ANALYSIS - Muslim Nations' Plans To Trade In Gold, Barter To Avoid Sanctions Likely To Fall Flat

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ANALYSIS - Muslim Nations' Plans to Trade in Gold, Barter to Avoid Sanctions Likely to Fall Flat

MOSCOW (UrduPoint News / Sputnik - 25th December, 2019) The idea of Iran, Malaysia, Turkey and Qatar trading in barter and gold as a way to protect themselves against potential sanctions will most likely never see the light of day as the US Dollar will continue dominating international trade, experts told Sputnik.

Last week, Malaysia convened a summit of Muslim nations in order to discuss the most pressing issues affecting the Islamic community. At the event, Malaysian Prime Minister Mahathir Mohamad said that Kuala Lumpur, Tehran, Ankara and Doha had been mulling plans to trade among themselves using gold and barter in order to avoid the impact of existing and future sanctions.

The idea comes on the heels of the United States' latest sanctions on Iran. Last year, after Washington withdrew from the 2015 Iran nuclear deal, it reinstated wide-ranging sanctions on Tehran, including secondary sanctions against companies and financial institutions of countries that do business with Tehran. China, France, Germany, Iran, Russia, the United Kingdom and the European Union the other signatories to the deal have condemned the move, with the European Union going so far as to set up a special mechanism to bypass the economic restrictions.

DOLLAR DOMINANCE HINDERS CHANCES FOR OTHER CURRENCIES

Dr. Ulrich Volz, the founding director of the Centre for Sustainable Finance at the SOAS University of London, told Sputnik that using barter or gold in trade was not a viable option for the countries seeking to limit their dependence on the US currency.

"I do not think such an announcement will be very meaningful in practice or have any implications on the global trade and financial architecture. There certainly is a strong interest in some countries, including Russia and China, to decrease their dependence on the US dollar and have and develop alternative international payment system to limit exposure to any potential sanctions. But going back to barter trade is not the way to go, and gold is unlikely going to play a major role either," Volz said.

Vivek H. Dehejia, associate professor of economics at Carleton University in Ottawa, echoed Volz in his comments to Sputnik, saying that the chances of Muslim countries switching to the proposed alternatives were scant.

"I do not think the chances are very high. Ever since French President Charles de Gaulle decried the 'exorbitant privilege' enjoyed by the United States as the provider of the world reserve Currency under the Bretton Woods [fixed-exchange rate financial system in 1971], many countries have tried and failed to supplant the dollar. Remarkably, the dollar's hegemony has even survived the collapse of Bretton Woods, and if anything has even strengthened. The reality is that 80 percent or more of trade credit in the world is priced in dollars, and a similarly high ratio for final trade," Dehejia, who is also an observer and writer on India, said.

According to the analyst, it is much simpler for the countries to trade in the dollar since "the US capital markets are the deepest and most liquid in the world, and transacting in Dollars eliminates the need for most bilateral currency markets." He added that there were currently not many viable alternatives to the US dollar, with the euro and Japanese Yen being the only other convenient currencies for international trade.

"With its imminent exit from the EU, the UK pound sterling will become more of a parochial and less of a world currency. Perhaps down the road, the Chinese currency could become a partial substitute for the dollar, but this will require much greater capital account liberalisation by the Chinese. The Russian currency is unlikely to play this role, if only because Russia is a heavily commodity dependent economy and thus the ruble has a very volatile exchange rate through no fault of the policymakers," Dehejia said.

The association of five major emerging economies including Brazil, Russia, India, China and South Africa (BRICS) has been calling for less dependence on the US dollar for years. The head of BRICS Russia's Ministry of Foreign Affairs, Mikhail Kalugin, told Sputnik in May that having mutual payments in national currencies was a priority task for the association.