran.

The bigger world powers, India and China have taken to forging ways around the power of U.S. currency. China has no intention of cooperating with U.S. sanctions, and has said as much. Reuters has reported that India may settle some its $12 billion in annual oil transactions with Iran in rupees, not the dollar, and there have even been faint rumors of gold exchange due to concerns over the rupee’s convertibility. Some specifics of the possible deal:

But Washington has snapped tighter financial sanctions on Iran and wants Asia, Tehran’s biggest oil market, to cut imports in a bid to pressure the Islamic nation to rein in its nuclear ambitions, which it suspects are aimed at making weapons.

Iran rejects the charge and says its programme is for peaceful means.

India’s central bank stopped one clearing mechanism in December 2010 for Iran payments and refiners finally managed to secure a route through Turkey’s Halkbank in July 2011 but this could be vulnerable to the new U.S. measures.

An Indian delegation has been in Tehran this week discussing options for payment and the source said the decision to pay in rupees was made after a meeting there.

“The Central Bank of Iran will open an account with an Indian bank for receiving payment and settling its import,” the source, who has direct knowledge of the matter, said, adding the new system will start “soon”.

India Trade Secretary Rahul Khullar said this week that the Indian delegation to Iran would work around the U.S. sanctions to protect oil supplies and promote Indian exports.

The government source said Iran has agreed to step up imports from India which added up to some $2.7 billion in 2010/11 and including oilmeal, rice and tea.

“This will cushion them (Iran) to some extent from exchange rate volatility,” the source said.

The rupee is only partly convertible, limiting its acceptability internationally. In addition, it was the worst performing major currency in Asia last year, losing about 16 percent against the dollar, and it remains volatile.

This WSJ article unpacks Iran’s oil problems;

Iran’s largest oil buyers, India and China, which have so far resisted U.S. pressure, have been seen as natural replacements for the loss of European markets. That’s because “by the end of the year, Iran’s remaining buyers will be looking for at least a 10% to 15% price discount,” said Trevor Houser, a partner at New York-based economic-research firm Rhodium Group.

But most experts say Iran may not be able to sell all the freed oil. That’s because China and India are unlikely to swap the safety of Russian or Saudi oil for Iran’s political risk. “While in theory China and India can absorb this rejected volume [from Europe], we believe both will be reluctant to reduce their intakes from other key countries such as Saudi Arabia,” London broker Barclays Capital said in a recent note.

Mr. Houser estimates that Iran is likely to find buyers for only half of the 600,000 barrels a day it normally ships to the EU. In that case, “we’d expect to see upward pressure almost immediately on [prices of] other medium sour crudes,” including those from Saudi Arabia and Russia, he said.

Other maneuvers have put Asian currency interests outside U.S. influence as well. India and Japan agreed to currency swaps to stabilize India’s economy due to capital outflows caused by declining rupee value versus the dollar. Along with those two countries, China and Iran, there have also been agreements between China and Japan, and China and Russia. Grumblings have reached Turkey as well. Even the UK has started to deal transactions with Chinese retailers in yuan. The creation of an Asian currency block is being pushed by our current Administration’s pursuit of interests that mainly help Israel’s position in the Middle East. And it may cause Iran into the arms of a country that already has nuclear weapons, thwarting the U.S.’s objectives.

Of course, Washington has powerful economic tools of its own to fight back. And that is to cripple Iran’s central bank. On December 31, 2011, the U.S. announced its policy to ban oil trading through Iran’s central bank starting in mid-2012. Inflation is getting scarily high, and is so volatile that the Iranian rial is effectively useless for transactions in Iran nowadays. If effect policy is ruining a Middle Eastern economy based on its abilities to export oil, and countries you want to counterbalance start siding with Iran in order to position themselves against U.S. currency and military hegemony, it’s nothing but effectively crazy. The possible losses certainly seem greater than the possible gains. And the fact that countries are leaving options open that oppose U.S. dollar hegemony is not a nice pill to swallow. Our military dominance is waning in its soft power via reserve currency status erosion although U.S. hard power still has no nearest competitor. The further degradation of this situation could lead to extremely dangerous effects on the U.S. economy. There may be a way to bomb our way out of the impasse with Iran, but the trend opposing the USD is a scary global path to think about wandering down.

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