The Daily View: Enter the petroyuan

IRAN’S “toll booth” system of granting clearance codes to permit safe passage across the Strait of Hormuz is unlikely to be a long-term feature of international trade.

It could, however, come with lasting consequences beyond the immediate disruption rippling through the global economy.

Not all ships transiting are paying fees — in fact most are not. The diplomatic interventions of foreign ministers talking directly with Iran’s fractured and embattled leadership have negotiated assurances that ships not deemed to be “hostile” can pass through Tehran’s unilaterally imposed vetting system.

Some, however, are paying, and they are paying via intermediaries in yuan. That is significant.

Gulf countries had been experimenting with forms of non-dollar payment infrastructure before this latest conflict, but that is a trend now gaining more interest.

“The conflict could be the catalyst for erosion in petrodollar dominance and the beginnings of the petroyuan,” Deutsche Bank wrote in a research note to clients this week.

The fact that payments are reportedly being settled in yuan is no coincidence.

Payments outside the dollar might help insulate companies from the attentions of regulators, but the bigger factor here is that China is a long-time partner of Iran and also the nation’s biggest oil customer.

Iran’s own oil has continued to transit the strait it controls — mostly towards China.

Every tanker that pays in yuan instead of dollars establishes a precedent. Every precedent weakens the petrodollar architecture that has governed energy trade since 1974.

The Iranian Revolutionary Guard Corps is in effect not just blocking a strait — it is attempting to build an alternative payment rail under live fire.

The $2m toll in yuan is not a fee. It is potentially a proof of concept for a post-dollar energy settlement system, argue some.

That may all sound like a leap too far, of course — the demise of the petrodollar has been routinely predicted in every crisis and survived regardless. But we are sailing through interesting times where precedents and established norms are falling fast.

Four weeks ago, very few of us would have predicted that 20% of the world’s oil supply would be controlled by the IRGC’s VHF radio clearance codes, or that safe passage would be payable in a currency that is not the dollar.

Richard Meade
Editor-in-chief, Lloyd’s List

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