Iran: ‘We accept yuan, rupees’Posted: 16/05/2012
By Elly Jupp, Research Associate, IISS-Middle East
Recent announcements that Iran is accepting yuan (renminbi) and rupees for crude sales to its two biggest clients, China and India, is another sign of an ongoing structural shift in global economic power. As more growth moves to the industrialising economies of Asia and other emerging regions, this geo-economic shift has begun to challenge the US dollar’s status as the world’s primary reserve currency. Although the dollar’s demise is hardly imminent, outgoing World Bank President Robert Zoellick is among those suggesting that a new monetary regime, with multiple reserve currencies, is needed for an increasingly multi-polar world.
The non-dollar payments for Iran’s oil are noteworthy for several reasons. Firstly, the move is a clear sign that Beijing and New Delhi consider their energy needs more important than heeding United States requests to join a boycott of Iran over its nuclear programme. Beijing has much to lose by supporting further action against Iran. The loss of Iranian oil would cause a massive supply shock to the Chinese economy and numerous contracts, worth billions, for energy exploration and refining would be at risk. India values Iran as a gateway to Central Asia and Afghanistan, especially in light of Delhi’s strained relations with Pakistan and China.
Secondly, while the deals provide a welcome source of revenue, Iran’s ability to access dollars is further damaged by them. Increasing amounts of Iranian crude are sitting in storage depots and aboard stationary tankers, a situation that will only worsen once the European Union oil embargo comes into effect on 1 July. But while the Chinese and Indian sales circumvent sanctions on oil sales, payment in renminbi and rupees effectively cuts off access to the US dollar. Because the renminbi and particularly the rupee are not as freely convertible as the dollar, Iran is locked in a barter arrangement of sorts; it must spend the revenue on goods and services purchased from China and India.
Thirdly, the payments are processed entirely outside the American financial system. The Chinese client is Unipec, a subsidiary of the country’s third largest state-owned oil entity Sinopec, and the payments are channelled to Iran through Russian banks. Iran’s rupee payment is deposited with an Indian bank, UCO, and the remainder is settled in euros at Turkish bank Turkiye Halk Bankasi.
The clear winners in this situation are China and India who are able to reduce their foreign-exchange risk when purchasing Iran’s oil. China in particular is able to promote its currency as an alternative global reserve, while both countries can leverage their status among a dwindling number of customers to extract favourable prices and terms from Iran.
For the US, the situation is a source of frustration. It loses dollar trade while the Iranian regime is insulated from the sharp edge of sanctions. Meanwhile, the renminbi’s prospects of becoming a global reserve currency are moderately bolstered.