Iran lost touch with reality when it developed its plan to use a new euro-based oil exchange on Kish Island in the Persian Gulf to dethrone the greenback from its position as the world’s reigning reserve currency. Such a project is neither likely to attract much business nor to have Tehran’s desired effect on the dollar.

Tehran’s plan of attack has the virtue of economic logic at least. Iran’s planners recognise that the heavy use of the dollar in international trade sustains its foreign exchange value by forcing people to hold greater dollar balances than they otherwise would. The dollar’s consequent strength encourages its use in other transactions, which require still greater

dollar holdings in a dollar-boosting cycle. They hope that their euro-based exchange will disrupt this pattern. By forcing oil traders to hold euro balances instead of dollar balances, Tehran expects the oil bourse to induce dollar selling and force a drop in value.

This economic logic, though reasonable from a theoretical standpoint, misses some very practical hurdles to success. Tehran’s exchange simply is not attractive compared with the exchanges in London and New York, where dealers and traders are prospering amid their well-developed networks. On distant Kish Island, they would lack trained locals to work in their operations, have to deal with a notoriously corrupt bureaucracy, lose contact with a transparent financial, regulatory, or banking system, lack the necessary technological infrastructure, and sever most links to the globe’s electronic commercial structures on which trading relies.

Because Iran is not even a member of the WTO, dealers who move to Kish Island would also miss the kind of legal structures on which they rely to facilitate trading and secure the contracts that support it. Against these drawbacks, it is difficult to see how such an exchange could even get started. Tehran is unconvincing with its argument that proximity to the Middle East oil fields can overcome other reservations, especially in today’s electronic, information-laden world. As long as Iran sells its oil into world markets, it has no control over where it gets traded.

Iran’s proposed bourse would also face serious diplomatic and religious problems. To work, the exchange would require a free flow of funds and oil, but Iran’s membership in OPEC subjects it to strict production and sales quotas. It is not at all clear how Tehran plans to reconcile one requirement with the other. Most fundamental of all, at least for many Iranians, is the likely violation of Islamic law. The Koran forbids either paying or receiving interest.

Clearly, Tehran has failed to think through its bourse project thoroughly. For the time being then, such talk of dollar destruction from Tehran resembles hopes and dreams more than practice and probability. To steal a phrase from that inspired Middle Eastern thinker, Fouad Ajami, the Iranian oil bourse would seem then to fit best with the many other Middle Eastern “dream palaces.” — The Christian Science Monitor