March 1, 2024

Tom Kool

Tom majored in International Business at Amsterdam’s Higher School of Economics, he is Oilprice.com’s Head of Operations

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Russia and Iran have finalized an agreement to trade in their local currencies instead of the U.S dollar, Iran’s state media has reported

Both countries are subject to U.S. sanctions.

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“Banks and economic actors can now use infrastructures including non-SWIFT interbank systems to deal in local currencies,” Iran’s state media has declared. 

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Moscow has lately been cozying up to Tehran, with Iran revealing in November it will provide Russia with Su-35 fighter jets, Mi-28 attack helicopters and Yak-130 pilot training aircraft.

The global de-dollarization drive has been going on for years with BRIC countries and the so-called pariah states trying to ditch the American dollar in favor of other currencies. 

Back in 2019, Putin declared that time was ripe to review the dollar’s role in trade. At that time, Russia and China considered switching to the euro, the world’s second most dominant currency, as an acceptable stalemate, with the ultimate goal being to use their own currencies. 

Earlier in the current year, Russia paid dividends from the Sakhalin 1 and 2 oil projects in Chinese yuan instead of the dollar. Last year, Russia was cut off from the US dollar-dominated global payments systems following sweeping sanctions off the Ukraine war. 

Russia has declared it will no longer accept the American currency as payment for its energy commodities but will instead switch to Chinese and Emirati currencies. 

However, global de-dollarization efforts have borne little fruit with the vast majority of cross-border transactions involving BRICS members continuing to be invoiced in dollars. Indeed, exchanging BRICS members’ local currencies with each other and with other emerging market currencies frequently requires using the dollar as an intermediary. 

Further, a large share of public and private debt in these economies is dollar denominated. The relative stability of the dollar compared to many local currencies makes it more attractive as a medium of payment in cross-border trade. The dollar’s widespread use in these cases has become self-reinforcing, thus preserving its dominant global role and impeding efforts to de-dollarize.  

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By Tom Kool for Oilprice.com

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