Politics, religion, and culture where East meets West

Fixing the rial

with 2 comments

Since March, when I last posted (“Iranian oil empire?”) about the currency war in Iran, things have visibly and significantly cooled. But just because there are no pipeline explosions, naval exercises, or military threats doesn’t mean the situation hasn’t progressed. Let’s start where we left off, with an Iran inconvenienced by sanctions, but essentially unfettered in its oil production and export capabilities—especially in transactions with the BRICS.

Chris Cook, former director of the International Petroleum Exchange, suggests that the sanctions on Iran may not just be ineffective, but counterproductive; and that Iran is actually better off (as March 20th might have suggested) without a market for dollars. Anyone who can foster a good relationship with an off-market Iran will now have incentive to buy discounted crude (relative to global prices) for refining and resale at a profit.

Even more significant is the possible end result of a developing energy voucher system in Iran designed to decrease domestic demand and wasteful energy use.

Taken to its logical conclusion, where this policy leads is for Iran’s Central Bank simply to fix a new rial – with several zeroes removed – to a suitable unit of energy, and for energy prices to be set against this unit. This could be implemented in a similar way that a deficit-based abstract currency unit was fixed to participating European currencies at the launch of the euro.

The transition process would need to be properly and transparently managed by a monetary authority – probably the Central Bank – in close liaison with the oil and gas complex. The outcome of adopting an “energy standard” and an energy dividend in this way would be to rapidly reduce profligate use of energy at the same time as addressing the problem of inflation.

Instead of debasing Iran’s rial entirely, the U.S. may only be encouraging Iran to rethink its currency in new, energy-based terms. If this becomes reality, the Iranian rial would effectively become a hedge against volatile global crude oil prices and dollar-denominated market manipulation. Put simply: If each rial in your reserves guarantees a fixed amount of Iranian oil, free from market volatility, you’re going to buy more rials.

I don’t think that’s what Obama intended.

Written by M. James

April 27, 2012 at 1:16 pm

2 Responses

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  1. I wonder if it’s as easy as that. Shoot me down if I’m wrong here. If Iran did the above, would a rial, pinned to a unit of energy, then become a hedge against volatile energy prices? If a rial is n BTUs, and I want to bet n BTUs will be worth more next month, I could trade my dollars for rial today and swap my rial for BTUs next month. That would give the rial a market value independent of the value of the unit of energy to which it is pinned, at least on the international market, because I’d pay a premium today for rial.

    Luc Issa

    April 28, 2012 at 9:13 pm

  2. Luc:

    I think that, with all other things being equal, the rial would still be an attractive hedge against dollar-denominated market volatility, especially given U.S. inflationary policy. I think it is also worth noting that while this new rial might fetch a premium on the global market, it might not “among friends,” which is the way Iran will presumably continue to operate.

    To belabor my point: even a regionally traded oil currency, as this could turn out to be, would be damaging to U.S. objectives. With an energy-denominated currency in the reserves, the dollar becomes less valuable.

    M. James

    April 28, 2012 at 10:34 pm

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