Iran’s Ban on USD Circulation: Economic Interest or Work of Drama?

Iran’s Ban on USD Circulation: Economic Interest or Work of Drama?

Despite oil- Iran’s number one trade good- is priced against the US dollar, Tehran announced, in the mid-November 2017, that it had a new plan to ban the circulation of the USD in its trade deals in coordination with Russia and to replace it with Euro, while no Russian statement has been made concerning this issue. After the US president, Donald Trump decertification of the Iran nuclear deal amid threats of classifying IRGC- one of Iran’s economic pillars- as a terrorist organization, Iran remade its announcement on the ban of the USD in its trade deals to diminish- as Iran’s officials think- the US dollar domination of international trade.
Earlier, Iran announced that it would stop the circulation of the US dollar by the beginning of the current fiscal year in March 2017; specifically, in January 2017 in response to Trump’s travel ban on the Iranian and another six Muslim countries’ citizens to the United States. However, it has been more than seven months since the Iranian announcement and nothing has happened; no clear plan or timeline has been set for renouncing the US dollar, except the propaganda announcement about the initial agreement with Turkey to replace the US dollar with the local currencies of both countries, but both, this agreement and the oil for goods agreement with Russia, have not been scheduled for implementation yet.
Nevertheless, some questions arise here; does the Iranian decision impact the US dollar power as the most important currency in international trade and currency basket of cash reserves? And does the Iranian economy have any gains or losses as a result of this ban? The following lines will answer the two questions.
» What does the Iranian ban of the US dollar circulation mean for the United States economy?
In fact, it means nothing. There are 194 countries in this world. Most of these countries- if not all- use the US dollar in their foreign trade –importation and exportation- and use it as their reserve currency. In case Iran takes this step and implements the ban, the US dollar will not be impacted, knowing that the volume of the mutual trade between the two countries is low in comparison with the global trade volume. Iran’s share amounts to 0.5 percent of world exports. It is not China- for example- that contributes to more than 14% of global exports. If Iran decides to ban circulation of the US dollar in its trade deals and replaces it with the Chinese Yuan, it will result in an increase in the Chinese Yuan against the US dollar, which will negatively impact the Chinese economy that is inclining toward devaluation of its currency to increase competitiveness of its products in the world. Indeed, the gap between the Chinese trade volume and the Iranian one is too big in world trade and Iran’s trade volume with the United States is negligible and limited to certain traditional products like carpets, dates, oils, and crackers.
» Can Iran achieve any gains from banning the circulation of the USD?
The only gain for Iran from this step cannot be more than propaganda and local publicity of Iran’s stand against the major economic and political power in the world. Iran can stop its trade deals with US dollar without impacting the United States in anything and not achieve any economic gains in return. On the contrary, it will lose several advantages in case it takes this step.
Iran can ban circulation of the US dollar because most of its trade deals are being made with countries and entities that have major international currencies like the Chinese Yuan- the currency of Iran’s number one trade partner and Euro- currency of the second source of Iran’s imports after China, but what losses can Iran’s economy suffer in case Tehran applies this decision?
The US dollar is a fundamental component in the currency basket of the Special Drawing Rights (SDR) in the International Monetary Fund and a basic constituent of the reserve assets for countries of the world. In addition to the US dollar, this currency basket has four more major currencies- Euro, Japanese Yen, Pound, and the Chinese Yuan that was added to the basket in 2015. This variety maintains the reserve assets of any country and keeps the value of its local currency from significant depreciation in case of the decline of any of these currencies for relying on the other currencies in the currency basket. Hence, if Iran bans the circulation of the US dollar, its reserve assets will lose the advantage of this variety and insurance of maximum stability of its local currency and foreign exchange reserves.
Oil- Iran’s major export commodity- is priced by the US dollar. It provided huge annual returns- more than fifty-five USD in the fiscal year 2016-2017. Changing this currency might destabilize the economic returns of Iran that have to maintain part of its cash reserves in US dollar to fulfill its obligations for its imports that amounted to about sixty-three billion USD in the same year.
On the other hand, it is unlikely the Iranian people- both businessmen and ordinary people- to easily agree on such decision and stop dealing in the US dollar, while they tended, over the past years, to keep the US dollar as a stored value for losing confidence in Iran’s local currency, Toman that depreciated against the American currency for at least 170% over the past five years. In addition, the attempt to convince the Iranian people to convert their funds and savings from US dollar into another currency is difficult. It might take years or be postponed until the last year of Rouhani’s presidency so that the next president holds responsibility for the consequences of this decision. According to Al-Monitor, the US financial advisor company “Forbes” warned Iran’s central bank from the consequences of this ban for the possibility of destabilizing the Iranian currency, which would diminish the gains Iran has achieved over the past four years.
» Currency exchange deals with Iran’s neighboring countries and the oil for Food agreements.
Iran relies on hammering out exchange agreements of local currencies with its neighbors and exchanging its oil for goods to minimize reliance on the US dollar in its trade deals. Over the past months, Iran signed agreements with Turkey and Azerbaijan to circulate their local currencies in their trade deals and signed another agreement with Russia to exchange the Iranian oil for Russian goods, equipment, and spare parts. However, none of these agreements has come into effect or been scheduled for implementation as the whole matter was the only sort of propaganda. However, even if Iran applies this decision and bans the circulation of the US dollar in its trade deals, it, still, will be in need for the American currency to pay for its imports from countries outside the EU and China, disregarding the advantages of availability of the US dollar in Iran’s cash reserves.

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