Iran’s yuan oil payments won’t catch on, yet

May 9, 2012

By Una Galani

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Iran’s yuan-for-oil payments won’t catch on, yet. Tough sanctions from the United States have pushed the Islamic Republic to accept the Chinese currency as part-payment for crude exports to the People’s Republic. But while the yuan should play a bigger role in the world’s energy settlements by the end of the decade, Iran’s shift won’t be the catalyst.

It makes sense for China to use its own currency to pay for oil imports. The move transfers foreign exchange risk away from the world’s second largest oil consumer and supports the government’s long-term drive to establish the yuan as an alternative global reserve currency to the dollar.

For Iran, the yuan trade is more a matter of necessity than desire. Sanctions have made it hard to deal in freely convertible dollars or euros – the currency of Chinese oil payment to Iran since 2006 – so it has been forced to let its largest customer pay in its own non-convertible currency, just as it let India pay in non-convertible rupees.

The Chinese might like the Iranian deal to start a trend in the Middle East, but less politically squeezed producers will be reluctant to follow Tehran’s example. While China might be more willing to buy oil denominated in yuan, Gulf producers have other considerations.

They peg their currencies closely or entirely against the dollar and hold most of their foreign reserves in dollar assets. Although the tie to U.S. monetary policy is not ideal, the choice is rational for economies dominated by a single commodity mostly priced and traded in dollars – and for governments which still rely on U.S. military support.

The yuan’s status is rising, very slowly. China and the UAE have a yuan currency swap agreement, but it covers less than a quarter of the value of two-way trade between the countries. The pace will pick up as Chinese GDP increases and its currency becomes more convertible. The yuan-denominated sales to Iran constitute a small step on the yuan’s long road to becoming a global commodity currency.


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Iran is also selling its oil to India, partly to be paid with Rupees. Soon, the dollar will become irrelevant. The US and its lackeys are committing economic suicide. Also, as the price of oil goes up, Iran ends up making more money selling less oil. Hello, Obama, do you understand what is going on?

Posted by Logical123 | Report as abusive

Although the author makes some relevant points about the ongoing yuan/dollar tussle, she has missed an awful lot of evidence too,

Over the last 4 years China, Russia, Brazil, India, Japan, The 10 Asean Nations, The Gulf States, Nigeria, Turkey, Belaruss as well as Iran have all agreed to swap currencies not only to pay for oil but to pay for goods and service as well. Will this have an insignificant effect on the dollar value and the current US economic situation?

Currently, China is building the biggest oil refinery in the world for the Saudi Arabians. The obvious next stage to this new “friendship” would be for the top exporter of oil in the world to then allow China to pay for Saudi Arabian oil using the yuan instead of the buck. How would that outcome effect the petrodollar’s value and influence?

I therefore find your article superficial and quite poorly researched.

Posted by slowsmile | Report as abusive

Freud was right. Sometimes when you don’t want to say sth which you think about, it will inevitably appear, like in this article.
Iran is under “tough sanctions from US” so they accept payment in yuan. The author forgets to mention that, as pragmatists say, much of their problems IS due to their trading in oil in Euro INSTEAD of US dollar.
In next sentences a lot meaningless words appear like “the US monetary policy may not be ideal etc.” and then we have some truth:”and for governments which still rely on U.S. military support.”
So now Iran does not rely on “US military support” which in US hard diplomacy language means “we will crush you, only problem is China and Russia in this UN Security Council”.

Posted by Wantunbiasednew | Report as abusive

What is the background history as to why we gave our dominance away to China? Or is it that multinationals have no allegiance but to shareholder profits, so we have the double whammy of unrestricted immigration and out sourcing / off shoring of jobs, so to break American expectations of being special or valued?? This plays into the speculation of a North American Union, as American wages, job security had to come down so to make the merge possible.

Posted by PieceofPeace | Report as abusive