CAPE TOWN – The current global events present us with both challenges and opportunities alike, which none of us have adequately prepared for. They are as tumultuous for Europe and the Middle East as they are for the rest of the developing world.
They include among others, threats to those developing countries who do not support US-sponsored resolutions at the UN General Assembly, to trade wars or threats of that kind, especially against China and other specifically targeted countries like Turkey.
But above all, there are Congress approved economic sanctions preferred against Russia and executive ones imposed against Iran which will come to full effect in November. It is the retaliatory trade and tariff measures which deliver a purchase no single country could ever have anticipated.
But first, it is important to observe that the project to wean the globe from the addiction to a dollar, or that section of the globe so determined, has been in progress for some time, arguably in small and imperfect measures. Significantly too, the progression in earnest, has resulted in its most prominent development, the formation of BRICS.
There were enough sceptics, there still are, who dismiss this formation as insignificant because they were and remain convinced in their assessment that no country or formation of like-minded allies is capable of replacing the dominance of the greenback. The opponents to the BRICS fraternity, or at least those opposing South Africa’s participation in it, seem to suggest that it is better when our fate is decided in bodies where we are not represented.
We are better off in Bretton Woods institutions where South Africa’s head is constantly shaved in its absence, they are convinced. And so joining BRICS would expose South Africa to the serendipitous discovery that none of the BRICS fraternity is vest with its hair. So, for all our sakes, South Africa must get out of the BRICS barbershop.
The veracity, or otherwise, of this assertion is best left to a different subject of investigation. In so far as the argument goes, it presupposes that the reserve functions of any currency or commodity is dialectically related to its military projection and therefore nothing else can conceivably portend the power of these attributes except if it possesses both. That may well be. But that is scarcely an economic argument anymore.
Calculus of economic sanctions
The calculus of economic sanctions is too complex to appeal to a logical deduction. It often triggers a variety of unplanned responses which tend to stretch the tolerance of the economic allure of sanctions beyond their capabilities.
But it can be said that if one country sells oil to another and being the dominant one, forces the other to purchase same with its dominant currency, the outcomes are predictable. If however a country under sanctions sells oil to another that is incapable of being sanctioned, the theoretical foundation of the calculus would be severely injured.
Enter China. Sometime in 1993 China promoted the trading of the Shengli Blend through a domestic futures contract, a whole quarter of a century before President Donald Trump assumed the reins of the highest office in his fatherland. By 2012, the promotion of an oil futures contract was disturbed by the volatility of the oil market.
Subsequently, however, they were spurred on by the most important milestone in 2017 when China surpassed the United States of America as the world’s biggest oil importer. In between, there were two developments worth noting. First, South Africa joined the BRIC member states, lending its identity to the brand to form what has become the acronym BRICS.
Second, which was the watershed moment, is the date on which the BRICS’ horse bolted out of the currency dependency stables. On the 15th of July, 2014 the BRICS countries agreed to establish a mechanism for the exchangeability of their currencies which would permit the purchasing of goods and services among each other using their own currencies referenced against an average of a basket of global currencies.
In pursuance of the goal to trade an oil futures contract, a date of March 2018 was set. The difference this time is the fact that even registered foreign brokerage houses can trade the oil futures contract.
Opportunities, like matter, have mass and dimension occurring within a defined timeframe. In 2012, the United States imposed certain limited economic sanctions on Iran. Certain countries, including Malaysia, Iran, India and China were exempted from the rigour of the proscriptions. South Africa on the contrary, wasn’t.
Which means that whenever there are tensions in the Middle East with one side persuasive enough to convince the United States to impose sanctions against the protagonist’s adversaries, South Africa’s oil imports become vulnerable. Over and above the abrupt interruption of long-term supply contracts, South Africans are often at the receiving end of the ever-increasing fuel prices.
Buying crude oil in rand
And as the government sages are always kind to remind us, it is a result of a dollar-rand exchange conundrum. This would mean that if we were buying crude oil in rand and not in dollars, the time-price delta caused by the currency exchange differential would be eliminated at once. But so would the import restrictions.
Ignoring the cacophony of the BRICS versus Breton Woods palaver for a moment, we cannot let this opportunity pass. South Africa’s National Oil Company is a preferred candidate for such brokerage registration to trade these oil futures contracts. Understandably, the FOB point of delivery has not been announced yet, even though Qindao is most likely to be the contract’s domicilium. Notwithstanding, as a BRICS member protected under the aegis of the Fortaleza Minute, South Africa stands to purchase crude oil with their own currency. A barrel for a Rand!
The Oil futures contract will be traded in Shanghai. Peter Fabricius reminds us that some dictionary ascribes to the verb ‘Shanghai’ the meaning that it is ‘to put into…an awkward situation by trickery..’ Perhaps, and just perhaps, someday there shall be a time when the European traders will price the Brent index in Euro, the premier currency of continental Europe, even in Pound Sterling for that matter, for there is no equivocation that where the Euro will do, the Queen’s currency will flourish.
But these Brexit times are inconvenient. Besides, someone may just insult all of them on Twitter. And that’s not good for the ego of the European project nor for the price of the black molecule.
Every generation has got its own singular moment, as epoch defining as the Hiroshima/Nagasaki and the cliff-hanger of the 1962 Bay of Pigs. In our case, whether or not the time for a barrel for a Rand is nigh, shall be determined by IDLIB. Brinksmanship in that Syrian Province can take humanity on to the precipice of internecine violence never seen before.
The price of the barrel will react, and the discipline of global commodity trading will seek new basis for co-operation. With the exception of Syria, all the major forces amassing around IDLIB, are significant oil producers, Russia being the largest in the world and the US being the largest in the Northern Hemisphere.
Iran is the second-largest producer in the Opec bloc and Turkey is the globe’s most important oil and gas non-producing transit state. And Syria is currently constrained from exploiting its known reserves in the north. In this game of high stakes, oil prices are bound to suffer, one way and another.
The reason there are Pound Sterling, Euro, Yen and as of late, the Yuan in the basket of currencies in the Bank of Settlements, is reverence to the old adage that it is unwise to put at once all the world’s economic eggs in the dollar basket. As yet, there is no suggestion that their continued existence is intended to subvert the obsequiousness of the dollar.
For in truth, the dollar does not care. Whilst the other four units are currencies for mortals, the dollar is religion. An impiety against its Order, may unchain the Beast and lead to a Holy War. But we are reminded by the terse Fabrician Warning that, when in Shanghai, tread ye lightly!
Ambassador Bheki Gila is a Barrister at Law.
The views expressed here are not necessarily those of Independent Media.
– BUSINESS REPORT