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India and the United Arab Emirates on Tuesday signed a currency swap agreement to boost investment and enable direct trade without using dollars or other international currencies
The swap is for 200 crore dirhams or Rs. 3,500 crore ($496 million), depending on which central bank requests the amount, an official statement said.
Could someone ELI5, What is currency swap? How does it work? Why is it done and what it entails?
You have two countries with their own central banks and currencies. They usually don't hold much of each other's currency. Let's say you're an Indian trader and you want to buy from the UAE. UAE businesses won't take Rupees, so you need Dirham. You can't get enough Dirham from the Indian central bank so you'd have to rig up some way to work with the UAE central bank outside the country, raising the cost of doing trade.
A currency swap in the context of central banks is the two agreeing to trade a large amount of each other's currency and keep it in their reserves. Now our Indian trader can get the Dirham he needs from the central bank at home he knows how to conduct business with, making it easier to do foreign trade.
Thank you for the explanation.
Does these currency swap agreement depends on the amount of bilateral trade?
I think it's supposed to be preparation for increased amounts of future trade. Hard to do any trading if you have to jump through loops to deal with currency exchange issues. How much future trade there is though depends on other factors like transport infrastructure, government subsidies, and individual businesses discovering profitable trade opportunities. The currency swap is a sign that they expect more trade in the future, but it can't force an increased volume of trade if the economics don't work out.
Does this mean the UAE is willing to sell oil for Rupees?
Stupid Question: can oil be purchased/traded in currency other than USD?
Well, india and iran have a long history of conducting oil trade in local currency.
Not a stupid question. The answer is: of course it CAN. These 2 countries here have agreed to. The question is what is the political fallout of doing so. India is in a position where its big enough and neutral enough that the US taking heavy handed action against it would be seen as politically unpalatable by most IMO.
Yeah for some reason I was under the impression that oil could only be purchased with USD. Not sure why I thought that.....on a side note: I’ve always been intrigued by India’s energy demands, and I think you’re right. This will probably slide under the radar of the current US administration without much fallout
Yes, it can be sold in whatever currency the seller and buyer want. It’s just usually US dollars because the dollar is stable, reliable, and virtually everybody has dollars. Using US dollars just makes things easier.
Yes...India buys iranian oil with rupeeshttps://economictimes.indiatimes.com/industry/energy/oil-gas/india-set-to-pay-for-iranian-oil-using-rupees-from-november-sources/articleshow/65887179.cms
I'd also like to point to Gaddafi and Saddam hussein....
I'm curious too.
The fight with Saddam in 03 wasn't really for the petrodollar though. It was more about the US getting rid of a relic of the cold war who was proving to be more of a nuisance than a useful ally. The neocons original goal was to turn it into an anti-Iranian client state. Basically a middle east version of South Korea or Japan, minus the religious aspect. Of course it was a spectacular failure and they severely underestimated what they were getting themselves into.
Weren't they anti Iranian as it was though?
They were anti-Iranian but not a useful ally, Saddam was too unstable. What followed him after the invasion was even more destabilizing and now there are pro-Iranian militias stretching from Iraq to Lebanon.
Cold War relic? The US still were using Saddam as a proxy to attack Iran with chemical weapons almost up till the 1990s as retribution for Iran kicking out the US installed despot and stopping them from ripping them off for oil like they had been. East-West tensions and the Cold War had nothing to do with what that.
Saddam was already running a non religious, anti Iranian state when the US decapitated him, the problem wasn’t that he wasn’t useful, it was that he sought autonomy and a position that left him less dependent on the United States. One way was to start trading oil in a currency other than the US dollar for example in Euros which Saddam motioned he was going to start doing. The United States response was to invade and decapitate him. That’s why it occurred in 2003 and that is why they had images of him in being publicly hung broadcast beamed around the world in prime time. The message wasn’t “this is what we do to people who are no longer useful”, rather it was a statement that clearly implied: “this is what happens to people who try and break out of our system”
And it wasn’t a failure at all. Millions may be dead and hundreds of billions may have been spent in war but all oil in that region is still bought and sold in US dollars with the US maintaining tight control over who earns what and when. The real conspiracy theorist in me says now the climate change agenda has done enough, the peak years of oil have now passed, the mideast is spent, the West weathered it, the Mid East mostly squandered it and now control will be loosened as energy starts to pivot away from crude.. but that’s a whole new discussion
The Gulf War was when the US turned on him. Relations between the two soured and the US's position was regime change pretty much since Clinton imposed sanctions. Your theory doesn't explain why Clinton continued to bomb and sanction Iraq after the Gulf War. There was no threat of him becoming autonomous at this time, which means that the US had broader geopolitical goals than "let's just stop him from getting off the petrodollar".
Saddam served his main purpose when he helped America cripple the Iranian economy and punish their attempts at independence. Where the US turned on Saddam is when he tried to take control of Kuwait and their by solidify his position in the region and mitigate America from betraying him and doing to him what he helped them do to Iran. That’s when Bush Sr and his administration cooked up the fake story about Iraqi soldiers walking into Kuwaiti hospitals and taking babies out of incubators and leaving them on the cold hospital floor. It was all propaganda and fabrication with the main testifying witness being the daughter of Kuwait’s ambassador to the US (an undisclosed fact at the time). Bush losing his second term election and Clinton coming in meant an interruption in doctrines. What the Clinton administration engaged in was basically ‘containment’ which neither changed the status quo or the established narrative nor let Saddam regain balance. This ‘mothballing’ of the Saddam state flicked back into decisive policy the moment Bush Jr entered office with Michael Bolton and the resumption of the original plan.
And to be clear it wasn’t just “stop Saddam and their oil getting off the dollar”, it was about keeping ALL oil on the dollar and not having any dangerous precedent set. Slaughter one sheep and the rest get back in line. I would actually be very impressed by how the US pivoted off of a gold backed currency to an oil backed one which all nations were forced to adopt as necessity which allowed the federal bank to print as much money and amass as much fiscal debt as it wanted always having the value supported and entwined with a global mandatory commodity if it wasn’t for the bloodshed and forcible retarding of nations that it took to accomplish. Actually I’m still a little bit impressed
Clinton was not engaged in "containment", he literally passed the Iraqi Liberation Act in 1998, which established the US's policy as regime change in Iraq. That was a turning point in American foreign policy towards Iraq, especially when you consider that Bush senior decide not to invade Iraq after the Gulf War. The petrodollar theory makes sense for Libya but it doesn't for Iraq.
You mean the Iraqi liberation act was passed 6 and 1/2 plus years into a 8 year term? By a president who was keeping a low profile trying not to be impeached for perjury and leaving Washington in disgrace? I remember those years and let me tell you, there was no time, no appetite and no at home support to follow through on such a thing. That act was only ground work, a peice of paper that sat dormant until 2002 when the Bush administration rolled it back out for added justification for what it was about to do. Clinton had no earnest history or involvement with the Iraq affair. It was all legacy of the family Bush. For a clear understanding, just look at the timing of when the hammer fell. America had purportedly been attacked by radical Islamic extremists. The country is on a campaign of eradicating and passifying all middle eastern fundamentalist regimes and their supporters. The one nation that you never had to worry about and had always kept a strong lid on Islamic extremism even if it’s own decision, is Saddam Husseins Iraq. Contrast that with Saudi Arabia which was the hot bed of radicalism and actually involved in 9/11 but because they abided by US oil policy they never faced so much as a sanction. The guy who was the strong anti radical operator is contrastly put right in the cross hairs. Practically moments after going public with plans to stop the US strangling his country’s economy and breaking the US dollar monopoly on oil trade. Next time you see him he’s in his pyjamas swinging from a noose. Same fate for Libya’s Gaddafi. International politics is a murderous game and money is very often at the bottom of deciding who gets to stay and who goes. All the rest is just window dressing to make it more palatable.
France had a bigger role to play in that than the US. IIRC they played a big part in the bombing campaign. Was Gaddafi using the dollar before he was deposed? If so, why did France get so involved ?
I remember claims at the time that Sarkozy had some shady financial ties to Gaddafi, which made France’s involvement more personal. Sarkozy supposedly accepted campaign funding from Gaddafi in violation of international sanctions and French law. Sarkozy was arrested in March of this year and questioned about this relationship, so maybe there was something to the personal aspect of France’s role.
Gadaffi financed Sarkozy's 2007 campaign to the tune of 50 million euros.
Hard to tell how that affected what happened in 2011, though.
Also wanted to reduce Italian influence in the region
Wouldn't you think France would try to play a bigger role in the restructuring of Libya post-Gaddafi? I guess you could say that Sarkozy was only in power for 7 months after Gaddafi died and maybe his successor didn't want to get caught up in the mess but maybe I'm missing part of the picture? What did France do to try to ensure its access to natural gas in Libya in that time?
Ediy: wow, downvoted for asking a question. What the hell.
NATO and EU thought they had reached a negotiation point where they could not get more from Lybia so they supported regime change, restart a new game and pick the 'we helped put you in charge' card once new leaders were elected.
It did not ended exactly how they intended but they still kept getting that gas on dollar or euro transactions. They also give money to the very unstable lybian regime for them to stop migrants (actually saving them money and especially saving votes). Meanwhile, Lybia has war, devastion, hunger, ISIS and slavery.
Wouldn't the oil production drop a ton after a Civil War breaks out, thus reducing the money gained by a ton? I guess you could say that they were faced with chance of losing a lot more money if Gaddafi was actually able to implement his policies, and they probablyassumed that a stable Libyan government would pop up after Gaddafi fell. Also, aren't there 3 governments in Libya rn, how can European nations be supporting the "Libyan regime"?
BTW I found this article that is a lot longer and imo better than the one you posted. They have an actual link to the specific email where they describe the reasons for going to war in Libya and how they support rebels right off the back, so I think I'll shift through those on my spare time. : https://www.foreignpolicyjournal.com/2016/01/06/new-hillary-emails-reveal-true-motive-for-libya-intervention/
Gaddafi had plans for his own gold-backed currency which the French saw as a threat to the dominance of the cfa franc in their former colonies in West- and Central Africa. Blumenthal, Advisor to SoS H.Clinton, lists this as one of the reasons the French pushed hard for war in a leaked e-mail.
This article has basically no substance aside from the title. Does the UAE and India produce enough of what each other need to trade in their own currencies? India can buy oil with the Rupee but what will the UAE use those Rupee for? I guess India can recycle the Dirhams for more oil or financial products but that's it.
UAE buys a lot of fruits, vegetables, spices, etc. from India. Since Indians are the largest group in UAE, they certainly import a lot of from India. (3rd largest actually)
It's hardly any money anyway, people are harping on about the end of the petro-dollar but it's literally a $496 million USD agreed swap, barely anything. It wont be used for oil or any derivatives as it's simply nowhere near enough currency volume.
This would matter except that the Emirati dirham is pegged to the US dollars
Surely it’s more about the fact that the transaction won’t happen through the US financial system, though I could be wrong,
The Dirham being pegged to the US dollar has no relation to this topic at all.
How so? I don’t have any clue on my end
Pegging to the dollar means they fix their change rate on the open market. Any country can peg their currency to the dollar, even America's enemies can. Not using the US dollar to trade relates to the importance of the dollar as a reserve currency and the laverage the US has over countries trading in dollars. These concepts are not related.
Okay, thank you very much for the simple explanation!