Global Policy Forum

By Charles Recknagel

Iraq is going ahead with its plans to stop using the U.S. dollar in its oil business in spite of warnings the move makes no financial sense. Baghdad this week insisted on and received UN approval to sell oil through the oil-for-food program for euros only after 6 November. Iraq had threatened to suspend all oil exports -- about 5 percent of the world's total -- if the body turned down the request.

The move comes despite repeated cautions that Baghdad's departure from the oil industry standard of the dollar will cost the country millions in currency conversion fees. UN officials have said Iraq will have to reduce the price of its crude oil by about 10 cents a barrel in order to compensate buyers for the additional costs. And the UN has said moving to the euro will mean Iraq earns less interest on its oil revenues, which are held in a UN- monitored escrow account in New York.

The UN also has warned that Iraq's switch will create cumbersome new administrative processes because Baghdad says it wants to keep its existing deposits in dollars for now. That means the oil-for-food program will have to maintain two accounts -- one in dollars and one in euros -- for the time being.

With Iraq now set to begin oil transactions in euros as early as next week, President Saddam Hussein has clearly made up his mind that banning the dollar is worth flying in the face of financial logic. The euro reached record lows last week as it traded at 82 cents to the dollar, down 30 percent since its launch in January last year. Currency traders say they don't expect a rebound soon. The calculation has set analysts scrambling to find where Baghdad sees the payoff.

Pierre Shammas, a Middle East expert at the Cyprus-based Arab Press Service, calls the move an emotional one impossible to understand on economic grounds. "As long as the euro goes down, you don't switch to a currency that goes down in value while the dollar goes up in value. Saddam has not spelled out his plan in detail. These are politicians talking. They are not experts, they are not central bankers, they are not even oil men." But he says Saddam may feel the strategy is worth the price because it allows him to draw a clear line between what Iraq sees as two camps in world opinion regarding the UN sanctions.

One camp, led by the U.S. and Britain -- a country also outside the euro zone -- wants to maintain strict trade sanctions on Iraq until Baghdad proves it has no more weapons of mass destruction. The other camp, led by euro-user France -- along with Russia and China -- favors easing the sanctions on humanitarian grounds while still pursuing disarmament.

Baghdad appears to be trying now to deepen that divide by rebuffing Washington as it takes a small part of the world's oil trade off the dollar. And it appears to want to encourage ties with states like France and Italy, which it sees as sympathetic, by embracing the euro.

But analysts say the political message Baghdad is sending is largely symbolic because the currency switch offers no gains or losses for any of the states involved except Iraq. That is because the currency switch merely formalizes what is already a standard Iraqi practice of purchasing goods under the oil-for-food program exclusively from nations it views as potential allies. Baghdad currently buys a significant share of its humanitarian supplies from the euro zone, as well as from several Arab countries and China.

Shammas says Saddam may also feel that rejecting the dollar is worth paying a financial price because he calculates the price as far lower than the UN does. Iraq has long complained that the oil-for-food program allows it to use only about a half of the money it earns from oil sales to purchase humanitarian goods. The rest of the money is used to pay for the UN's administrative expenses connected with the program and for war reparations in the wake of Baghdad's 1990 invasion of the emirate and the ensuing Gulf War.

At the same time, Baghdad has said the UN sanctions committee routinely holds up contract approvals for purchasing goods, further limiting its access to the oil earnings. Iraq says the delays are a deliberate policy by Washington and London to keep sanctions tight. The U.S. and Britain say a long contract-review process is necessary to assure Iraq only acquires humanitarian products.

But if Saddam sees a low price tag to playing with the oil-for-food program, Baghdad is still limiting its losses by saying it does not want any of the dollars currently in its escrow account to be converted. The account, kept at the New York branch of the French bank BNP Paribas, now totals some $10 billion.

Analysts say Baghdad's decision not to convert that large sum means Iraq's switching currencies will have no effect on the embattled euro's fortunes. The untouched $10 billion are equivalent to several European bank interventions to prop up the weak currency and such a large conversion might have helped bolster investor confidence in it.

Shammas says that in deciding to move to the euro, Iraq is dusting off a strategy which another state hit by U.S. sanctions -- Iran -- discussed as recently as last year. But talk of a conversion quickly ended in Tehran as the euro has plunged over recent months. Shammas:

"In Iran, a presidential adviser -- now he is a presidential adviser -- proposed a switch to the euro last year in a newspaper editorial. But that was before the euro weakened. He said 'since our European trading allies have the balance tilted in their favor in our balance of trade, since the bulk of our investment is coming from the euro zone, and since it's likely to be a very stable currency, stronger than the dollar, why don't we switch to the euro?' But, of course, the reality proved different."

Shammas says the idea of switching to the euro has appeal to Iran and Iraq because they feel if several major oil producers did it they could create a stampede from the dollar which would weaken Washington. He says another possible candidate for a changeover if the euro were strong might be Venezuela, whose relations with Washington have turned rocky as President Hugo Chavez has stressed ties with Cuba's Fidel Castro.

But so far, no big stampede to the euro is on the horizon -- except in Baghdad. And that leaves Saddam once again charting a highly individual course that guarantees he keeps other capitals guessing what his next move will be.

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