Middle East and Asian Trade Wars
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Iran is the fulcrum on so many subplots in the global macro picture that it bears looking at from a variety of perspectives as events unfold. I wrote about the currency devaluations last week that have been ongoing since the Federal Reserve began a violent change in monetary policy beginning in March. All of the countries who have aligned themselves with Iran have had their currencies under fire: Turkey, India, Russia and China have all had to cope with sudden reversals in their currency’s strength versus the U.S. dollar.
That being said, the latest news coming from India is that they and Iran are in negotiations to radically expand bilateral trade between them. They currently do approximately $16 billion in trade annually. Iran is interested in having that amount expand as high as $50 billion.
Trade Expansion Rupee Reduction
Whether that expansion of trade comes to pass there is an enormous opportunity for India to create an increased international presence for the Rupee as the two countries have agreed to settle 45% of the oil transactions in Rupees. That said, April’s imports of Iranian oil by India decreased by 34% compared to March. By contrast, Japan has apparently acceded to Washington’s demands by cutting back their oil shipments a reported 250,000 barrels per day. Iran’s exports are down as much as 23% so far in 2012.
But, the latest report from Reuters makes it clear that the trade between the two nations has been agreed to continue at a rate of 311,270 barrels of oil per day. At $97 per barrel Brent Crude, that trade is worth $13.58 million per day or $407 million per month and it is no longer flowing through the U.S. dollar. Iran can then turn around and use some of those very same Rupees to pay Indian non-0il exporters for goods and services such as wheat, mining and construction equipment and steel.
This trade represents nearly $4.9 billion per year, or 30% of the current level of trade between the two nations. If Brent Crude had stayed at $125 per barrel then the monthly flow would have been $525 million per month. By creating an environment where the rupee buys less oil it blunts the effectiveness of the policy, starves Iran buy loading them up with another junk currency to rival their own Rial, which has undergone a 50+% devaluation since the ban on trade with the Central Bank of Iran went into effect in December.
Relationship Stresses
No wonder Secretary of State Hillary Clinton is furious with the Indian government. Because of U.S. sanctions against Iran, U.S. oil companies like Exxon-Mobil (NYSE: XOM) and Conoco-Phillips (NYSE: COP) cannot do business with Iran. Any attempt by Iran’s allies to bolster their ability to resist the U.S. sanctions weakens their ability to effect regime change and allow U.S. oil producers to gain access to Iran’s huge reserves in a very similar way they were able to do so in Iraq.
If the Rupee trade with Iran is successful it sets a dangerous precedent in the open market for oil. The action in the markets on Friday June 1st, suggest that another inflection point in the game has been reached. Gold popped 4% during New York trading while the U.S. dollar sold off.
Iran is formally inviting Indian Prime Minister to the Non-Aligned Movement Summit in Tehran by sending their Foreign Minister to present the invitation personally. If Prime Minister Singh accepts, this would be another in a long list of snubs by the Indian government towards Washington since this standoff over Iran’s nuclear weapons program began.
The Last Economic Weapon
Since it looks like Iran’s expulsion from SWIFT has failed to deter anyone, the last line of defense for the U.S. and the E.U. comes from the banks who hold the notes on many of the tankers that would carry the oil after sanctions go into effect. In short, the European banks have final say as to whether they will allow a change in insurer for the vessel. Both Japan and India have pledged to insure the cargo and China has already done so. But after July 1st any ship financed through a European bank would put the bank at odds with the E.U.’s sanctions as they cover both financing and insuring Iranian oil. One bank alone, Nordea Bank AB, has $17.7 billion dollars in outstanding shipping loans.
If the E.U. would pursue this path it would only pour more fuel on a fire within the crumbling E.U. banking system. The last round of talks before the tankers have to begin their journeys from China and Japan between Iran and the U.S. will take place on June 18th and 19th. If those break down the world is headed for a show down and we’ll know soon enough just how serious the U.S. is about a potential shooting war.
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