In a chess game, "zugzwang"
occurs when the player to move has no good move
because every move loses the game. That is now
exactly the position in which Iran's chess masters
see themselves in their Great Game with the P5+1
nations - the United Nations Security Council
permanent members plus Germany.
The first
point to understand is that the conflict going on
is not military but economic. There is precisely
zero chance of a military attack on Iran by Israel
without United States support and
precisely zero chance of US
support without consent from China which will not
be forthcoming.
Dumb US oil sanctions and
incessant Israeli sabre-rattling have combined to
create an "Iran premium" in the global oil price
which has meant that Iran has lost relatively
little net oil revenue, since while exporting less
it is being excessively rewarded for what it does
sell.
Smart US financial sanctions on the
other hand - culminating in cutting off Iran's
Central Bank Markazi from the dollar payments
system - have been having an increasingly drastic
effect on Iran's economy. The flow of liquidity
necessary for both domestic and international
trade has been choked off almost entirely with
dramatic effects in terms of inflation of the
price of staples, particularly chicken.
The rapidly deteriorating situation was
illustrated by reports from Tehran that the street
rate is now 24,300 riyals to the dollar, almost
precisely double the official rate of 12,260.
It has not helped Iran that China, which I
was told in Tehran earlier this year then had an
outstanding balance to Iran of some US$50 billion,
has quietly become illiquid and short of dollars,
and therefore prefers to settle its obligations in
kind, such as in goods, services and
infrastructure, rather than in increasingly scarce
dollars.
A clear and present
danger The basis of Iran's riyal - as it is
with any such "fiat" currency issued by a central
bank as the fiscal agent of the State Treasury -
is Iran's tax base and economy.
But Iran's
recent disconnection from the dollar payments
system has interrupted the flow of value that
sustains Iran's economy and tax-base and backs
Iran's domestic currency issuance of riyals. This
is exactly what the US intended when taking what
is essentially an act of economic warfare .
Iran's central bank is firmly in the
control of President Mahmud Ahmadinejad's faction,
whose understanding of markets and economics is
limited. It was announced this week by the central
bank that a currency bourse would open on
September 21 the purpose of which is to create a
better and more transparent dollar/riyal exchange
rate. The street rate of exchange for riyals
against dollars is snow almost double the official
rate and this disparity affords mouthwatering
profit opportunities to those with privileged
access to dollars.
Iran's population has
never had much confidence in the riyal and if the
central bank were to increase the flow of riyals
into the economy, without addressing the current
interruption of the flow of dollar-denominated
value upon which the riyal is based, this will
lead quite quickly to hyper-inflation in Iran and
to the destruction of Iran's economy.
In
other words, hyperinflation in Iran is now a clear
and present danger, and this is in all probability
the key US policy objective in pursuing current
financial sanctions.
Lose,
lose For Iran every move appears to be a
losing move. If nuclear concessions are not made,
then the economic stranglehold will continue to
choke the life out of Iran's economy. If they are
made, not only will the domestic political price
be high for those responsible, with an imminent
presidential election in 2013, but also the
inflated global oil price will then collapse and
the last vestiges of domestic confidence in the
economy and the currency will collapse with Iran's
oil revenues.
The sophisticates who rule
the conservative factions understand only too well
that Iran has no good policy options, and this has
led to a strange paralysis, where the only
initiatives come from the unsophisticated
Ahmadinejad faction, which last year lost out in
an oligarchic power play for control of Iran's
natural resources.
So while nuclear
diplomacy and domestic politics remain paralyzed,
the Non-Aligned Meeting (NAM) had the effect of
closing Tehran for a week of holidays, and
President Ahmadinejad will once again shortly be
pulling the US tiger's tail at the United Nation.
Such distractions, combined with the Olympics (12
medals) and Paralympics (24 medals, including 10
golds), are reminiscent of ancient Rome's "bread
and circuses" ... albeit with bread becoming
scarcer by the day.
A new-clear
option In 1923, Germany stabilized one of
the worst cases of hyperinflation in history
through the creation and issue of the
"rentenmark". This transitional currency, which
replaced the worthless hyper-inflated
deutschemark, was land-backed, being based
directly upon mortgages over the productive value
of Germany's flourishing agricultural economy. Its
basis on land value gave the rentenmark
credibility with the German population while a new
and more conventional currency was developed.
In Iran, however, the principal basis of
the economy is carbon-based energy, and during
high level meetings earlier this year, and in
recent dialogue, my advice to Iran's policy makers
has been to re-base the riyal currency directly
upon the use value of energy.
In this
model, issuance of currency units returnable in
payment for energy would take place transparently
by Iran's energy utilities and companies under the
management of banking service providers and the
supervision of the central bank as a monetary
authority.
Properly executed, such a
monetary and fiscal policy would neutralize the
inflationary effect of current subsidies in
riyals, and would lead to energy conservation by a
population accustomed to cheap fuel, since the new
energy-based riyals they hold - and would be
motivated to save - would be acceptable in any
country to which Iran supplies crude oil, natural
gas, electricity or oil products.
In
summary, I advocate to Iran specifically, but also
to other members of the regional Economic
Co-operation Organization, a transition through
energy co-operation to a new regional market in
energy centered upon the vast energy resources of
the Caspian Sea and the Persian Gulf.
The
necessary "clearing union" legal and financial
platform, and energy market instruments are
achievable with no change in any domestic law.
Such a "NewClear" option would see Iran adopt an
"energy standard" of exchange and could lead a
transition from the current paradigm of
deficit-based dollar economics to an asset-based
energy economics.
Chris Cook is
a former director of the International Petroleum
Exchange. He is now a strategic market consultant,
entrepreneur and commentator.
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