CONSPIRACY AGAINST THE DOLLAR

A short article in the highly respected British publication The Independent rattled the world currency markets in the space of a few days, substantially lowering the image of the dollar. The newspaper simply quoted unnamed sources in banking circles in Hong Kong as saying that Russia, Japan, France and the Gulf states intend to abandon the dollar as payment for oil. Instead of the dollar, they want to use a currency basket consisting of the yen, yuan, euro, gold and the new currency of member countries of the Council of Economic Cooperation in the region. This organization includes the UAE, Saudi Arabia, Kuwait and Qatar. India and Brazil have also shown interest in such a scheme. According to the newspaper, these plans were discussed at secret meetings of the heads of central banks and the finance ministers of Russia, Japan, China and Brazil. It is assumed that they will be put into effect in 2018 and change completely the global financial system. Experts believe that the mere appearance of such ideas deals a blow to the US currency, although many, including in Azerbaijan, doubt that such plans are realistic.

Did it or did it not?

If we believe The Independent, what are the oil-producing states driving at and why are they unhappy with the dollar? To begin with, talk of replacing the dollar in the buying and selling of energy has been around for some long time, and the idea has repeatedly been put forward by Arabic countries, while Iran began to export oil for other currencies several years ago, mostly euros, although the actual price of Iranian oil is still set in dollars. According to the British newspaper, the motivation behind the current negotiations is more economic than political: the question of abandoning the dollar when trading in oil is linked to the weakening of the US economy during the global crisis. The newspaper quotes China's former Special Envoy to the Middle East, Sun Bigan, who said that in this approach "bilateral quarrels and conflicts are inevitable". He noted that "we should not lower our vigilance in the region". "These plans will change the face of the world financial system," the newspaper quotes the Chinese banker as saying. It is assumed that transition to the new system will take nine years and will be completed in 2018. The reality of such negotiations may be indicated by a sharp rise in gold prices, sources believe.

The article in The Independent affected the value of the dollar, according to experts. Bloomberg says that the US currency lost value on 15 out of 16 Asian stock exchanges. "This is bad news for the dollar, and it moves the market and shows that central banks, not only in Asia, want to diversify currencies and move away from the dollar," Reuters quotes Westpac analyst Jonathan Cavanagh as saying. "The very appearance of such information undermines the dollar," Dariusz Kowalczyk, the chief investment specialist of the Hong Kong branch of SJS Markets, told Bloomberg.

It should be noted that almost immediately after the publication of the article, some officials of countries allegedly involved in the secret negotiations made statements refuting this information. The French Ministry of Finance described it as "baseless speculation", while Russia's Deputy Finance Minister Dmitriy Pankin assured reporters that the Russian Ministry of Finance had not been engaged in such talks. The Japanese finance minister said at a press conference that he "knows nothing" about the talks. Saudi and Kuwaiti officials made similar statements.

However, experts are not so categorical in their judgments and tend to believe that the negotiations did take place. But some analysts doubt that the "conspirators" plans will materialize. "I don't think we'll see any decisive action resulting from these negotiations. Even though the dollar is weak, the cost of raw materials is still undervalued," thinks David Moore, a commodity analyst of the Commonwealth Bank of Australia. "In fact, when the dollar weakens, commodity prices tend to rise." 

Azerbaijan faithful to tradition

It must be said that although Azerbaijan is not among the "conspirators", as an oil-producing state it is entitled to its own position on this matter. The executive director of the State Oil Fund of Azerbaijan (SOFAR), Sahmar Movsumov, told journalists that the republic is not involved in negotiations to replace the US dollar with a currency basket for sales of oil and it sells in the same currency as other oil-producing countries. "At present, Azerbaijan sells oil for US dollars, and I do not believe that there will be change any time soon," said Movsumov.

Meanwhile, according to local experts, even if some countries abandon the dollar as payment for oil, this will not affect Azerbaijan. In the first half of 2009 the country exported its oil to 35 countries. And only one third of its oil was exported to the US, while 40 per cent was exported to Europe, 5 per cent to Latin America and the rest to South-East Asia, China, India and South Korea. In other words, exports of Azerbaijani oil are diversified. Last year alone, Azerbaijan exported oil and non-oil products worth 5.5 billion dollars, and it will not abandon the dollar as payment for oil.

The economist Inqilab Ahmadov noted that "Azerbaijan is a new country on the world oil market. Our oil makes up a very small part of the overall basket. And Azerbaijan will not abandon the tradition."

He said that there have been several attempts to give up the dollar and all of them were political in nature. "The problem is that, in the last few years, oil prices have been too unstable. Because of the volatility of prices, manufacturers and buyers cannot develop a long-term plan of work and they suffer. Experts believe that changes in oil prices stem largely from the movement of the dollar against other currencies, and this is the policy of the United States. However, this affects other countries which want a stable price for oil. But projections show that, without the agreement of the US, it is impossible to give up the dollar as payment for oil," said Ahmadov.

The US will not let this go unanswered

In fact, the USA consumes about 40 per cent of the world's oil and, in response, it could influence world oil prices by refusing to purchase oil for some time. The US has its own stocks and technology of constraint which can help it to refrain from purchasing oil for several months. In that case, of course, oil prices would fall, having a negative impact on countries that had decided to abandon the dollar as oil currency.

Analysts also believe that the "weakest link" in these negotiations could be the positions of Saudi Arabia, the UAE, Kuwait and Qatar. Firstly, because their common currency has not yet been created, although they have been discussing it for a long time. They have even come up with a name - the "Persian Gulf dinar", but despite this, it remains a mirage. Perhaps this is due to the fact that the parties to the planned monetary union do not want to take on additional responsibilities (for example, restricting the size of the budget deficit, the permitted level of national debt, inflation, etc.) and perhaps because of political differences which also occur.

On the other hand, however, the US is not too interested in strengthening the dollar: the weakness of the national currency in relation to other currencies increases the competitiveness of American producers. This, of course, cannot please other countries: European Union leaders have repeatedly stated that they would like to see the dollar stronger. It is possible that this game was begun by the United States, and perhaps it is the desire of Europe and other countries to make the dollar stronger...

Meanwhile, the scientific director of Russia's Higher School of Economics, Yevgeniy Yasin, believes that the information about the negotiations merits attention. "This was expected, since the weakening of the dollar results in holders seeking to diversify their reserves somehow," said Russia's former minister of economy. Yasin agreed that replacing the dollar by other forms of payment is an extremely difficult task. However, the weakening of the US currency, in his opinion, alarms many countries, including China. "China, which has been taking dollars in exchange for its goods for a long time, is now beginning to worry, because the depreciation of the dollar leads to the depreciation of accumulated foreign exchange reserves," said the economist.

It should be said that the report about "the plot against the dollar" came amid widespread predictions that a second wave of crisis is expected to hit the world economy (and, therefore, primarily the US economy). This was declared recently by the heads of the IMF and the World Bank, Dominique Strauss-Kahn and Robert Zoellick, the US economist Nouriel Roubini and Nobel Prize winner Joseph Stiglitz at an international conference in Istanbul. Their findings concur: the global economy will face a period of hardship in the medium term. And hardly anyone seriously doubts that the first blow will be dealt to the dollar, the credibility of which was so seriously undermined during the first phase of the crisis.