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Petrol Bourses are Modern Silk Routes
by K. Gajendra Singh Bookmark and Share
 

Post Bretton Woods:
Emerging Outlines of New International Monetary Order
 

"History is ruled by an inexorable determinism in which the free choice of major historical figures plays a minimal role", - Leo Tolstoy  

“Keynes's collective work amounted to a powerful argument that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a cliff," - Hyman Minsky.

In 1960s, while returning from Algiers by boat via Marseilles, I found that the French shopkeepers were very reluctant to accept US dollars, preferring Algerian Dinars. It was said that the French were converting their reserves of US dollars into gold. Why were the French and president Gen De Gaulle doing so! (It became clear by1971) 

Because at the end of WWII in1944, agreements were drawn up at Bretton Woods, New Hampshire, USA to establish a new monetary management system to avoid worldwide economic disasters like the great depression experienced in the 1930's. Under this agreement the International Monetary Fund was set up along with the World Bank. Both the institutions have been used to maintain and expand US financial hegemony around the world. 

Bretton Woods established the US dollar as the reserve currency of the world, replacing the British pound sterling and required world currencies to be pegged to the dollar rather than gold. 

The demise of Bretton Woods began in 1971 when Richard Nixon took the US off of the Gold Standard to stem the outflow of gold. But the dollar has remained a 'fiat currency,' backed by nothing but the promise of the US federal government. But the 1971 US action, referred to as the Nixon shock, created a situation in which the United States dollar remains the sole backing of currencies and a reserve currency for the member states. 

Thus USA which had promised an ounce of Gold for US$ 35 went back on its international commitment, causing loss to those who held US dollars and not gold as reserves. So do not be surprised if Washington devalues $ or even refuses to reimburse trillions of dollars of debt, many countries hold in US dollar denominated securities.

In any case by 1976 the principles of Bretton Woods were abandoned all together and the world currencies again became free floating. But Bretton Woods remains an important template for forex traders. 

At the Bretton Woods II conference in New Hampshire in April last year funded by US speculator billionaire George Soros, who finances regime changes in US favor, he admitted that “The big question is whether the U.S. dollar should be the reserve currency; and, added that in fact, it no longer is.”  The Nobel Prize winning economist Joseph Stieglitz, Columbia University professor, and former Senior Vice President and Chief Economist of the World Bank admitted that the US dollar as the reserve currency is hurting the entire world. The US Federal Reserve has failed, and inequality in the US was reaching a tipping point that hurts the economy and society, with policymakers sending the US further in the wrong direction.

Stieglitz who also chairs the U.N. General Assembly on Reforms of the International Monetary and Financial System, has argued  for “a global reserve currency and  called for a new “global system,” saying the current one is “fundamentally unfair because it means that poor countries are lending to the U.S. at close to zero interest rates.”

During the last few years many countries including the five BRICS nations – Brazil, Russia, India, China and South Africa have held many meetings including at the summit level and called “for a restructuring of the World War II-era global financial system and an eventual end to the long reign of the U.S. dollar as the world’s reserve currency.” 

Petrodollars: US-Ibn Saud Dynasty Nexus

Since the 1930s after the discovery of oil in the Arab peninsula, a critical development in the history of oil industry, there is the nexus between US and Saudi Arabia and a compact between the Saudi ruling elite and the puritan Wahhabis, to handover the peninsula’s oil wealth and revenues for western exploitation and benefit in return for protection to the Saud dynasty. This nexus has stood the test of time between successive Saudi and US governments. Washington has done everything to maintain the feudal regime in power, a regime which controls “the largest family business" in the world and lacks any popular mandate. (It has not stopped Riyadh from interfering in other nations affairs across the Muslim world for greater freedoms and democracy i.e. in Syria, earlier in Libya etc.) 

This nexus began with first Franklin Roosevelt, then Dwight Eisenhower to Jimmy Carter to George H.W. Bush. Declared Roosevelt after meeting Saudi Arabia’s king aboard a warship in 1945, "I hereby find that the defense of Saudi Arabia is vital to the defense of the United States." Carter, in 1980, put it even more forcefully: "Let our position be absolutely clear. Any attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States." It was clear even before WWII that oil had become the vital strategic commodity for expanding military and economic clout. During WWII, the Nazis occupied Romania for its oil and went for the oil fields in Azerbaijan, both countries then big oil producers.

Even a major reason for the partition of Hindustan was to protect western oil wells in the Middle East. Late Indian diplomat Narendra Singh Sarila in his well-researched book 'The Shadow of the Great Game: The Untold Story of India's Partition’, documents how the British leadership across the political spectrum, Conservatives and Labor, intrigued, told lies, divided the Indian subcontinent and created a weak state of Pakistan which would be reliant on the West. Because Mahatma Gandhi with this opposition to violence and war, and emphasis on peaceful means to resolve all disputes and Jawaharlal Nehru with his non-real politic idealism and vision of creating friendship and understanding among colonized and exploited people of Asia, Africa, Middle east and elsewhere, would not join Western military pacts to protect from the Soviet Union, the oil wells in the Middle East dominated by Western oil companies.

Washington backed its commitment to protect Saudi Arabia with military treaties reaching into the Middle East. Apart from NATO and CENTO, U.S. military bases are stretched into east Africa, the Indian Ocean, and the Gulf to protect ME oil. Then came the Rapid Deployment Force and the U.S. Central Command and the U.S. 5th Fleet, now based in Bahrain. The 1991 Gulf War led to a massive expansion of the U.S. military presence in the region, including putting US troops on sacred Saudi soil, a major cause of anguish and deep resentment among conservative Muslims, specially the likes of the recently assassinated Osama bin Laden and Al Qaida and other such outfits.

Then came the 2003 illegal US led invasion of Iraq for its oil, publicly proclaimed by powerful deputy defense secretary Paul Wolfowitz and others like Alan Greenspan. The invasion and brutal occupation has resulted in the death of over a million Iraqis, devastated the people ,divided and destroyed the state. But the outcome has been discomforting and to the contrary. The fierce Iraqi resistance has ‘broken the US army’ on the ground, making Washington to think many times to land large body of troops elsewhere. A Shia led pro-Tehran élite now controls Baghdad. Thus Iran’s position has been strengthened against which Washington has developed a visceral hatred since West’s gendarme in the region, Shah of Iran was ousted in 1979 and US diplomats in Tehran Embassy held hostage. 

All efforts are now being made to weaken Iran, directly or by weakening its allies; the Hezbollah in Lebanon and Assad regime in Damascus. But Russia and China are offering strong resistance, especially Moscow, against regime change of its ally Bashar Assad in Syria, since it will adversely affect its strategic position in the Mediterranean after the loss of Libyan ports. Washington with Saudi (and Qatari) finances has been exploiting the revolt of Arabs in north Africa against US puppet rulers of Egypt, Tunisia, Yemen and elsewhere by promoting Muslim Brotherhood and other religious groups, as it has always done i.e. against nationalist and socialist regimes of Nasser in 1950s and 1960s and recently Saddam Hussein in Iraq and Muammer Gaddafi in Libya.

US remains determined that the business and trade in petroleum and gas is carried out and nominated in dollars, not only by Saudi Arabia but other five members of the Gulf Cooperation Council (GCC) as ordained but by others too. It is this template which acts as the spine for dollar as the reserve currency. But major changes are emerging.

Shifting of Economic Power from West to Asia 

John Embry, Chief Investment Strategist of $9 billion strong Sprott Asset Management, said last year “When you look at the financial condition of the United States at the federal level, at the state level and at the municipal level, I don’t see any way out of this.  There’s too much debt, interest rates are far too low.  If interest rates really reflected what’s going on, this risk in the debt and the risk of inflation, they would be hundreds of basis points higher and under that event the debt couldn’t be serviced.  So there will be some form of default.” 

Financial Times (London) warned last year that the US dollar will lose its status as the reserve currency in 25 years and would be replaced by a portfolio of currencies according to a survey of central bank reserve managers who collectively control more than $8,000 billion, unlike in the past when they said the dollar would retain its status as the sole reserve currency.  The dollar would be replaced by a portfolio of currencies within the next 25 years. Central banks have bought about 151 tons of gold so far this year, led by Russia and Mexico, according to the World Gold Council, and are on track to make their largest annual purchases of bullion since the collapse in 1971 of the Bretton Woods system, which pegged the value of the dollar to gold. The Yellow metal 

Would be the best performing asset class over the next year, citing sovereign defaults as the chief risk to the global economy. 

US debt now amounts to over $ 14 trillion; equal to its GDP .Even in this GDP, the financial industry contributes 40%.TheUS economy is now 20-25 % of world GDP unlike 50% after WWII and is being artificially sustained by a stimulus of $ 2.8 trillion. There are no green shoots of revival, unemployment continues to rise. US economy remains in recession. The 1930s recession was overcome by WWII which allowed its protected (from war) industry to run full steam and indebt European and other countries. With many industries disappearing or in decline, even the automobile one, the US economic downhill can only worsen. 

For the first time ever, the United States lost its perfect credit rating as Standard & Poor's reduced its long-term debt assessment in August last year from AAA to AA+ with a negative outlook.

In announcing the move, the ratings agency said a deal that week to reduce the nation's debt did not go far enough and exposed paralyzing political dysfunction. The downgrade could cost the government and ordinary consumers billions of dollars by jacking up interest rates the U.S. must pay on its $14.4 trillion debt and a host of rates consumers pay for items such as mortgages, car loans and credit cards. 

Has the Critical Moment of Paradigm Shift Arrived

In an article of 26 October, 2011, titled ‘The End of the American Era’, Prof Stephen M. Walt stated that ‘THE AMERICAN ERA’ began immediately after World War II. Europe may have been the center of international politics for over three centuries, but two destructive world wars decimated these great powers. So is USA in many wars. Paul Kennedy’s best-selling Rise and Fall of the Great Powers, had argued in 1985 that America was in danger of “imperial overstretch.” He believed that Great Britain returned to the unseemly ranks of mediocrity because it spent too much money defending far-flung interests and fighting costly wars, and he warned that the United States was headed down a similar path.

A new Reserve currency to challenge the dollar –
What’s really going on in the Straits of Hormuz

Speculation and talk about a Settlement or Reserve Currency has been going for quite some time, especially in the last few years. David Malone, author of the "The Debt Generation” has focused considerable attention on the financial systems. The Settlement Currency just means the currency both parties agree is stable, internationally trusted and accepted, and in plentiful supply which may not be the case for their own currencies. China and some other countries want to challenge the US and dollar hegemony with the eventual goal of creating an alternative reserve currency backed by gold rather than the dollar or by debt. These countries have been buying lots of gold and include Russia, China and India among others. They are talking about the need for a new reserve currency to replace the dollar.

Malone noted media reports that India was talking to Iran about moving out of dollar settlements so as to be able to buy Iranian oil despite a US embargo. India said it was discussing settling payments in Gold since Iran does not buy much from India unlike from China. India has also signed a settlement agreement with China to use the Yuan. China and Russia have been trading directly in their own currencies and using them both interchangeably for settlement for over a year. As the “The China Daily “article reported that Beijing is allowing greater use of its currency for cross-border transactions to reduce reliance on the US dollar, after Premier Wen Jiabao said in March last year that he was “worried” about holdings of assets denominated in the greenbacks.

Then on 26th December 2011 Bloomberg reported, Japan and China will promote direct trading of the yen and Yuan without using dollars and will encourage the development of a market for companies involved in the exchanges. China is Japan’s largest trading partner. Japan will also start in 2012 buying Chinese debts. How much Dollar debt will either of them buy? They have both already been buying less.

 

On Dec. 28 last year the Iranian news service reported that Iran and China signed two agreements on expansion of trade ties and joint investments. These trades too will not be settled in Dollars or in Euros. 

The China Post” reported that on the last day of 2011, US President Obama had signed a new law imposing sanctions on banks dealing with Iran….Sanctioned institutions would be frozen out of U.S. financial markets. But as the article went on to report, with only barely concealed delight, the threat may be as hollow as the dollar itself. The law comes with exemptions which may eventually highlight America’s plight rather than its might.

The Iranian Oil Embargo Blowback

While events and changes have been taking place as do all major historical movements and changes, perhaps the US and EU decision to put more sanctions against Iran and for EU not to buy Iran oil from July may be one of the straws that breaks the US Camel of Dollar Reserve Currency .Iran is an important oil supplier to emerging Asian countries like China, Japan, South Korea and India. 

India whose prime minister committed Indians of deep love for George Bush, a few years ago, as a result of one harmful policy after another against India by Washington, finding its back stretched has decided that New Delhi, faced with difficulties to make payment by banks for Iranian oil will even settle the accounts in gold bullion, according to media reports including one close to Israel.

Veteran journalist Pepe Escobar puts it colorfully in his Asia Times column “The Iranian oil embargo blowback

“Russian Foreign Minister Sergey Lavrov said, "Unilateral sanctions don't help matters". The Ministry of Foreign Affairs in Beijing, exercising immense tact, nevertheless was unmistakable; "To blindly pressure and impose sanctions on Iran are not constructive approaches." 

Turkey's Foreign Minister Ahmet Davutoglu said, "We have very good relations with Iran, and we are putting much effort into renewing Iran's talks with the 5+1 [Iran Six - the United Nations Security Council permanent members plus Germany] mediators' group. Turkey will continue looking for a peaceful solution to the issue.” 

BRICS member India - alongside Russia and China - also dismissed sanctions. South Korea and Japan will inevitably extract exemptions from the Barack Obama administration. 

All across Eurasia trade is fast moving away from the US dollar. The Asian Dollar Exclusion Zone, crucially, also means that Asia is slowly disengaging itself from Western banks. 

The movement may be led by China - but it's irreversibly transnational. Once again, follow the money. BRICS members China and Brazil started bypassing the US dollar on trade in 2007. BRICS members Russia and China did the same in2010. Japan and China - the top two Asian giants - did the same only last month. 

Only last week, Saudi Arabia and China rolled out a project for a giant oil refinery in the Red Sea. And India more or less secretly is deciding to pay for Iranian oil in gold - even bypassing the current middleman, a Turkish bank. 

Asia wants a new international system - and it's working for it. Inevitable long-term consequences; the US dollar - and, crucially, the petrodollar - slowly drifting into irrelevance. "Too Big to Fail" may turn out to be not a categorical imperative, but an epitaph.” concluded Escobar.

Under US pressure, EU declared economic war in the form of an Iranian oil embargo, beginning July, never mind many of their refineries are suited to light Iranian oil, although Libya can make up for some of the loss, the only thing the invaders have set right since Gaddafi lynching. Libya remains chaotic, with torture and strong trends towards a possible civil war, showing that West was only interested in stealing Libyan oil, having earlier gulped its assets in Western banks.

Against ill thought bluff moves, chess players in Iran have acted fast. The Majlis (Iranian parliament) is discussing  the matter of sanctions and EU embargo on 29 January and may decide  to cancel right away all oil exports to any European country that approved the embargo. A member of Parliament Nasser Soudani: declared "Europe will burn in the fire of Iran's oil wells." 

Wrote Ambassador M.K. Bhadrakumarin his recent blog;

“The week ahead promises to be of momentous importance for the Middle East - and for international security. Two templates are overlapping in Tehran. One, Iran’s Majlis is voting today on a legislation to put embargo on oil exports to Europe w.e.f coming week. The indications are that the law will sail through and may forthwith secure the approval of the Guardian Council. 

Iran’s retaliation has huge implications for international security. Put simply, we are all wading into unchartered waters. There is high probability of a chain reaction with oil price skyrocketing. The analysts have only been dabbling in the subject, as the latest disclosure by Reuters from Tehran suggests. 

“The Reuters report says that all European companies with pending oil contracts with Iran are going to be hit. For Italy’s Eni, for instance, the buyback contracts are worth $1.5 billion. Again, around 70 refineries in Europe will need to be shut down if the light, ’sweet’ crude from Iran is unavailable. So, it all goes far beyond a matter of shortages in crude supply that Saudi Arabia can somehow make up.

Significantly, Saudi FM Prince Saud Al-Faisal has been quoted as saying that there is no ‘binding decision’ by the GCC countries in response to the EU’s sanctions against Iran and adding, most interestingly, that they will only defer to decisions made by the UN. The FM underscored the importance of a “balanced market” for oil. 

Riyadh is obviously having a multitude of considerations, which certainly includes Saudi Arabia’s long-term relationship with Iran and the logic of geography that places the two countries as neighbors. Prince Faisal was speaking on the sidelines of a GCC-Turkey conference in Istanbul on Saturday where Turkish FM Ahmed Davutoglu categorically distanced his country from sanctions against Iran.

Meanwhile, the IAEA inspectors have arrived in Tehran. Iran’s dialogue with the IAEA is resuming after a gap of 3 years. Most western assessments are already pessimistic about the prospects of the talks, while Iranian FM Ali Akbar Salehi has sounded hopeful. 

The IAEA director-general Yukiya Amano, ominously, has dimension “to Iran’s nuclear program. Unlike Mohammed ElBaradei, who had a mind of his own, Amano holds the American brief and seems to be working toward the objective of referring Iran to the UN Security Council. 

Ironically, he acknowledges that he has no proof in hand that there is any military content to Iran’s nuclear program. Equally, the renowned former IAEA director Hans Blix has suggested that there is still room for diplomacy. 

But if the intention is to browbeat Iran, the inspectors aren’t going to get anywhere. The supreme leader’s advisor and elder statesman Ali Akbar Velayati has forewarned that Iran won’t blink. Tehran is on guard that the IAEA inspectors are possibly holding a western brief. Velayati said: “We [Iran] have always been open with regard to our nuclear issues and the IAEA team coming to Iran can make the necessary inspections. We will, however, not withdraw from our nuclear rights as we have consistently acted within international regulations and in line with the laws of the non-proliferation treaty. Furthermore, wherever Iran has any nuclear activities, the IAEA cameras have constant monitoring, adds Amb Bhadrakumar. 

If EU hopes that Saudi Arabia will bail out, whatever the spin in Western corporate media – Riyadh does not have the spare capacity. Saudis will be happy with higher prices  is high oil prices, as they have indicated, to bribe - apart from repressing - its own population into forgetting about Arab revolts against US puppets in Arab states in north Africa and Yemen. It is likely that the Europeans will be compelled to buy oil at higher prices indirectly through intermediaries. This will hit Club Med countries such as Spain, Italy and Greece, having little time to find a possible alternative to Iran's light, high-quality crude.  Greece - already facing the abyss - has been buying heavily discounted oil from Iran. The oil embargo may even precipitating a Greek government bond default - and have even cascading effect in the Euro-zone (Ireland, Portugal, Italy, Spain – and even beyond) 

Reaction to Sanctions and Embargo  

Russian Foreign Minister Sergey Lavrov said, "Unilateral sanctions don't help matters". Foreign Ministry in Beijing, said “To blindly pressure and impose sanctions on Iran are not constructive approaches." 

Even Turkey which has been cajoled and enticed into supporting Saudi policies by Yesil Surmaye aka Green Money from Riyadh since 2001, finds that its  Foreign Minister Ahmet Davutoglu policy of 'Zero friction with neighbors' has ended in  tensions with all its neighbors and the passage of Armenian genocide bill in French Parliament. Davutoglu, who recently visited Tehran to sort out differences said  "We have very good relations with Iran, and we are putting much effort into renewing Iran's talks with the 5+1 [Iran Six - the United Nations Security Council permanent members plus Germany]mediators' group. Turkey will continue looking for a peaceful solution to the issue.” 

BRICS member India - alongside Russia and China –is opposed to sanctions according the media including a website close to Israel. India will keep buying Iranian oil and paying in rupees or even in gold. After being led by the noose and hood winked by Washington on Indo-US Nuclear Treaty which has given no freedom from NSG regime or access to advanced technology, not allowed to work out an energy security policy with Iran and others, New Delhi is moving away from total obedience to Washington, since the replacement of a policeman National Security Adviser by a strategic expert.

Oil Bourses 

West controls the oil trade via three current oil markers, all US dollar denominated: North America's West Texas Intermediate crude (WTI), North Sea Brent Crude, and the UAE Dubai Crude. The two major oil bourses are the New York Mercantile Exchange (NYMEX) in New York City and the Intercontinental Exchange (ICE) in London & Atlanta.

US led west and its oil companies manipulate oil prices. Now the stimulus of over three trillion dollars is used to play around the stocks in the world and use this vast almost interest free sum for speculating in commodities and oil. Energy expert and economist William Engdahl has proved clearly, how a large portion of high oil prices paid by the world goes into the pockets of western speculators who have free access to massive funds from US and allied banks.

A defiant president Saddam Hussein of Iraq had converted in 2000, all its oil transactions under the Oil for Food program to Euros. When U.S. invaded Iraq in 2003, it returned oil sales from the euro to the USD. It is now clear that the invasion of Iraq had little threat from Saddam's so called WMD program but with gaining strategic control over Iraq's hydrocarbon reserves and in doing so maintain the U.S. dollar as the monopoly currency for the critical international oil market.   

Iran has been planning its own independent oil bourse since 2005. In middle ages when trade was mostly done by caravans along Silk Routes, the empires vied with each other to control them and fought wars.

The Iranian Oil Bourse in Kish took some time to develop as a Petro bourse, a fourth oil market, denominated by the Iranian rial, the euro and other major currencies. It opened for business on February 17, 2008, a joint venture between Iranian ministries, the Iran Mercantile Exchange and other state and private institutions. It is located at the Persian Gulf island of Kish and is designated by Iran as a free trade zone.

During 2007, Iran asked its petroleum customers to pay in non US dollar currencies. By December 8, 2007, Iran was reported to have converted all of its oil export payments to non-dollar currencies. The Kish Bourse was opened in a videoconference ceremony on February 17, 2008, despite last minute disruptions to the internet services to the Persian Gulf regions. 

According to Iran’s Press TV, Iran’s international oil bourse was officially inaugurated in July 2011.  The opening ceremony was attended by Iran’s First Vice President Mohammad Reza Rahimi, Economy Minister Shamseddin Husseini, and Caretaker of the Oil Ministry Mohammad Aliabadi. 

National Iranian Oil Company (NIOC) was expected to offer 600,000 barrels of heavy crude oil for sale on the first day launch of the bourse. Ali Akbar Hashemian, the managing director of Iran Mercantile Exchange, said the NIOC planned to offer 50,000 barrels of Iran's crude on the bourse on a regular daily basis, once all the necessary requirements are satisfied. Iran, OPEC's second-largest oil producer, has the world's second largest natural gas reserves after Russia. 

Conclusion

US led West and the world itself is entering an unknown territory. The only definite outcome is the reduction and perhaps elimination of US led Western hegemony since WWII and almost a rogue elephant like run in the world since the Fall of the Berlin Wall .But how long will it take US to be reduced in influence and economic and military reach !The first shoe fell in September2008.

When will the second shoe fall?

Let me conclude with a historic parallel. After centuries of warfare, both the Byzantine and Persian empires collapsed. The Soviet empire collapsed in 1990s. Is it now the turn of the US led Western hegemony! 

In end 1993, along with six ambassadors resident in Ankara I flew to Baku ,capital of Azerbaijan, to present our first letters of credence to president Haidar Aliev, a former senior member of the Soviet Politburo, from Azerbaijan After the letters ceremony and calls on ministers, I called on resident ambassadors in Baku. The new US embassy was quite large and imposing, the British, smaller undergoing renovation; the Israeli, extensive extensions and renovation. 

But I was in for a shock when I called on the Russian ambassador, who’s Residence, consisted of a couple of rooms in an Intourist hotel. Russians were the masters of Azerbaijan till it broke away a few years earlier. 

The point I want to make is that the Russians who lorded over Azerbaijan till recently were reduced to such straits that its Ambassador Extraordinary and Minister Plenipotentiary was confined to a suite in a two star hotel you find near old Delhi Railway station. But this kind of thing is not new in history. After all USSR had lost the Cold War, which was a tabletop nuclear war exercise between the two mighty adversaries. Moscow just could not match huge sums Washington poured into military expenditure. Washington now spends over US$700 billion for its defense and over $ One Trillion in all on National Security according to Chris Hellmen in Tomgram.  
 

29-Jan-2012
More by :  K. Gajendra Singh
 
Views: 1177
 
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