Have Moscow and Tehran essentially turned away from United States Dollar?

“Russia and Iran will transfer payments using an alternative system to the internationally recognized SWIFT money transfer network, Governor of Iranian central bank, Abdolnaser Hemmati”, has announced.

Instead of SWIFT, a system that facilitates cross-border payments between 11,000 financial institutions in more than 200 countries worldwide, the two countries will use their own domestically developed financial messaging systems – Iran’s SEPAM and Russia’s SPFS.

“Using this system for trade and business exchanges between EAEU (Eurasian Economic Union) member states can help develop and expand trade exchanges between the member states as well,” Abdolnaser Hemmati said.

Tehran is set to officially join the Russia-led free-trade zone, the EAEU shortly. The document on Iran’s participation was ratified in June by the nation’s parliament (Majlis) and President Hassan Rouhani has already ordered that the free trade zone agreement be implemented.

Earlier this month, Russian presidential aide Yury Ushakov said that Tehran and Moscow are developing an alternative to SWIFT. Russia began development of SPFS in 2014 amid Washington’s threats to disconnect the country from SWIFT.

The first transaction on the SPFS network involving a non-bank enterprise was made in December 2017. Around 500 participants, including major Russian financial institutions and companies, have already joined the payment channel, while some foreign banks have shown interest in joining.

Last year, Belgium-based SWIFT cut off some Iranian banks from its messaging system. It came after US President Donald Trump abandoned the landmark nuclear deal with the Islamic Republic and resumed US sanctions against Tehran.

Moscow and Tehran have essentially turned away from the greenback in bilateral trade, and are using the Ruble and Rial for payments. Turning to cross-currency trade was a vital issue for both Russia and Iran, and the two countries are planning to use all available means to boost these efforts.

“We have already essentially dropped the dollar in cooperation with the Iranians, we will rely on the Russian Ruble and the Iranian Rial, [and] in case of urgent need, on the Euro, if we have no other options,” the diplomat said. He added that banking structures in both countries have the potential to cope with this “difficult” task.

Despite efforts by European countries to keep trading with the Islamic Republic after the US pulled out of the nuclear agreement, their efforts still do not fully address Tehran’s interests, Dzhagaryan believes.

The diplomat said that the payment system recently created by France, Germany and the UK to facilitate trade with Iran raises “more questions than it answers,” claiming that it does not change the state of affairs for Tehran.

He explained that the Instrument in Support of Trade Exchanges (INSTEX) covers only items not blacklisted by the US, but does not apply to vital sectors of trade for Iran.

“Oil is the most important [sector] for Iran. It is a huge question if Europe can allow the proper volume of oil exports and flow of revenue to the Iranian budget,” Dzhagaryan stated. “EU countries should show that they can carry independent foreign policy without fearing any warnings from overseas partners.”

Russia along with several other countries, including India, China and Turkey – has been accelerating efforts to fight the dominance of the US currency in global trade amid rising tensions with Washington. Last year, Russian President Vladimir Putin called on the member states of the Eurasian Economic Union (EEU) to create a common dollar-less payment system for boosting economic sovereignty. The bloc, which consists of Russia, Kazakhstan, Belarus, Kyrgyzstan and Armenia, has free trade agreements with multiple partners across the globe, including Iran and China.

Will United States Attack Iran?

The United States has openly accused Iran for the drone and cruise missile attacks on Saudi Arabia’s largest oil refinery. Now the question is what will it do in response? 

The attacks have not affected the sole surviving super power. On the contrary, the US will benefit the most from the hike in oil prices, which has overtaken Saudi Arabia as the largest oil producing country.

There is a temptation for the US to let the attacks slip into history. The US has formed an anti-Iran alliance in which Saudi Arabia is a key player. Doing nothing would put the coalition into question. Failing to respond to an Iranian attack on a vital Saudi facility could help Iran increase its power throughout the region.

Donald Trump’s inclination has been to avoid initiating direct military action against Iran but applying economic pressure. He has maneuvered to minimize and halt active military engagement. Military action would not only contradict the US strategy, but also endanger other alliance members.

An alternative option would be to introduce new sanctions, but there are two problems with this move. First, sanctions do not have the psychological impact and second, the US has already imposed sanctions on Iran and any more sanctions would have only limited effects.

The US could impose a blockade on Iranian ports and close of Strait of Hormuz. This strategy has three weaknesses. First, a large naval force of multiple carrier battle groups would have to be deployed for a potentially unlimited time. Second, the fleet could come under attack from Iranian missiles. To counter this, anti-missile air attacks as well as defensive measures would be needed, creating a second potentially costly dimension to this operation. Finally, such a blockade is by definition without a terminal point. If Iran does not fold under the pressure, the blockade could continue indefinitely, since ending it without a successful outcome would be seen as a defeat.

Another possible response would be to launch air strikes against Iran. The most appropriate target would be the factories producing drones and cruise missiles, along with storage facilities and so on. However, the biggest problem will be getting accurate intelligence. Acting on poor information could result in an Iranian strike on US forces or another sensitive site under informal American protection.

As regards an air campaign, history has shown that these tend to take much longer than expected and sometimes fail altogether. Any US attempt to eliminate Iran’s strike capability can be costly and hidden Iranian missiles can attack regional targets. An air campaign can go on indefinitely without yielding the desired results.

As for sending in ground troops, the US military fully deployed can defeat the Iranian military and take terrain, but to hold it against a hostile militia would create interminable conflict with casualties that cannot be sustained. Iran is a big and rugged country, with a population of 82 million people, more than twice as large as Iraq or Afghanistan. And the idea that US troops would be greeted as liberators is mere fantasy.

The US has been concerned about Iran’s expanding political influence, which also creates potential targets that are of high value to Iran. Hitting these targets would be less daunting as compared to attacks on Iran. Iran has its own or proxy forces in Iraq, Syria, Lebanon and Yemen. It has invested a great deal of time, resources and risk in creating these forces that are now holding territory in these countries.

Doing nothing could well destroy the anti-Iran bloc the US has worked hard to create. The likely but not certain answer to this problem will be a symbolic retaliation. The problem with retaliations, however, is that they get out of hand

Who has attacked Saudi oil facility?

Western media controlled by those having vested interest was prompt in spreading the disinformation about attacks on Saudi oil facilities. It has used following pointers: 1) Yemen’s Iran-aligned Houthi group has claimed responsibility of attacks, 2) Kingdom’s output will be knocked out more than half, 3) oil prices will surge and 4) tension will rise in the Middle East.

This is exactly what western media has been doing for ages, only the operators have been changing. One must not forget that these attacks have come in the aftermath of earlier cross-border attacks on Saudi oil installations and on oil tankers in Gulf waters, which have failed in skyrocketing oil prices.

Mike Pompeo, Secretary of State of United States was prompt in accusing Iran of the attacks. In the same breath he ruled out Yemeni involvement and denounced Tehran for engaging in false diplomacy. He claimed “Tehran is behind nearly 100 attacks on Saudi Arabia. He accused Iran’s President Hassan Rouhani and Foreign Minister Mohammed Javad Zarif for pretending to engage in diplomacy.”

Apparently the Zionists were happy when US President Donald Trump withdrew his country from a 2015 pact and imposed a series of sanctions that could cripple Iran’s economy. But in recent weeks they were annoyed when Trump said he would be open to meeting with Rouhani on the sidelines of the United National General Assembly in New York later this month. Pompeo had also said such talks could take place without any preconditions.

Let us review the immediate response of the US which alleges Iran for the attack. The sole purpose is to diminish any and every possibility of reconciliation with Iran and keep it out of oil trade. The ultimate beneficiary of high crude price is United States as 1) its Shale oil producers remain competitive and 2) it keeps on selling arms to Saudi Arabia.

One could also recall that President Trump has often said “Saudis can’t survive without their (US) help.” As the Kingdom was going for IPO of Aramco, its production has to be suspended to make the IPO a big failure. The attack is also aimed at proving that Saudis can’t protect their assets and must ask the US to provide security. Interestingly, it is beyond comprehension how a Houthi drone attack could curtail Saudi crude production to half?

The sole purpose of spreading disinformation is to jack up crude price. Certainly, if output is curtailed by 5.7 million barrels per day the price could raise up to US$10/ barrel on Monday. Since the US has the largest surplus production capacity, it will be the only beneficiary. The attack is also aimed at reducing the importance of newly appointed Saudi Oil Minister.

To create uncertainty and make crude price volatile, the news have started pouring in. “Abqaiq is the nerve center of the Saudi energy system. Even if exports resume in the next 24-48 hours, the image of invulnerability has been altered,” Helima Croft, global head of commodity strategy at RBC Capital Markets, told Reuters.

A Saudi-led coalition battling Yemen’s Houthi group said it was investigating drone attacks against Saudi oil installations and would confront terrorist threats to global energy security. “Investigations are ongoing to determine the parties responsible for planning and executing these terrorist attacks,” said coalition spokesman Colonel Turki al-Malki. Analysts can’t rule out putting the entire blame on Iran.

Iranian foreign ministry spokesman Abbas Mousavi dismissed the US allegation as pointless. A senior Revolutionary Guards commander warned that the Islamic Republic was ready for full-fledged war. He went to the extent of saying, “All the US bases and its aircraft carriers in a distance of up to 2,000 kilometers around Iran are within the range of our missiles.”

While the probability of any attack on Iran remains low, the US will be able to achieve its prime objective, jacking up crude oil prices. Western media has already started saying, “Aramco has given no timeline for output resumption, but return to full oil capacity could take weeks, not days.” Traders and analysts say crude price may spike to as high as US$100/barrel if Riyadh fails to quickly bring back supply.

Stimulus Package of European Central Bank

The European Central Bank (ECB) rolled out a massive stimulus package on Thursday. The actions not only reflect the desperation but also the resolve to boost the Eurozone economy and mitigate the risk of recession.

The announcement could be summed up in five steps and the combination drove EUR/USD to a low of 1.0927. The ECB also lowered its inflation and GDP forecasts for 2019 and 2020.

According to ECB President Draghi, these actions were prompted by 3 elements - a more marked slowdown in the Eurozone economy, the persistence of downside risks and their baseline scenarios that included downward revisions to all of their inflation projections. However, instead of extending its losses below 1.09, EUR/USD reversed sharply after Draghi's press conference and traded well above 1.10.

ECB Stimulus Package

1. Interest rates cut by 10bp to -0.5%
2. ECB dropped their calendar guidance
3. Restarted bond purchases
4. Changed their TLTRO rate to eliminate 10bp spread and provide more favorable bank lending conditions
5. Introduced a 2 tier reserve system that would exempt part of bank holdings from negative rates

One can find at least three reasons for the turnaround in the EUR. First and foremost, ECB President Draghi called on governments to go big with fiscal stimulus. He said "reform implementation must be stepped but substantially" to raise long term growth potential. The central bank has long felt that monetary stimulus alone won't be enough and by doubling down on a massive stimulus package, he's put the ball in their court. With his bold curtain call, Draghi took the problem of low growth seriously and said the governments would have to act.

Euro also u-turned on the hope that the stimulus will work as the promise of unending QE should go a long way in boosting the economy. The market believes that all of this guarantees a rate cut from the Federal Reserve next week and the prospect of Fed easing is bullish for EUR/USD.

EUR Recovery

1. ECB lays on fiscal stimulus pressure
2. Unending QE will have positive impact on the economy
3. ECB actions guarantee Fed cut next week

Looking ahead, analysts believe that the actions could mark a bottom for EUR/USD. One of the biggest near term risks for the EUR was looming. Christine Lagarde takes over as head of the ECB in November and like Draghi, she's a big supporter of fiscal stimulus. The difference between Draghi and Lagarde is that she's more politically rooted and could have a greater influence on Germany.

If the Eurozone existed in a silo, analysts would declare ECB move a sustainable bottom for euro. However, US President Trump made it very clear that he's not happy the ECB is "weakening the euro," so we need to be mindful of the risks including retaliatory actions from the US (including tariffs) and Brexit.