WILL A CURRENCY SWAP CHANGE THE TOTAL?

The Organization of Oil Exporting Countries (OPEC) might stop selling oil for dollars in the near future. Judging from a recent statement by OPEC's secretary general, Abdalla El-Badri, the US currency will be replaced by the euro. There are several reasons.

The constant fall of the dollar throughout the past year has significantly undermined the authority of the American currency. Inflation has affected almost all countries as a consequence of the fall in the dollar exchange rate, while the cost of oil itself has gone up.

It should be said that OPEC representatives have been "threatening" to switch to another currency for some time. But the experience of the last few years has shown that no real moves have been made in that direction. OPEC's secretary general himself thinks that the switch to a new payments system will not be instantaneous but will take 10 years. Moreover, the recently published quarterly review by the international clearing bank notes that OPEC countries are gradually transferring their reserves from dollars into euros, yen and sterling, while paying considerable attention to internal investments. Despite the fact that oil prices are rising, the dollar accounts of OPEC countries are inexorably shrinking.

USA sounds alarm

On top of all this, one of the major oil exporters, Iran, has opened a commodity exchange, which will trade in contracts for the sale of oil, petrochemicals and gas. Payments at the exchange will be made in Iranian rials, but possibly also in euros. The exchange has opened in a free economic zone on the Persian Gulf island of Kish. Initially petrochemicals will be traded here while the exchange beds down, but in two to three months all Iran's export oil will have to be sold on the exchange and not for US dollars.

Tehran first mooted the exchange in 2002. In 2004 the location for the exchange was chosen - the island of Kish - but the opening of the exchange was constantly delayed. The bourse has appeared, nonetheless, and some European traders are already in talks on setting up a joint venture with Iranian organizations.

Russia is also planning to set up an oil and gas exchange with payments in Russian roubles.

Many experts think that just one country selling its oil for euros or any currency other than the US dollar will not change the overall trade picture worldwide based on transactions in US dollars. Serious consequences will arise after the entire oil market switches to euros. Understandably, the USA will be the most deeply affected and, despite OPEC's predictions of a 10-year switch, the USA is sounding the alarm now. It is no secret that the US dollar constitutes a significant proportion of the currency reserves of many countries, including the Persian Gulf states. Therefore, a fall in the dollar exchange rate on world markets is alarming not only for the USA. And if several major oil-producing countries at once want to transfer their revenue to euros the dollar's position as the leading international currency could be under threat. In other words, the dollar is losing its position as the leading international currency and the concept of "oil dollars" will gradually be replaced by "euro dollars".

Let's pose another question: is a switch to selling oil for euros beneficial for oil-producing countries, including Azerbaijan? Will buyers be found?

Imports the only problem?

Since demand for oil often exceeds supply, buyers will be found. For example, it is no secret that the European Union is the OPEC countries' main trading partner. 

The same applies to Azerbaijan, which is orientated towards energy exports, including to the European Union. 

The fact that countries in the European economic zone are Azerbaijan's main trading partners is another factor in favour. The EU has an around 40-per-cent share of Azerbaijan's foreign trade. Any export operations with the European zone will be advantageous to Azerbaijan if the euro exchange rate rises. This will inevitably happen if oil is in fact sold in the single European currency. The OPEC secretary general's statement about the possibility of a switch to the euro had an immediate affect on the euro-dollar rate with the European currency leaping from 1.45 to 1.4547 dollars to the euro.

Problems arise only with imports, as Azerbaijan will begin to buy a range of European output at high prices. However, in this instance effective compensatory mechanisms can be brought into play.

Representatives of the National Bank of Azerbaijan (NBA) say that today demand for foreign currency is significantly lower than supply and is created mainly by the non-oil sector of the economy. The fall in the US dollar exchange rate last year affected the reduction in its share of import and export transactions in Azerbaijan, while the euro's share increased. The same state of affairs can be seen on the country's domestic market.

Oil exporters such as Iraq and Norway have already switched payments to euros. According to experts, individual contracts for the supply of oil and gas can be concluded in any currency and this has no decisive significance. But if we are talking about a complete switch to payments from the dollar to the euro, the question arises of changes in the base pricing system.

Decision yet to be taken!

The president of the Fund to Assist Business and the Market Economy, Sabit Bagirov, thinks that the OPEC countries and other oil suppliers are undoubtedly losing from the dollar's fall against the euro and other stronger currencies. "But on the other hand, most countries that supply hydrocarbons to world markets keep a significant proportion of their currency reserves in dollars," Sabit Bagirov said. "For example, almost a quarter of the currency reserves of the Persian Gulf exporters are held in dollars or invested in the US economy. And a decision by OPEC to switch to euro transactions will rapidly lead to the dollar losing even more value and, therefore, to a drop in the real values of the currency reserves of the exporting countries."

Sabit Bagirov told Region+ that OPEC has not yet taken a final decision on completely stopping transactions in dollars. "If a decision is being prepared, then it will probably be taken only after a further fall in the importance of the dollar in the currency reserves of the cartel's members," Bagirov said.

To date the dollar remains the main international currency and any country, including oil exporting countries, has to take this into account. Sabit Bagirov said that Arab oil exporters also have an interest in the dollar thanks to a special policy of incentives provided by US oil importers. Since the 1950s American importers of black gold have been paying annual bonuses - supplements to the export price for the quality of crude, regularity of supply, dollar export, etc. These supplements, according to OPEC and the US Energy Department, reach 20 per cent of the shipping (selling) price of oil in the Arabian Peninsula states and eastern Mediterranean. The bonus system arose because up to 65 per cent of US refining and petrochemicals capacity is orientated towards Arab oil.

As for Azerbaijan's currency reserves, Sabit Bagirov said that our government will of course take into account the state of the international currency market and trends. He said that the Azerbaijani government is taking action to maintain the real value of the reserves. This is why the balance of the main currencies in which the fund's reserves are held is reviewed regularly.

Azerbaijan ready for change

Today the dollar accounts for the lion's share of Azerbaijan's strategic currency reserves. "Today 90 per cent of the National Bank's reserves are in US dollars; these reserves are used to service and pay the country's foreign debt and to conduct other operations," the chairman of the board of the National Bank of Azerbaijan, Elman Rustamov, said earlier. At present the Azerbaijani government is discussing the options for the best composition of the republic's foreign currency reserves. 

At present the financing of imports and services in the non-oil sector from foreign currency exceeds international norms fivefold. In 2007 the NBA's currency reserves doubled and reached $4bn and the National Bank made revenue of $150m on managing those reserves. The volume of the currency market in 2007 exceeded $12bn. "Supply on the market exceeded demand by $2bn," Elman Rustamov said. "The National Bank sterilized these funds and averted a sharp hike in the national currency. Overall, the national currency was strengthened by 3 per cent over the year."

For its part the State Oil Fund of Azerbaijan (SOFAZ) is also optimistically watching the current crisis phenomena on the world markets - the funds crisis and fall in the dollar exchange rate. The fund's executive director, Saxmar Movsumov, said that these factors will also affect SOFAZ's reserves. "However, this influence will be positive. In 2007 we earned $15m from a re-evaluation of the currency reserves. The fall in the value of shares on international markets will not affect us, as we invest only in government and agency debt. With an investment portfolio of $2.1013bn, the fund has placed $934.53m in bank bonds, $271.81m in government bonds and $646.32m securities in other agencies. "Moreover, 95 per cent of the portfolio is placed in A-rated securities and the remainder in B-rated," Saxmar Movsumov said.

SOFAZ's income for 2008 is forecast to be 3.5bn manats or $4.5bn. Of this, 95 per cent will come from revenue from the sale of profit oil. When the state budget for 2008 was drawn up, the base price of a barrel of oil was set at $50.

At the same time, financiers say that the processes under way in the world economy will certainly affect Azerbaijan, as our country is being integrated into the world economy. At the same time the republic's economy is already ready to neutralize negative processes. It is obvious that if the euro becomes the world oil currency and, therefore is further strengthened, Azerbaijan can follow the example of the Asian central banks and oil exporters and increase the proportion of its reserves held in euros. However, the factors are not evident at present that could lead to a radical review of the structure of the state's strategic currency reserves.