Russia and Iran oil exchanges may compete with New York and London

by John C.K. Daly

The seismic cracks produced in the Western economic structures amid the greatest recession since the Great Depression are reverberating far beyond the major financial centres of Wall Street and the City of London as nations consider how to protect their economies from further contraction. New ideas and concepts are receiving a far more sympathetic hearing as countries scramble to halt their economies' decline.
One of the most potentially significant new ideas whose time may have come involves the establishment by major energy-exporting nations of alternative exchanges for oil, the world's most actively traded commodity, and natural gas. Until now oil trade has been dominated by the New York Mercantile Exchange, the world's largest physical commodity futures exchange, which handles West Texas Intermediate benchmark futures, and London's Intercontinental Exchange, which deals in North Sea Brent. All trades are in dollars, effectively giving the US currency a monopoly.

Now Russia, the world's second-largest oil exporter, is discussing with Iran, the Organization of Petroleum Exporting Countries' second-largest exporter, the possibility of Tehran using the St Petersburg Commodity Exchange to market its output. Given the shifting tectonic plates of the global economy, the offer, if accepted, may prove to be the harbinger of change in how marketing the world's most fungible commodity is traded, with potentially ominous implications for New York and London's effective monopoly.
The proposed collaboration is initially modest but significant: On March 3, during a visit to Tehran, Russian Energy Minister Sergei Shmatko observed that Moscow could assist Iran in marketing its gas in Europe, as "Russia enjoys a good and effective position in the European gas market."

Warming to his theme, Shmatko told that he suggested, during his discussions with Iranian Oil Minister Gholamhossein Nozari, the "establishment of a joint oil bourse (stock exchange) by Iran and Russia" to "form a regional market for oil trade, as many of the oil-producing countries are currently seeking different markets for their crude oil." Shmatko added, "The Russian side has proposed that our Iranian partners consider the possibility of selling a part of Iran's oil at the St Petersburg Commodity Exchange," to which Nozari replied that the Iranian government would review the offer.
Nozari and Shmatko agreed to establish a joint energy committee to enhance Russian-Iranian energy cooperation. According to Nozari, Iran and Russia have been discussing proposals for natural gas swaps, building a refinery in the Caspian Sea region, Russian participation in constructing the trans-Iran Neka-Jask pipeline to the Gulf of Oman, as well as joint exploration and development of oil fields.

It is hardly a secret that both countries have chafed for years under the Anglo-American and dollar's predominance in the global oil trade, and Nozari's and Shmatko's discussions represent an incremental undermining of NYMEX and ICE's dominance of global energy markets. Both countries have established exchanges, though their trading is at present dwarfed by both NYMEX and ICE.
In April 2008 a consortium of Russian oil and transport companies and large banks founded the St Petersburg Commodity Exchange, which conducted its first trading session five months later, trading a small number of aviation and diesel fuel contracts. As the bourse's opening coincided with the onset of the global recession, plans for full-scale trading to start in early 2009 have been delayed. In a sign of Moscow's intention to downsize its energy market's dependence on the dollar, the St Petersburg Commodity Exchange's news service reported that bourse director Sergei Maslov said Feb. 26 that the Russian branch of British company British Petroleum TNK-BP will begin to sell crude oil for rubles at the Exchange.

The policy has strong state support, as Russian Prime Minister Vladimir Putin has said repeatedly that Russia should begin trading energy contracts in rubles to tighten state control over prices. As TNK-BP is currently responsible for 18 % of Russia's current oil production, it is not an insignificant move. As the Exchange's membership includes Transneft, Rosneft, Transnefteproduct, Gazprom Neft, Zarubezhneft and Surgutneftegaz, TNK-BP's move could be followed by others that collectively produce the majority of Russia's oil.
On Feb. 17, 2008, Iran opened its own Petroleum Exchange on its Persian Gulf Kish Island, which Tehran had designated as a free trade zone. The Exchange was set up to trade contracts in euros, Iranian rials and a basket of other currencies other than dollars. The previous year, Iran had requested that its petroleum customers pay in non-dollar currencies, and by Dec. 8, 2007, Iran reportedly had converted all of its oil export payments to non-dollar currencies.

The Kish Island Petroleum Exchange currently trades contracts for oil-derived products, such as those used as feedstock for plastics and pharmaceuticals. According to Nozari, the bourse eventually may begin direct trading in crude oil, if the exchange successfully establishes itself. Should Iran participate in the St Petersburg Commodity Exchange, it could avail itself of Russia's greater expertise in European markets while nurturing its own petroleum commodity exchange, and sharing Moscow's declared intention to shift trade beyond the international dollar-dominated market.
Diversification away from the dollar has long been a key tenet of Iranian government policy. On June 17 last year, addressing the 29th meeting of the Council of Ministers of the OPEC Fund for International Development in the Iranian city of Isfahan, Iranian President Mahmoud Ahmadinejad told those in attendance: "The fall in the value of the dollar is one of the biggest problems facing the world today. The damage caused by this has already affected the global economy, particularly those of the energy-exporting countries. ... Therefore, I repeat my earlier suggestion, that a combination of the world's valid currencies should become a basis for oil transactions, or (OPEC) member countries should determine a new currency for oil transactions."

If the growing rapprochement between Russia and Iran is enough to unsettle New York and London oil brokers, Washington's previously solid relationship with Saudi Arabia, the world's leading oil producer, may also be about to shift toward Moscow. Last year National Security Council of Saudi Arabia Secretary-General Prince Bandar bin Sultan bin Abdulaziz, who had served as Saudi ambassador to the United States from 1983 to 2005, becoming dean of the Washington diplomatic corps and earning the sobriquet "Bandar Bush" for his closeness to the president's family, visited Russia, ostensibly to explore Saudi-Russian military cooperation.
What was overlooked by many Western energy analysts, however, was his single sentence, as reported on July 14, "Both Russia and Saudi Arabia agree upon and understand each other in virtually every energy-related issue."

If Russia's assiduous courtship of the Middle East's pre-eminent oil producers bears fruit, then Britain and the United States may shortly find in the globalist world they so assiduously promoted that their hegemony in the world's energy markets has been diminished by forces beyond the control of both Wall Street and the City of London.