As Iran gets ready to celebrate its greatest holiday of the year, New Year’s Eve, on March 20th, it not only celebrates the beginning of a new year but also the end of the dollar as an acceptable currency for payment of its oil.

Although the holiday, known as Nowruz, is typically commemorated by a symbolic purging of the home and spiritual representation of creation and fertility, this year Iran is celebrating by changing its policy for payment of oil. Essentially, Iran will no longer accept the U.S. dollar as payment for oil, and instead, will be looking for other currencies and commodities.

The charter of the Iranian oil bourse, a commodity exchange which opened back in February of 2008, calls for the commercialization of petroleum and other byproducts in various currencies other than the U.S. dollar, primarily the euro, Iranian rial and a basket of other major (non-U.S.) currencies. While there are three other major U.S. dollar-denominated oil markers in the world (North America’s West Texas Intermediate crude, North Sea Brent Crude, and the UAE Dubai Crude), there are just two major oil bourses: the New York Mercantile Exchange (NYMEX) in New York City, and the Intercontinental Exchange (‘ICE’) in London and Atlanta.

Iran sits on one of the largest oil and gas reserves in the world, and its plan is to develop a fourth oil market where U.S. dollars are not accepted for oil trade. In fact, Iran has proposed the creation of a Petrochemical Exporting Countries Forum (‘PECF’), aimed at financial and technological cooperation among members, as well as product pricing and policy making in production issues – not unlike the Organization of the Petroleum Exporting Countries (‘OPEC’). The British newspaper The Guardian, cites Iran, Saudi Arabia, UAE, Russia, Qatar, and Turkey as potential members of PECF.

This issue is not new. In the last decade, a few Latin American countries – the most dollarized region in the world – began introducing measures to create incentives to internalize the risks of dollarization, the development of capital markets in local currencies, and de-dollarization of deposits. These all contribute to a decline in credit dollarization globally, but predominantly in Latin America and the BRIC (Brazil, Russia, India and China) countries. Bolivia, Paraguay, Peru, and Uruguay have been gradually declining in financial dollarization. Iran’s upcoming official announcement of non-acceptance of dollars for oil was first announced back in 2007. At that time, Japan was the first country to comply with Iran’s requirements, when it began to pay for oil in yen.

For several decades, dollarization has greatly complicated the policy response in several crises and near-crisis episodes, especially for emerging economies. In some cases, it has been the primary source of financial vulnerability that triggered a crisis not only for BRIC countries, but also for Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa (CIVETS) block. The urge to “de-dollarize,” or to withdraw from U.S. Treasury bills and the dollar, is a direct result of foreign countries’ mistrust in the U.S. government’s ability to control its massive budget deficits.

This, in turn, arises from the fact that dollarization almost invariably undermines monetary policies conducted by foreign states’ central banks, limiting their role as a lender of last resort and creating losses in revenue from the printing and issuing of new currency. Foreign countries are realizing that oftentimes dollarization makes them vulnerable to changes in U.S. currency policy, especially in a currency crisis. Iran’s de-dollarization intentions aside, many of the emerging economies are also considering de-dollarization…..MORE HERE