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Waiting for the dinar

25.07.2014 | By Stas Forostovets

The new US policy in respect of Iraq along with the de-escalation of the conflict in Syria makes Saudi Arabia take decisive steps to increase its influence in the Middle East. Riyadh, committed to increased independence in foreign policy, is going to strengthen its authority via financial consolidation of monarchies of the Middle East and creation of a single currency dinar and the Central Bank of the Gulf region. One of the latest developments on the way to the pan-Arabic dinar is the creation of a common market and the customs union between the countries in the Persian Gulf

ARABIAN ECONOMIC UNION

The logic of the Arab economic alliance with a common currency in its basis is understandable. This is a financial consolidation mechanism for protection of the Arabian Peninsula from the very probable internal shocks (because the Gulf monarchies are almost the last stable part of the Arab world, not embraced by the spring evoked by Americans), as well as from external threats represented by the radical Islam of the ISIL and the Shiite Tehran. In addition, it is a way to strengthen Middle Eastern monarchies on the international arena because at the moment only Saudi Arabia is a member of the G20. And rates of production in the six countries of the region (Saudi Arabia, Bahrain, Kuwait, Qatar, the UAE and Oman), members of the future financial alliance, will allow it to have the 13th place on the list of the largest economies in the world.

The initiators of the Monetary Union hope that introduction of the single currency dinar (originally there were several variants of the name of currency rial, khaleeji and juman the old name for pearls) will ensure the continued growth of mutual trade between the Gulf countries, which currently exceeds US $92 bn, with the expected growth of 5% in the mediumterm prospect. And the economic growth driver for dinar will be a sizeable reduction in the cost of financial transactions between countries with the unified Arab currency. Having chosen such development strategy the Middle East repeats the path of the EU, which also introduced Euro in 2002 as an effective mechanism against the high cost of transactions in the Euro zone.

At the same time it must be recognized that the integration processes within the Oil G6 develop very fast, even faster than once in the EU. However, IMF economists estimate that the actual positive effect from the introduction of the single currency in the Gulf will be significantly inferior to the effect from creation of the Euro zone, as the share of total exports of the countries of the future dinar is less than 10%. But experts believe that the true purpose and strategy of the countries creating a unified Arab currency is economic integration of the region, which will be a powerful motivation for the growth of trade and will help reduce the dependence on oil dollars.

It is most likely that dinar will be pegged to dollar by 50%, because it the main wealth of the region oil is sold for dollars. At the same time the peg to the US dollar is a political, not a logical decision. From an economic standpoint, it would be correct to peg dinars exchange rate to a basket of currencies on the basis of Euro, as 70% of oil purchased by European countries comes from the Gulf region.

CONTRADICTIONS WITHIN THE ALLIANCE

Oman and the United Arab Emirate reject the idea of a single currency for now (the UAE motivated such decision by the fact that the headquarters of the Central Bank of the new monetary union is supposed to be located in the Saudi capital of Riyadh, and not in Abu Dhabi), because they are not prepared to accept the Saudis as the elder brother. In addition, opponents of the dinar suggest that the monetary union can provide the Saudi elite, which is dominant in the economy of the region, additional leverage in the political situation in the Middle East. At the same time it should be noted that after liberal Hassan Rouhani came to power in Tehran, Oman and the UAE have been trying to strengthen their relations with Iran, which completely contradicts the strategy of the Sunni Saudi Arabia for prevention of the spread of influence of Shiite Iran in the region.

Currently, the Gulf monarchies are waiting and are in no hurry to introduce the longawaited unified Arab currency to which many optimists predict the status of the gravedigger for dollar and Euro. In the past, they have postponed the original term of introduction of dinar in 2010 because of the global economic crisis. Now they mention rescheduling of introduction of dinar to 2015.

This is due to the crisis in relations between the allies in the monetary alliance, which could be told from the evaluation and attitude of Qatar, the UAE and the SA to the events in Egypt, Iraq and Syria. Contradictions and polarity of interests of the three countries are expressed in the extreme opinions on whether they should or should not help such associations as the ISIL which leads the civil war in Iraq, and more moderate Muslim Brotherhood.

WASHINGTON DINAR TEHRAN

However, the main problem of the originating Monetary Union is the development of relations with Washington and ratio of pegging of the future dinar to dollar against the background of the US refusal to bomb Syria and recognition of nuclear diplomacy of the new Iranian government in the west. Now Riyadh is stoically watching Barack Obamas rapprochement with Iran and hoping that the US presidential election in 2016 will return the Republicans to the Oval Office, with whom Saudis have a long historical and strategic military and economic partnership and common aversion to Tehran.

But other countries, less weighty in the Gulf Monetary Union, comment on Obamas soft policy on Iran less diplomatically and more clearly. For example, recently the Crown Prince of Bahrain said that America is suffering from schizophrenia, when it deals with the Arab countries, it has no longterm planning of its policy in the region. The prince criticized Washingtons concessions in relation to Tehrans nuclear program and warned that in case the US did not change their attitude towards the allies, the Arab countries might reconsider their current course focusing solely on the US, hinting that Arabian countries will sell their hydrocarbons for the future dinar, and not for the US dollar. Yet, such statements should not be interpreted as political bluff. It should be kept in mind that such statements about oil trade for currencies other than dollar, eventually became one of the reasons for overthrowing Muammar Gaddafi, and imposition of economic sanctions against Iran.

We may assume that the SaudiUS strategic partnership will not be interrupted even against the background of the war in Iraq, where the US and Iran share a common position. Partnership with the US is one of the unshakable foundations in the Saudi foreign policy, moreover, the global financial system is based on a conditional oil dollar or US Middle East binary code.

Therefore, it is most likely that dinar will be introduced in 2015, and the Arab Financial Spring will take place, but will differ for a very mild and moderate weather. Dinar will be introduced with more than 50% binding to dollar, and it will not be an alternative currency for which oil will be sold, and dollar will retain its monopoly.

The Gulf Monetary Union will not refuse to sell oil for dollars and switch to settlements in dinar mindful of Americas demonstrative actions in Yugoslavia on the eve of the introduction of Euro. That time Washington played the Balkan conflict and showed Europeans what could happen when a new regional currency is trying to compete with the dollar on the global scale.

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