One way that Iran has found to combat the tightening international sanctions on its crude oil sales is to accept payment in something other than US dollars. The Iranians have been selling oil to India and accepting payment in rupees for a while. Iran is also accepting Chinese yuan in payment.

The US-led sanctions that have been imposed on Iran in an effort to get the country to stop its nuclear development program have led Iran to seek alternatives to trading oil for hard currency. The deal with India, and China, involves not just getting paid in local currency, but barter arrangements where Iranian oil is traded for whatever goods that India and China want to get rid of.

The Financial Times reports this morning:

The renminbi purchases began some months ago. Initially the non-barter portion of the transactions were settled in Beijing through renminbi accounts but now, as a result of US pressure, domestic banks such as Bank of China have stopped dealing with Iran… .

Instead, much of the money is transferred to Tehran through Russian banks, which take large commissions on the transactions, these people said.

US Secretary of State Clinton is trying to get India to cut its imports from Iran even further. The US is probably not going to push India hard enough to force significant changes, however. The country has cut its imports from Iran by about 15% so far, but still takes about 300,000 barrels/day of Iranian crude.

Accepting payment in currencies like the yuan and the rupee, which are not freely traded, forces the Iranian government to spend the money in either China or India. That, in turn, forces Iran to spend what hard currency it has on imports of items that it really needs. Sooner or later, the country will be bled dry of foreign exchange.

That’s a mixed blessing for the US however. If the local currency trades with China continue, the Chinese will have put another stake in the ground on internationalizing the yuan. Last week the London Metal Exchange said it would consider adding the Chinese yuan as a means of settling trades on the world’s largest commodity metal exchange.

It is probably inevitable that the Chinese yuan will be adopted as an international currency. One could argue that the government is using the current situation in Iran as a test-bed for what managing an international currency would mean. Right now, though, the country’s financial system lacks many of the controls that the financial world expects to have in place for an international currency.

For Iran, deals like those it has with India and China, do not really solve its internal problems. By accepting payments either in local currency or goods, Iran is forced eventually to inflate its own currency, weakening its economy even further. Trading oil for junk can’t last.

Paul Ausick

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