The USA dollar will now start to suffer as India and China try to skirt the Iranian sanctions:
India and China Skirt Iran Sanctions With ‘Junk for Oil’
By Indira A.R. Lakshmanan and Pratish Narayanan - Mar 29, 2012 7:16 PM ET
Iran and its leading oil buyers, China and India, are finding ways to skirt U.S. and European Union financial sanctions on the Islamic republic by agreeing to trade oil for local currencies and goods including wheat, soybean meal and consumer products.
India, the second-biggest importer of Iran's oil, has set up a rupee account at a state-owned bank to settle as much as much as 45 percent of its bill, according to Indian officials. China, Iran’s largest oil customer, already settles some of its oil debts through barter, Mahmoud Bahmani, Iran’s central bank governor, said Feb. 28. Iran also has sought to trade oil for wheat from Pakistan and Russia, according to media reports from the two countries.
The trend is growing, sanctions specialists and U.S. officials say, and is denying the Islamic Republic hard currency to prop up the plummeting value of the rial and to fund nuclear and missile programs. Iran already is starved for dollars and euros to support the rial, and barter deals will force it to spend billions of dollars of oil revenue on goods, according to Kenneth Katzman at the Congressional Research Service, a nonpartisan government-research institute in Washington.
“Iran cannot stabilize the value of its currency with such unorthodox payment methods, and that is why its economy is collapsing,” Katzman, an Iran sanctions specialist, said in an interview. “Iran is essentially on a junk-for-oil program.”
LOCAL CURRENCY, GOLD
The second-largest producer in the Organization of Petroleum Exporting Countries, Iran said last month it will accept payment in any local currency or gold as new sanctions make it harder for trading partners to pay in dollars and euros.
The barter trend, lawyers and trade analysts say, is exposing an unintended consequence of sanctions. Cutting Iran off from the global financial system, they say, is driving trade into informal channels and producing greater opportunities for corruption and the diversion of funds for illicit purposes.
“Payments through the financial system are easier to police, and there is less scope for corruption,” said Nigel Kushner, a London-based attorney who specializes in Iran sanctions and export controls.
While “the upside of denying Iran access to hard currency for furthering its nuclear program outweighs the downside of decreasing transparency and pushing trade underground, we could be left very much in the dark as to who is dealing with Iran,” Kushner said in an interview.
HARDER TO POLICE
“When you force trade out of established channels, you have no way to measure it” or to verify that Iran’s trading partners are abiding by global sanctions regimes, said Barbara Slavin, a senior fellow at the Atlantic Council, a Washington research group.
Iran is feeling the impact of tightened sanctions on finance, insurance, shipping and energy. The Society for Worldwide Interbank Financial Telecommunication, known as Swift, expelled Iran’s central bank and more than 20 other Iranian banks this month, making it almost impossible for Iran to complete large international funds transfers.
The biggest winners in the rise of barter deals with Iran are India and China, the world’s fastest-growing major economies, which now are able to meet some of their burgeoning energy demands by trading rupees and yuan or agricultural and consumer goods, analysts said.
OIL FOR ELECTRONICS
Iran is using yuan paid into Chinese bank accounts to buy Chinese-made washing machines, refrigerators, electronic goods, toys, clothes, cosmetics and toiletries, Katzman said.
Rupee payments to Iran from India may total at least $4 billion a year and will be deposited in India’s state-run UCO Bank (UCO), which doesn’t have U.S. operations and is unlikely to be affected by the global sanctions, according to an official with knowledge of the matter who declined to be named because the information is confidential.
Payments in local currencies such as the yuan and rupee, which are not fully convertible, are less beneficial for Iran than hard currencies such as dollars, euros, and Japanese yen.
Trevor Houser, an energy analyst and partner at the Rhodium Group, a New York-based economic research firm, said paying for Iranian oil in rupees is “a pretty good deal for India, and it’s a pretty bad deal for Iran.” It limits the goods the Persian Gulf nation can buy and “deprives Iran of the hard currency they need for effective monetary policy,” he said in a telephone interview.
India’s $2.7 billion in exports to Iran last year amounted to less than a third of the $9.5 billion worth of crude oil that India bought from the Islamic Republic, meaning it may prove difficult to pay for as much as 45 percent of Iran’s oil exports through barter.
Barter deals themselves don’t violate sanctions provided that no laws are broken, such as dealing with sanctioned banks and companies or providing technology for Iran’s nuclear program, according to three Obama administration officials who spoke on condition of anonymity because of the sensitivity of the issue. So long as countries comply with a new U.S. law by reducing Iranian crude imports, there’s no prohibition on paying for that oil with legal goods and services, the officials said.
If India pays for oil with wheat, one U.S. official said, that’s better than paying the Iranians in dollars or euros they might use to buy additional centrifuges to enrich uranium.
Another U.S. official said the administration has no evidence that any country is using barter deals to conceal increased oil imports from Iran or to trade in illicit goods.
Iran earned about $100 billion from crude oil exports in 2011, according to International Monetary Fund projections. U.S. and EU sanctions imposed since November are intended to squeeze the Islamic Republic’s economy, persuading its leaders to abandon any illicit aspects of its nuclear program.
United Nations inspectors issued a report Nov. 8 raising questions about possible military dimensions of Iran’s nuclear program, adding fuel to U.S., EU and Israeli claims that Iran is seeking to develop nuclear weapons. Iran says its program is strictly for civilian energy and medical research.
China and India have maintained commercial ties with their Persian neighbor even as the sanctions have created obstacles. Trade among the nations dates back 2,200 years to the Silk Route, a trade network spanning Central and East Asia.
While neither China nor Iran has made details of existing barter arrangements public, China’s exports to Iran increased to $14.8 billion in 2011, compared with $900 million in 2001, according to Chinese customs data. China imported $21.7 billion in Iranian oil last year, the figures show.
India exported $2.7 billion worth of goods to Iran in the financial year that ended in March 2011, according to India’s Department of Commerce. Iron and steel articles were the biggest category, accounting for $623 million. That was followed by $454 million in products including inorganic chemicals, precious metal compounds and rare-earth metals, and $419.6 million in cereals.
Seventy Indian business representatives met Iranian companies and officials in Tehran and Tabriz this month to discuss boosting trade, said Anand Seth, spokesman for the Federation of Indian Export Organizations, which organized the tour. The federation, a partnership between private companies and the Indian Commerce Ministry, won’t release the names of the Indian companies for fear of subjecting them to pressures from the U.S., Seth said.
“Barter trade is nothing new for Iran, and the country’s merchant mentality will adapt quickly to the new situation,” Bijan Khajehpour, an Iranian business consultant based in Vienna, said in an interview.
To contact the reporters on this story: Indira A.R. Lakshmanan in Washington firstname.lastname@example.org; Pratish Narayanan in Mumbai at email@example.com
To contact the editor responsible for this story: John Walcott at firstname.lastname@example.org
Now the Bank of Korea has cut USA dollar reserves. The USA dollar is heading south:
Bank of Korea cuts dollar reserves by 3%
Submitted by cpowell on Fri, 2012-03-30 12:43. Section: Daily Dispatches By Eunkyung Se
Friday, March 30, 2012
SEOUL, South Korea -- South Korea, Asia's fourth-largest economy, pared the share of dollars in its foreign-exchange reserves to the lowest level since the global financial crisis erupted in 2007.
Dollar holdings dropped to 60.5 percent of foreign- exchange reserves at the end of last year from 63.7 percent in 2010, the central bank said in its annual report for 2011 released today.
The drop underscores a shift among reserve managers to diversify assets, with China's yuan and Australia's dollar among the beneficiaries. South Korea's government earlier this year announced plans to invest in Chinese equities as well as bonds as the yuan's international role increases.
"The move to diversify reserves away from U.S. dollars and the euro accelerated last year, largely on weaker fiscal fundamentals and subdued economic conditions in developed markets," Wai Ho Leong, a senior regional economist at Barclays Capital in Singapore, said in an e-mail. "At the same time, it marked a move into gold, and bonds of stable emerging-market economies, particularly those with better longer-term prospects and currency appreciation potential."
The central bank boosted the proportion of equity investments to 5.4 percent last year from 3.8 percent, it said. Holdings of foreign government bonds rose to 36.8 percent from 35.8 percent in 2010, the BOK said.
While the proportion of dollar holdings declined to the lowest since 2007, when the central bank began to disclose details about its asset portfolio, the change doesn't reflect a lack of confidence in the currency, Kang Sung Kyung, a director at the bank's Reserve Management Group, told reporters in Seoul today
Other currencies held by the BOK include the euro, yen, pound, and Canadian and Australian dollars, Kang said. The central bank holds government bonds issued mostly by the U.S., Japan, Canada, Australia, the U.K., Germany, and France, he said.
Foreign-exchange reserves climbed by $4.46 billion to a record $315.8 billion at the end of February as the euro and pound strengthened against the dollar and the central bank made gains by managing assets, according to a central bank statement on March 5.
Choo Heung Sik, the director general of the Reserve Management Group, said in an interview in January that the yuan "has the potential to become a key reserve currency in the long term and thus we are building a channel to invest there."
The BOK said that month it received approval from the People's Bank of China to buy bonds and obtained a license as a Qualified Foreign Institutional Investor, or QFII.
"Central banks need to look for higher returns," said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong. "Their sterilization programs used to mop up liquidity is creating the pressure for them to look for assets with better returns."