20 October 2000
Baghdad’s politically motivated bid to replace the US dollar with the beleaguered euro as its currency for international transactions – including oil sales – could become reality.
There is a precedent: Libya has been receiving oil payments in currencies other than the dollar for some time, and in euros occasionally, since the start of this year. Provided the Iraqi oil pricing formula is calculated in dollars – with payments then converted into euros – and customers hedge against currency exchange risk, many buyers don’t see it as a real problem. And Eurozone countries like France would be positively happy, since the move would not only lend international credibility to the euro – now trading at record lows against the dollar – but also eliminate foreign exchange risks and the cost of hedging against them.
Following the decision to use the euro, taken by the Iraqi cabinet last month, Baghdad wrote to UN Secretary-General Kofi Annan two weeks ago asking the secretariat to instruct Banque Nationale de Paris-Paribas – where Iraq’s existing UN-controlled dollar escrow account is held – to open a second account in euros. At the same time, Iraq’s state marketing organization, Somo, told the secretariat it intended to issue invoices for sales of Kirkuk and Basrah crude oil in euros f.o.b. the loading port.
“The pricing mechanism will not change as far as the reference price and its calculations are concerned and we will continue publishing it through the same procedures,” an Iraqi Oil Ministry official says. “But there will be a mention that payment is to be made in euro equivalent.” Iraqi oil lifters were asked to make payments in euros starting on Nov. 1, in line with a decision from Iraqi oil minister Amer Rashid.
“As long as the price formula is calculated in US dollars, it’s a straightforward operation and our bank can do the conversion to any currency Iraq chooses,” one Somo customer tells Energy Compass. But if Baghdad suddenly decided to stop using the dollar in the pricing mechanism, “there will be a mess.”
Deciding the date on which the currency conversion should be made could be problematic, however. Under an expedited procedure introduced recently to minimize delays in payment of oil revenues, Somo sends partly completed invoices to the UN detailing volumes of oil to be loaded. When pricing information subsequently becomes available, the UN fills in the price formula and finalizes the invoice before forwarding it to BNP-Paribas. Up to four weeks can elapse between the pricing date and the payment date. The rate for converting dollars into euros will be the closing rate published by the European Central Bank on the payment date, the Iraqi ministry source says.
The Iraqis seem unconcerned by the euro’s feeble performance on foreign exchange markets. “Since we (will) sell oil in euros and pay for humanitarian goods in the same currency, the risk is no bigger than in any commercial transaction,” an Iraqi diplomat says.
The real worry is how the UN sanctions committee, particularly the US, will react. Baghdad made no secret of the fact that the decision to abandon the dollar was a metaphorical slap in the face to Washington. “There is no reason why the world economy be based on the American currency,” says the Iraqi diplomat, echoing the cabinet’s statement that the move is intended to confront “the daily American-Zionist aggression.”
And according to one European diplomat, nowhere in the text of UN resolutions or procedures governing the sanctions committee – which approves Iraq’s crude pricing formulas – does it state that the escrow account for Iraqi oil revenues should be denominated in dollars. There have been cases in which humanitarian contracts have been denominated in currencies other than the dollar. So any objection from the sanctions committee would be as politically motivated as the Iraqi request itself.
Essentially, the committee has to decide whether to risk turning down Baghdad’s request and face a possible cut-off in Iraqi oil supplies on the eve of American elections. Moreover, an American confrontation with Iraq while hostility is growing in the Arab world towards what is widely seen as its pro-Israel stance in the current Middle East crisis would be particularly badly timed.
Iraq is already watching airlines fly into Saddam International airport, and its expected participation in next week’s Arab summit for the first time since 1991 would add further impetus to its moves to break free of the UN embargo. With its sway over oil markets increasing – along with its revenues – its latest offensive consists of imposing fees ranging from $15,000 to $25,000, depending on vessel, to be paid in Iraqi dinars at the port of Mina al-Bakr. Moreover, sources say Somo is demanding that UN-approved buyers of Iraqi oil make under-the-table payments of 10c-15c per barrel on top of the official price paid into the escrow account.
By Ruba Husari, London
(Published in Energy Compass, Oct.20, 2000)