China And Iran To Bypass Dollar, Plan Oil Barter System, And A Deeper Dive Into The Iranian Oil Bourse

Tyler Durden's picture

One of the more notable events in the past week was the previously discussed reopening of the Iranian Oil Bourse, an attempt by Iran to launch a venue that bypasses US sanctions against Iran which has prevented payment in the world's reserve currency for Iranian goods. "Big deal", some will say, this is not the first time Iran has attempt to upstage the Great Satan. Well, true, although as OilPrice said last week, "what it would take for Iran’s new exchange to survive and flourish are some heavy-duty customers that Washington would be wary of picking a fight with, and Tehran already has one – China... China, the world's largest buyer of Iranian crude oil, has renewed its annual import pacts for 2011. In 2010 Iran supplied about 12 percent of China's total crude imports. According to the latest report of the China Customs Organization, Iran's total oil exports to China stood at 8.549 million tons between January and April 2011, up 32 percent compared with the same period last year. Iran is currently China's third largest supplier of crude oil, providing China with nearly one million barrels per day." Still, the perceived provocation to Uncle Sam should China go ahead and slap America in the face by accepting the existence of the Kish exchange, would echo around the world. Which is why many don't think much if anything will happen. Until today, that is: according to the FT, China has decided to commence an barter system in which Iranian oil is exchanged directly for Chinese exports. The net result: not only a slap for the US Dollar, but implicitly for all fiat intermediaries, as Iran and China are about to prove that when it comes to exchanging hard resources for critical Chinese goods and services, the world's so called reserve currency is completely irrelevant. The implications of this are momentous, especially for US debt, whose indomitability is only predicated upon the continued acceptance of the currency it backs as a global reserve. If China is now openly admitting to the world that it does not need US monetary intermediation, and by implication, the "debt" backing said intermediation, what then? And who will follow China next?

From the FT:

Tehran and Beijing are in talks about using a barter system to exchange Iranian oil for Chinese goods and services, as US financial sanctions have blocked China from paying at least $20bn for oil imports.

The US sanctions against Iran, which make it extremely difficult to conduct dollar-denominated business, mean that China could owe the oil-rich nation as much as $30bn, according to people familiar with the problem.

They said the unpaid oil bills had built up over the past two years and the governments, which are in early-stage talks, were looking at how to “offset” the debt.

Some Iranian officials are growing increasingly angry about the inability of the country’s largest oil customers to pay cash, a problem that has contributed to a shortage of hard currency and has hindered the central bank from defending the Iranian rial, which has been sharply devalued over the past month.

China and India together buy about one-third of Iran’s oil, the country’s economic lifeblood. China’s oil imports from Iran have risen 49 per cent this year, according to Reuters.

While Iran can do without India, it needs China:

Iran last week threatened to cut off oil exports to India, which owes $5bn for oil but has not been able to move the money out of an escrow account to Tehran.

Unlike India, which exports almost nothing to Iran, China is dominant in Iranian business and could use a barter system to balance trade between the two countries. Beijing is involved in everything from building tunnels to exporting toys and has been expanding into Iran’s oil sector, where European companies such as Shell and Total have been deterred by the difficulties of operating without contravening sanctions.

China and Iran’s bilateral trade totaled $29.3bn last year, up almost 40 per cent from 2009. The two countries this month signed several infrastructure and trade collaboration agreements that would see Chinese companies invest in big infrastructure projects in Iran, while Iran would export large quantities of chrome ore to China, according to local reports.

“Both China and India are happy to keep Iran’s money in their banks and try to get Iran involved in barter deals to sell their junk, or give yuan and rupees instead of hard currencies,” said one Iranian former official, on condition of anonymity. Iran had not yet accepted the alternatives, he added.

While Iran would have very little use for a non-convertible Yuan (for now), direct barter is something that will be far more useful to the resource-rich country. Yet, as Isaac Newton once cautioned, "in order to measure, you must define your unit." What will China and Iran agree on as the unit of exchange, if not monetary intermediate, especially in those cases when there is no preset barter agreement?

If said neutral monetary "hard asset" ends up being a precious metal, look out US Dollar.

And for those curious to learn some more about the Iranian Oil Bourse, here is Grant Williams with his latest "Things that make you go hmmm."

Hmmm Jul 23 2011

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camoes's picture

Go east, bitchez

narapoiddyslexia's picture

This isn't exactly the doomsday scenario its painted to be above. If you read the FT article, the Iranians are not delerious about the trade deal with China. Here is what one Iranian official was quoted as saying, in the FT article -

“Both China and India are happy to keep Iran’s money in their banks and try to get Iran involved in barter deals to sell their junk, or give yuan and rupees instead of hard currencies,” said one Iranian former official, on condition of anonymity. Iran had not yet accepted the alternatives, he added."

So the deal does not appear to even be done, yet. And even if it is, its a big disappointment for Iran. Why not get gold for oil?

'Cause no one will make that particular trade...

magpie's picture

Like that "sell their junk" bit.

Commodity exporters hold the cards for the rest of the century, i'm afraid.

TaxSlave's picture

In which the traders re-discover that money evolved to overcome the inconvenience of barter.

Only the inconvenience of paper money could be more inconvenient than barter.

AldousHuxley's picture

Pirates and Emperors (from SchoolHouse Rock makers of How a Bill becomes a law)

magpie's picture

Yes, but only depending on bilateral deals gets you into the poor house, a point even the Iranians understand.

Paladin en passant's picture

Correctomundo...what fool country would the Iranians trade their Chinese crap to in order to purchase goods their people actually want and can afford?  China's already sold that same crap to Iran's potential buyers.  I smell desperation in Terhan, the desperation of those ignorant of econ 101.

Doyle Hargraves's picture


We r no letting u not use our dollar.

expect our bombs to fall soon.

signed ur masters...

zorba THE GREEK's picture

I don't blame them. I have been bypassing the dollar for 11 years now using gold and silver. 

reader2010's picture

Beijing has fired its first shot at Uncle Sam. The WWIII has already started quietly.

HamyWanger's picture

Lol, what would the Chinese do? They are - simply put - poor and weak. 

In America, we have a very high-IQ (120+) and healthy population, solid principles and motivations, an incredibly strong economy (despite what all the doomers say), and high-grade equipment and technology. 

WWIII, if it happens, will only result in the complete annihilation of the Yellows.

Bastiat's picture

"we have a very high-IQ (120+) and healthy population"


. . .and all the children are above average.

Kali's picture

Above average in obesity.  What is the military rejecting due to obesity again?  35%.  Don't even get me started on IQ.  American Exceptionalism?  Exceptionally stupid.

infinity8's picture

Hahahahhahaa. . . yes! and they can all be whatever they want. . . brain surgeon, reality TV star - dare to dream brilliant babies!

francis_sawyer's picture

recalculating... recalculating...

IQ now 119.9 (after that comment)...


malikai's picture

Glad to see you back Hamy. Don't worry, they'll figure out how to junk you soon enough.

IAmNotMark's picture

"solid principles and motivations"

I used to think that but I look at the crooks and shysters that are running and ruining our country and I no longer believe that is true. 

I think that almost every U.S. politician today would sell their mother, destroy the constitution, kill a million Iraqis, kill a billion asians...all to get re-elected.

cosmictrainwreck's picture

Hamy....muh Maaan! where you been?

SheepDog-One's picture

LOL Hamy good one! So funny.

Dugald's picture
  • What the hell are you smoking cobber?....
Lord Koos's picture

Hamy, let us know when you come down from the crack you've been smoking.  

matrix2012's picture


just woke up from a long hibernation :D duh world, so chaotic it's now... better get back to a long sleep again :)




Djirk's picture

I think the dollar issue is secondary, this is China saying fuck your embargoes, we are going to trade and support Iran. US driving global policy is now officially over.

The US embargoes on Iran are like swiss cheese, over 10,000 special permits have been issued to US companies to do biz there. Biggest US export to Iran is tobacco, chemical warfare.

Hearst's picture

"And who will follow China next?"  Definetely Russia..

Cognitive Dissonance's picture

20 years from today this span of time, from 2007 to 2017 will be seen as the time when America came apart at the seams. And not quietly either.

Landrew's picture

CD, I believe this decade of 07/17 will be noted as well. The global connected failures being propped up killing one of the most important cores of capitalism (failed business fails) will be the number one topic of economic classes and the primary driver in the creation of a different type of economic system based on something like thermodynamics.

RockyRacoon's picture

You are wise enough, CD, for me to trust your opinion.

I'm preparing accordingly.

As for the upcoming debt ceiling default, bring that sucker on.

Per Ron Paul's comment in the article:  We've defaulted 3 times in the past.

One more might be the charm?

DeadFred's picture

China is poised and in need of making a big power play. This could be part of it. Don't bet much based on the assumption China won't want to alienate the US.

New_Meat's picture

Dead: you bet that PRC is "poised and in need".  But consider TPMB

- Ned

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Yes, big big news.  Iraq tried this and was invaded.  Will the same fate hold for Iran?  Who knows?  Not good news for the dollar as you so eloquently, as usual, described.

Tuco Benedicto Pacifico Juan Maria Ramirez

sun tzu's picture

There aren't any troops left to invade Iran unless we reinstate the draft. Imagine trying to draft a bunch of inner city gangbanger to go to the desert and die. HAHAHA

irishlink's picture

yea . Join  the dots and we now can see why so many are concerned with an Israeli move on Iran. The USA / Israel special relationship works both ways.

TideFighter's picture

Every time I pass a WalMart, I bi-pass China. My curiousity about what the markets are going to do tonight is killin' me. I snicker and think many ZH's are in the same boat. ZH is a great place to go when a storm is about to hit; best weather reports anywhere. 

trampstamp's picture

Not sure if you all have noticed, but Wamlart is starting to cary US made products. I guess underwear and socks is a start.

francis_sawyer's picture


I'm guessing 'depends' would help their ebitda more...

Short WAL-MART...

sun tzu's picture

How about Target and Best Buy? Everything is made in China.

ciscokid's picture

He who holds the biggest stick rules.

HungrySeagull's picture

We have our Artic/Canada Resources along with Shale in the middle of the USA as well as Coastal.

Iran is not going to be allowed to enrich at our expense. Russia will do well to reposition to become a major supplier to Europe off HER Artic resources.

anonnn's picture

And then there's Denmark...Who knows what magnitudes of  resources lay under the Greenland ice?

At some point, exploration becomes feasible, folowed by development. Technology and desperation will combine at some point , probably as the desire to survive exposes the limits of profit-motive.

Negro Primero's picture

...don't worry!






HungrySeagull's picture

I am well aware of the USSR Ambition to take the entire top of the artic.

We might have to fight Russia for it someday.