Iran, Russia sign 70 billion euro trade deal

Developing Just Leadership

Tahir Mahmoud

Dhu al-Hijjah 06, 1435 2014-10-01

News & Analysis

by Tahir Mahmoud (News & Analysis, Crescent International Vol. 43, No. 8, Dhu al-Hijjah, 1435)

Islamic Iran and Russia have signed a massive trade deal that would be conducted in their local currencies bypassing the US dollar. Countries around the world are getting fed up with US policies and are abandoning trading in dollars.

The US may have overplayed its hand vis-a-vis trade sanctions it has imposed on several countries. The Islamic Republic of Iran has suffered more than three decades of US-imposed sanctions that are meant to blackmail Tehran not only economically but also politically with the specific aim of forcing it to change its policies and bring them in line with US demands. It is basically a declaration of war. The Americans, however, have demonstrably failed in their stated objectives.

What the US does not understand — indeed the West in general — or refuses to understand is that committed Muslims are not easily coerced. Economic deprivation is not a major consideration in the lives of people that adhere to higher principles of fairness and justice and commitment to Allah (swt). Muslims do not live for this world. Imperialism’s mistaken notion that it can coerce people into surrendering their rights and dignity is based on a purely materialistic assessment. True, this works in the West but Muslims think at a different level.

This is even more applicable to the revolutionary people of Iran as indeed to members/supporters of Hizbullah and the Palestinians. In the recent Israeli onslaught on Gaza for instance, the Zionists were unable to break the spirit of resistance despite killing thousands of Palestinians. Consider the flip side; more than 30% of Zionists said they wanted to leave Israel because life had become too precarious.

The decades-long sanctions on Iran have not had the kind of impact the US thought they would have. True, there are shortages of some mainly luxury goods but the revolutionary spirit of the overwhelming majority has not been broken. Instead, the Islamic government of Iran has made major strides in developing indigenous technology and achieving self-sufficiency in many fields that would not otherwise have been possible.

In addition to Iran, the US and its European allies have also imposed sanctions on Russia over the crisis in Ukraine. A coup engineered by the CIA in Ukraine, a once-Russian ally, brought the neo-Nazis and fascists to power in Kiev. Since Russia is resisting such Western manoeuvres, it has been subjected to sanctions. In turn, Moscow has imposed sanctions on several European and North American countries.

In another development that will have far-reaching consequences, especially for the American dollar as the global reserve currency, last month Russia and Iran signed a 70 billion euro ($91 billion) deal involving numerous projects. Russian Energy Minister Alexander Novak announced during the 11th round of Iran-Russia trade cooperation commission meeting in Tehran on September 9 that the two countries had signed deals to increase trade and strengthen economic ties. Novak also revealed that 40 Russian companies took part in the joint economic meeting.

The two countries also agreed to use each other’s currencies in trade deals by-passing the US dollar. They signed a memorandum of understanding aimed at developing industrial, mining, trade, agricultural, tourism, border, technological and energy cooperation. At the same time, Iran’s International Petrochemical Company and Russia’s Gas Stroll signed a Memorandum of Understanding (MoU) on the construction of the Hormuz chemical fertilizer plant in Iran.

Officials from both countries expressed the hope and determination to increase the value of trade between them from its current level of $5 billion annually to $50 billion within two years. While it may sound overtly ambitious, given the international environment, it is do-able.

For instance, Russian Energy Minister Novak said that “before the imposition of sanctions on Russia, Moscow imported certain commodities from the European Union but now [after the bans imposed by the West] we can import them from Iran, which can increase trade transactions between the two countries.”

These developments occurred at the same time that Russia and China announced plans to expand cooperation by using their currencies in bilateral trade instead of the US dollar. Russian Deputy Prime Minister Igor Shuvalov and Chinese Vice Premier Zhang Gaoli on September 9 agreed to an economic pact that included boosting use of the ruble and yuan for trade transactions between the two countires, according to a report by the British news agency Reuters.
“We are not going to break old contracts, most of which were denominated in dollars,” Shuvalov said. They will continue to be transacted in dollars. “But, we’re going to encourage companies from the two countries to settle more in local currencies, to avoid using a currency from a third country,” he added.

What is envisaged under the deal is that Russian banks will be allowed to set up accounts with Chinese banks, and Russian companies can seek loans from Chinese firms. The Russian deputy prime minister made clear that the moves occurred against the backdrop of US and European sanctions on Russia. “Certainly, sanctions are a bad thing but it is a moment that we need to use for real work, for expanding partnership with Asia-Pacific countries,” Shuvalov said.

The Russian deputy prime minister revealed that Chinese firms planned to invest in more than 30 projects in Russia that were discussed between the two officials. The Chinese are interested in building roads and bridges, resource development, agricultural production and transportation facilities in Russia.

China’s economy is growing rapidly. Its GDP at $9.2 trillion is second only to that of the US and has surpassed such other leading economies as those of Italy, Britain, Germany and Japan in the last two decades. China’s annual GDP growth rate at around 7.5–8% will enable it to outstrip the US economy by 2021 according to the Economist magazine of Britain. The magazine further predicts that by the year 2030, Chinese GDP will have grown to $75 trillion while the US would be at around $30 trillion.

To maintain its economic growth, China needs vast energy resources. The US is trying to prevent China from accessing these resources, especially hydrocarbons from Central and South Asia as well as the Muslim East. Most of the wars in these regions are instigated by the US with the specific aim of controlling their resources and denying access to China. The Americans are also involved in instigating military conflict in the Pacific region against China in what the Americans call the “Asia Pivot.”

With a 5,000-year history, the Chinese are well aware of these American moves and have carefully calibrated their policies to meet such challenges. Their trade and currency links with Russia and a number of other countries are meant to circumvent American obstructionist policies. Last May, for instance, Russia and China signed a gas supply deal worth $400 billion. This secured for China— the world’s leading energy user — a major source of fuel while opening a new market for Russia.

At the same time, members of BRICS — Brazil, Russia, India, China and South Africa — at their meeting last June announced they will open a new bank that would be the equivalent of the International Monetary Fund (IMF) but backed by these countries. They realize that together with the World Bank, the IMF is an instrument of Western hegemony. They are determined to break this and chalk out a strategy that would enable them to secure their rightful place in the global economy.

BRICS member countries are thinking in terms of creating a basket of currencies starting with their own for trade transactions, initially between members and later on opening up this arrangement for non-members as well. It is likely that as the strongest economies, China and Russia will dominate the alliance and their currencies might ultimately create a niche for themselves in global financial transactions. The US dollar has already lost some of its clout to the euro but that is little consolation to countries in the rest of the world.

Today, only about 55–60% of global reserves of central banks are held in the US dollar. This is down from 80% only two decades ago. True, the euro has attracted what the dollar lost but if there are other currencies that emerge and their countries’ economies are stable, there is no reason why other countries would not trade in those currencies. The Chinese yuan is the strongest contender for this role.

The deals struck between Russia and Iran and between Russia and China may prove a harbinger of seismic changes in global trade and finance. We are entering interesting times despite a number of wars, instigated by the US and its allies, raging in the world. These are meant to maintain US global hegemony but with the decline in US military power, massive changes are underway. These cannot be anything but for the better.

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