Gulf won't ditch dollar as crude trading currency

Big oil producing nations denied a British newspaper report on Tuesday that Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the US dollar with a basket of currencies in trading oil.

The dollar eased in response to the report, which was written by The Independent's Middle East correspondent Robert Fisk and cited unidentified sources in Gulf Arab states and Chinese banking sources in Hong Kong.

It said the proposal was for trade in crude oil to move over nine years to a basket of currencies including the Japanese yen, the Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, which includes Saudi Arabia and Kuwait.

The report comes amid a wider debate on the role of the dollar as the world's reserve currency, which has come under question. For most of this decade, the United States has struggled to maintain the dollar's value.

But top officials of Saudia Arabia and Russia, speaking on the sidelines of International Monetary Fund meetings in Istanbul, denied there were such talks. The two countries are the world's largest and second-largest oil exporters.

Asked by reporters about the newspaper story, Saudi Arabia's central bank chief Muhammad Al Jasser said: "Absolutely incorrect." He repeated the same response when asked whether Saudi Arabia was in such talks.

Kuwait's oil minister made similar remarks, while Russia's deputy finance minister Dmitry Pankin said: "We did not discuss this at all."

Algerian Finance Minister Karim Djoudi told Reuters: "Oil producing countries need to stabilise revenues but...I don't see a need for oil trade to be denominated differently.

"But we are at the IMF conference where all sorts of subjects are raised and discussed," he added.

In the wake of the newspaper story the dollar slipped. The euro edged up as high as $1.4749 in European trade from $1.4662 before the story appeared.

The euro fell back to $1.4701 when the Saudi Arabian and Russian officials denied the story, but it subsequently resumed strengthening because of the currency market's continued concern over the dollar's trend.

Russia has in the past publicly raised the idea of shifting its oil trade away from the dollar because of the weakness and volatility of the currency, which has been undermined by the US trade and budget deficits.

China, holder of the world's biggest foreign exchange reserves, has suggested that in the long term, the dollar should lose its role as the globe's top reserve currency.

A main focus of the talks among global finance officials in Istanbul has been correcting big trade imbalances that can destabilise the world economy. Many economists think the dollar may have to weaken further to reduce the imbalances.

However, analysts said that while individual countries would find it relatively easy to stop using the dollar in settling oil trades, as Iran has already done, replacing the currency in which oil is priced would require a massive effort.

The newspaper story did not make clear how the change would work, and many analysts doubted it would occur any time soon.

"I don't think this is a likely scenario in the short to medium term," said Carsten Fritsch, oil analyst at Commerzbank. "Without Saudi Arabia's support it is difficult to imagine that the dollar will be replaced."

And apart from the strong political links between Gulf nations and the United States, the lack of convertibility for many Gulf currencies and the yuan tops the list of practical hurdles to making such a shift.

Saudi Arabia and some other Gulf states now peg their currencies to the dollar.

"If there was already a significant proportion of global oil trade being priced in non-US dollar now, than perhaps there would be more pressure to price crude in another currency," said Victor Shum, energy analyst at Purvin & Gertz Consultancy in Singapore. "But we're still far from that."

The Independent's story said: "Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars."

France had also been involved in the talks, it said.

The Independent said US authorities were aware that the meetings had taken place but had not discovered the details and were "sure to fight this international cabal".