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How can the dollar collapse in Iran? An explanation by Rudo de Ruijter

How can the dollar collapse in Iran? An explanation by Rudo de Ruijter

February 17/06

http://www.moneyfiles.org/deruiter01.html

The facts below explain why and how the new euro-denominated oil bourse (opening on March 20, 2006 in Tehran) will cause the collapse of the US-dollar.

This is a far more important issue, than the US' allegations about an Iranian nuclear threat. These allegations may well appear to be a smokescreen.

Take 60 seconds to understand the key of the real issue.

1. How, since decades, does the US succeed to import more than it exports?
2. How Saddam spoiled the game?
3. How would the dollar collapse in Tehran?

1. How, since decades, does the US succeed to import more than it exports?

US' debt is about 8,000,000,000,000 dollars. 45 percent is due to foreigners. How can the US make such high debts?

Thanks to OPEC's agreement (1971 and 1973) oil is exclusively sold in US-dollars. This creates a permanent demand for dollars on the exchange market.
Roughly 85 percent of the oil trade takes place completely outside the US. The related dollar cycle goes from exchange market, via oil buying countries, to oil producing countries, which spend them in different countries, which bring them back to the exchange market.

Back on the exchange market there are, generally and since decades, always dollars missing (more demand than offer.)

Reasons:
a. The volume and price of the traded oil generally increases. More dollars are needed over time.
b. Thanks to the free trade, many dollars stay in use in international trade outside the US.
c. Many foreign central banks keep dollars as strategic reserves.
d. The US Treasury issues bonds, which, when sold to foreigners, reduces the amount of dollars available abroad.

So, during decades, foreigners always needed more dollars. The US treasury issued extra dollars. And here it becomes very interesting. There is only one way to make these dollars available abroad. Spend them around the world! The US would purchase goods, services, shares, investments etc. But the US never had to deliver anything in return. The foreigners needed these dollars to buy oil. The purchases were just inscribed on the trade balances and the amounts added to the US' foreign debt. For the US, the oil trade works like a fairy credit card. Each time more dollars are needed abroad, this means "free" shopping. Nothing can be done about it.

2. How Saddam spoiled the game?

Saddam switched to the euro on November 6th, 2000. The exchange of the Iraqi dollar reserves soon followed. It created an overflow on the exchange market and the dollar started its descent. (See graphic.) Number of international traders and investors reacted by switching away from the dollar. Central banks would sooner or later have to exchange a part of their dollar reserves too. By the end of 2002 the dollar had lost 18 percent. On March 20 2003 the US invaded Iraq. On June 6th, 2003 the oil trade was switched back to dollars. However, the descent of the dollar merely halted. In the meantime Iran had switched to the euro too.




3. How can the dollar collapse in Tehran?

Iran has switched to the euro from spring 2003. Versus the euro, and since the start of its descent, the dollar is 30 percent down now. The next Iranian step away from the dollar is the euro-based oil bourse (forseen from March 20, 2006). The sole fact that there will be another world oil price, independant from IPE and NYMEX, will leave the US dollar without defense, as soon as a single oil producing country switches away from the dollar.

When an oil producing country switches away from the dollar, the dollars related to its oil trade become superfluous and overflow the exchange market. Basically the US has three ways to get rid of the overflow:
1. withdraw the dollars from the exchange market by issuing bonds;
2. get the dollars back into the oil trade by letting the oil prices rise on IPE and NYMEX;
3. export more than import.

Method 1 still worked partially between 2000 and 2003. Method 2 has been used in 2004 and 2005. The oil price doubled. (This was probably more than the Treasury had counted on. A few hurricanes helped to push the oil prices sky high.)

If, after March 20th 2003, Teheran keeps its oil price stable, just one switch-to-the-euro of an oil producing country will make the dollar collapse.

The US won't be able to deal with the superfluous dollars that will overflow the exchange market then.
Method 1 won't work: There is insuffiscient demand for bonds. (Short term rates are already inverted.)
Method 2 won't work: Rises in oil prices on IPE and NYMEX are more or less blocked, if Tehran's oil price remains stable.
Method 3 won't work: Increasing tremendously the US exports, is not a feasable short term solution.

The Oil Bourse in Tehran will not only reduce the power of IPE and NYMEX. It will also have its influence on the exchange rate between dollars and euros. If oil gets cheaper in euros, there will be a rush on euros. And vice versa. Many countries have each their particular reasons to fear the upcoming bourse.

Just an extra ride in the merry-go-round of Debts.

The strategy of a war or embargo against Iran is shortsighted. The US may stop Iranian oil sale in euros and force the world to buy oil in dollars again. But with a US' debt rocketing at higher and higher speed, very soon another non-dollar oil bourse (or even several) can be established elsewhere in the world. A war or embargo would only mean a small extra time for the dollar miracle. It would be at a very high price.


A DETAILED OVERVIEW
with references to sources and proofs

In 2002, most journalists did not see what was behind the accusations that Iraq had WMDs. Today, most people do not know what is behind the accusations that Iran has plans for nuclear weapons.

Iran's threat is not nuclear, but far more dangerous to the US. If Iran can open its upcoming euro-based Oil Bourse in Tehran on March 20th 2006, Iran will threaten the US dollar.

Up to 1971, each US dollar represented a fixed amount of gold. During the Vietnam War, the US had printed and spent more money than their gold reserves allowed. President Nixon had to abandon the gold guarantee. Since then the dollar value is determined by the law of offer and demand on the exchange market.

Normally, the exchange rates between currencies reflect the health of their countries' trade balances. Countries that export more than they import will see their currency rise in value, and countries that buy more than they sell will see the value of their currency decrease.

This is the case for all other currencies, but not for the US dollar. For 30 years the US has imported much more than it exported, and the trend is worsening. [1] Normally, this should make the currency fall in value, but the dollar has not fallen. How is that possible?

The same year Nixon abandoned the gold standard, the Oil Producing and Exporting Countries (OPEC) agreed they would only accept US dollars in payment for their oil. This has a major advantage for the US: all other countries would have to buy dollars first before they can obtain oil. This creates a permanent demand for dollars.

Those foreign countries account for roughly 85 percent of the international oil trade. [2] This is the part of the oil trade that takes place outside the US, between oil producing countries and foreign countries.

Call it the foreign oil trade dollar cycle: dollars are bought on the exchange market and spent in oil producing countries, which spend them in countries around the world. Those countries offer their dollar surplus on the exchange market and the cycle restarts.

Oil commerce always consumes more dollars. Global consumption increases, which raises demand for the dollar and allows the US to increase its production of dollars.[3]

Since they are needed outside the US, they have to be made available abroad. This is where it becomes very interesting. There is only one way to get the new notes outside the US: spend them and do free shopping around the world. (These notes have only cost the paper and the ink.) [4]

Of course, this creates a debt, for the foreigners could use these notes some day to buy goods, services, shares, buildings or land from the US. But since they are now needed in the always-growing money cycle for the oil trade, there is no need to worry about that.

This system works like a fairy credit card. Although the US has already much too much debt, suppliers cannot refuse to deliver goods, because they need the dollars for their oil purchases.

There are more sources of demand for dollars. Dollars disappear from the oil trade cycle for use in international trade between countries abroad. They form a huge amount of dollars that stays outside the US, only because of the preference of traders to use this currency.

Nearly the whole world needs dollars, so they are accepted nearly everywhere. Central banks, when they can, keep reserves in foreign money to protect their own currency. To explain it simply: if ever the money market would be glutted by their own currency, they could buy it back and offer the foreign currency in exchange.

These foreign banks traditionaly choose to build up their stategic reserves in the best accepted currency on the market: the US dollar.

For decades, the amount of dollars outside the US was generally growing. Each additional dollar abroad has meant it had to leave the US, the US has spent it abroad, and it has increased the US debt. Oceans of dollars are outside the US today. However, when traders lose their preference for the dollar, huge waves might overflow the exchange market and make the dollar drop.

The US Treasury, the Federal Reserve, has an efficient way to pull dollar surpluses away from the exchange market: it offers bonds with interest. It is a good way to control the rate of the dollar. Pull more dollars from the market to see the rate go up, and pull fewer dollars from the market to see the rate go down.

These loans cost interest. To pay for the interest the Fed issues new loans, which adds to the interest to be paid. As a spiral the annual amounts have gone up and continue to increase. The national debt is increasing explosively now, at over eight trillion dollars ($8,000,000,000,000). [5] 45 percent is owed to foreign creditors. You have to be very optimistic to believe that this debt will ever be paid back.

The only difficulty for the Fed is to find enough foreigners to buy their bonds. Traditional buyers are growing more reluctant. Often these are foreign banks and companies, which already have invested a lot in dollars. They fear that if the dollar collapses, their investments will be worthless too.

To keep the dollar miracle going, the buyers still continue to buy bonds. If they are shortsighted, they will think they get interest. If they observe better, they will notice they have to buy additional bonds first and that the interest is paid with their own money.

Each year the US buys more goods than it sells. For the year 2004, the shortage on US commercial balance was six hundred and fifty billion dollars ($650,000,000,000), meaning that in average each US citizen enjoyed $3,000 more imported products than he or she earned.

You can express it as "the average productivity is too low" or "the government spends too much money". For instance, on the high military cost to fulfil the neoconservative dream to rule the world. [6] It will be an empire on credit, based on a strategy to keep the demand for dollars going, the dollar rate high enough, and Treasury Bonds attractive.

Iraq

Of course, Iraq's destiny had already been sealed in the neo-conservatives' plans even before Bush Jr. entered the White House. In their eyes it is natural that the US should dominate the Middle East.

The US is world's biggest oil consumer (25 percent of global oil consumption) and most of world's oil reserves are in the Middle East: Saudi Arabia (26 percent), Iraq (11.5 percent), Kuwait (10 percent) and Iran (13 percent).[7]

Iraq seemed already under control, as it had been paralysed since 1991 by the embargo. The UN and US had inspected the country during many years without finding anything suspicious. Sadam seemed already beaten.

However, he still had a trick. Since 1997, Iraq had been allowed to export oil in the Oil For Food program. In 2000 Sadam asked the UN to convert the account of the Oil For Food program from dollars into euros. The UN had no legal base to refuse it [8] and from November 2000 Iraq sold its oil in euros.

As a result, the oil trade dollars became superfluous and overflowed the money exchange market, soon followed 10 billion from Iraqis dollar reserves. The dollar rate went down.[9] Seeing the dollar rate lowering, many operators in the rest of the world trade switched to the euro too, which lead to new waves of dollar offers on the exchange market and lowered the dollar rate further.

For the US it normally does not seem a big deal to absorb surpluses of dollars by issuing Treasury Bonds, as long as there are enough foreigners to buy them. Once the dollars are absorbed, offer and demand would be stabilized again.

Nevertheless, Iraq's switch to the euro reduced the market share for the permanent demand for dollars, and thus this reduced the upward force on the dollar rate.

When the world oil price would rise again, there would not be any extra dollar needed in the Iraqi oil trade. It would permanently limit America's free shopping. Most painful, the US had no unlimited access to Iraqi oil anymore. It had to buy euros to dispose of it.

In 2002 the fall of the dollar became more dramatic. The White House spread lies about WMDs and prepared to invade Iraq. Unfortunately the international community appeared to be reluctant. Meanwhile the dollar continued falling.

In March 2003, the US overruled the Security Council and attacked Iraq. On June 6, 2003 the Iraqi oil trade was switched back from euros to dollars. [10]

Iran

In spite of Iraq's switch back to dollars, the fall of the dollar merely halted. [9] In the spring of 2003 Iran had started to sell their oil in euros too. (Iran had announced its intention already in 1999, but Sadam actually switched to the euro in November 2000).

Iran's move to the euro is logical if you realize that Iran sells 30 percent of its oil production to Europe and the rest mainly to India and China. The Iranian oil price was still labeled in US dollars, but customers did not have to exchange their money into dollars anymore.

From August 2003, the euro continued its march upwards and the dollar continued to go down. Again huge amounts of superfluous dollars from the oil trade overflowed the exchange market and had to be mopped up by issuing Treasury Bonds. However, this would not repair the needed permanent demand level.

It was not feasible to Invade Iran and turn the oil trade back into dollars, so a less popular method had to be used. The oil price should rise. This pumps the dollars into the oil trade again. For each extra dollar needed by the US, seven times more dollars are needed abroad (as 85 percent of the international oil trade takes place outside the US).

To make up for the loss of the Iranian trade the price increase had to be substantial. US' military spending needed extra credit, and thus extra oil price increases. The prayers of the treasury have been heard. Between July 2004 and September 2005, spot prices doubled. [11]

A few hurricanes helped US citizens, and the rest of the world's oil consumers, accept the new policy.

To see Iran in the euro-camp is not pleasant for the US. It creates a growing demand for euros. On the contrary, the market share for the permanent dollar demand becomes narrower and so does the acceptance of the dollar in international commerce. Between July 2004 and July 2005 the part of the dollar in world trade went down from 70 percent to 64 percenet. A little bit less than half of those 64 percent represents America's part in world trade.[12]

Oil bourse in euros
However, the biggest change has to come next month. On March 20, 2006, the Iranians want to start an oil bourse in Teheran, with prices in euros.[13]

This can have big effects on the exchange rate between dollars and euros. If the oil price in euros gets lower than the oil price in dollars, there will be a rush on euros. And if it the oil price in euros gets higher than its price in dollars, there will be a rush on dollars.

So, basically Teheran gets an influence in the exchange rate of the currencies, which means risks for both the US and Europe. Today Teheran is pressured and threatened by both. Fluctuations in exchange rates might also bother China's exports to the US.

The New York based NYMEX and London based IPE would lose a lot of their power to set the world's oil prices. Normally, since Tehran's bourse has to be attractive for oil producers and oil consumers, it would not be logical to expect important differences in price with the dollar-based markets. Maybe just a bit lower, to build up a market share.

Each loss of market share of NYMEX and IPE is a big problem for the US, since it determines world's permanent demand for dollars. But the problem can also become much bigger. At the moment that other oil producing countries switch to the euro, there will be new waves of superfluous dollars on the exchange market, which take the dollar rate down.

For the US, mopping them up by issuing bonds will then hardly be possible, since traditional buyers and central banks will prefer to convert, as least partly, to the euro too.

Pumping the dollars back into the oil trade with rises in oil prices worked fine in 2004. But from March 2006 this way out can easily be blocked by stabel prices in Teheran. If prices in euros ramain stable, prices in dollars can hardly rise.

Prayers on the NYMEX and IPE market will be rather useless then. If the US loses its means to get superfluous dollars from the exchange market, the fall of the dollar would be a fact.

As by coincidence the Federal Reserve has decided that from March 23, 2006 they will not publish the M3 money aggregate anymore. To put it simply, they will keep secret how many dollars are held in non-American banks.[14]

When the dollar falls
There are a lot of speculations about what would happen when the dollar falls. In my opinion it all depends on what will be left of the permanent demand for dollars. As long as the dollar rate is not based purely on US imports and exports, any scenario of changings will turn out to be temporary. I do not say these changings would not hurt, but in the end the US would still have its credit card and can continue to buy on tick.

Normally, when dollars become cheaper, American products and services become cheaper for foreigners. Instead of buying bonds, foreigners would increase their imports from the US. Simultaneously, foreign goods will become more expensive for the US. But once again, the US will profit from the oil trade. Oil producers will not accept a lower value

for their barrils. If the dollar goes down 10 percent, their prices will "logically" rise 10 percent. (In this case the price converted to euros would remain the same.)

So this would mean that the permanent demand for dollars in the oil trade rises with 10 percent again. At some point of the fall, the upward force on the dollar rate will be back, the US treasury will mop up the dollar overflow and the US can continue to buy on tick again.

Outside the US many central banks detain enormous reserves of dollars and treasury bonds. These paper mountains would shrink in value. Many industries detain dollar denominated capital. In most cases their value will drop.

Many banks in the world hold dollar denominated assets. They will have troubles in meeting the obligations to their clients. These difficulties may lead to a cascade of bankrupts.

The essence of the problem
The essence of the problem is the fact you need a special currency to buy oil. As long as the world needs dollars to buy oil, the US makes abuse of the situation and buys on tick from the rest of the world.

The euro contains the same risks. As long as there would be a motor for a permanent demand for euros like, for instance, an euro denominated oil bourse in Tehran, the eurozone could make debts and let it increase indefinitely.

To avoid such debts, the eurozone would have to export the equivalent of all euros needed outside its borders and keep the same amount in foreign currencies in their central bank. Why would they? The credit trick worked fine for the US during more than 30 years!

When oil producing countries would sell oil in two or three different currencies, this simply means that the three involved countries can do the same trick as the US does now. In the long run it would multiply the problem by three.

The only solution for this problem would be that oil selling countries accept all currencies on the market. Tehran has already taken into consideration to accept more than one currency and not just the euro. Step by step.

For the outside world the diplomatic joust is about nukes, which seems more exciting. However, since 9/11 the whole world knows that rather inexpensive terrorist solutions are much more effective to do harm and that even a big arsenal of nukes does not offer any protection. We are asked to believe Iran did not notice that and still wants such old fashioned nukes. [15]

Rudo de Ruijter,
independent researcher,
rudoderuijter@wanadoo.nl

---

[1] http://www.census.gov/foreign-trade/statistics/historical/gands.txt

[2] http://www.eia.doe.gov

[3] printed is a way of speaking, since today many created dollars are just numbers on bank accounts.

[4] If you prefer, you could convert the dollars into another currency first. That makes no difference.

[5] http://www.babylontoday.com/national_debt_clock.htm (The showed amount can vary from one internet provider to another. Probably due to internet-proxyservers that do not update often enough.)

[6] http://newamericancentury.org/RebuildingAmericasDefenses.pdf

[7] http://www.eia.doe.gov/emeu/international/reserves.html

[8] http://www.un.org/News/briefings/docs/2000/20001031.db103100.doc.html

[9] http://fx.sauder.ubc.ca/data.html

[10] Financial Times, le 5 juin 2003

[11] http://tonto.eia.doe.gov/dnav/pet/hist/wtotworldw.htm

[12] BIS (Bank for International Settlements)

[13]http://www.iranmania.com/News/ArticleView/?NewsCode=28176&NewsKind=Business+%26+Economy

[14] http://www.federalreserve.gov/releases/h6/discm3.htm

[15] Already during the Cold War the use of nukes was limited to frighten each other. Threats and reactions on threats were matters between presidents with red buttons. Today the reactions on threats or use of nukes do not simply depend on presidents and governments. They are much more difficult to control.


NOTE ABOUT GRAPHICS:

Trade Balances 1960 - 2004 are made with data from http://www.census.gov/foreign-trade/statistics/historical/gands.txt
Dollar rate versus euro from 1998 to 2006 are made with data from http://fx.sauder.ubc.ca/data.html
Oil prices fron 1998 to 2006 are made with data from http://tonto.eia.doe.gov/dnav/pet/hist/wtotworldw.htm


LIST OF ARTICLES:

Petrodollar Warfare: Dollars, Euros and the Upcoming Iranian Oil Bourse
by William R. Clark
(Friday August 05 2005)
http://usa.mediamonitors.net/content/view/full/17450

Killing the dollar in Iran
By Toni Straka
"With the world facing a daily bill of roughly $5.5 billion for crude oil at current price levels,"
http://www.atimes.com/atimes/Global_Economy/GH26Dj01.html

America's Foreign Owners
Thursday, September 22, 2005
http://www.thetrumpet.com/index.php?page=article&id=1712

The Proposed Iranian Oil Bourse
Krassimir Petrov, Ph. D.
January 17, 2006
http://www.321gold.com/editorials/petrov/petrov011706.html

Walker's World: Iran's really big weapon
By Martin Walker,
UPI Editor
1/19/2006
http://www.upi.com/InternationalIntelligence/view.php?StoryID=20060118-052333-1392r

Behind the mad rush to bomb Iran
Webster Tarpley, Jan 25 2006
http://www.pressbox.co.uk/detailed/International/BEHIND_THE_MAD_RUSH_TO_BOMB_IRAN_-_Teheran_s_Euro-Based_Oil_Exchange_Spells_Doom_for_Dollar_-_Interv_50885.html

Short articles
February 06, 2006
http://www.whatreallyhappened.com/archives/cat_iran.html

Petroeuro
From Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Petroeuro

Trading oil in euros - does it matter?
by Cóilín Nunan
Published on 30 Jan 2006 by Energy Bulletin. Archived on 30 Jan 2006.
http://www.energybulletin.net/12463.html

Interview: An Iranian Commodity Market With Global Impact

oilbourse.blogfa.com

بورس نفت
این یک وبلاگ تخصصی در باره بورس نفت ایران است

An Iranian Commodity Market With Global Impact

TEHRAN – A decision for Iran to launch a petroleum commodity exchange has drawn mixed reactions in the past couple of years. A globally recognized petroleum commodity market will definitely create opportunities for the country to develop its oil capacities.

Mohammad Javad Assemipour, charged with launching the commodity market, reveals his opinions about the project.

Q: Some lawmakers have reacted to the planned petroleum commodity market saying they would oppose it if it sets the stage for rente-seeking. What is your answer?

A: They have not said anything illogical. The stock market will start work once it goes through its legal channels. We established a consortium of the Tehran Stock Exchange, Informatics Company, IPE and Nymex to study the project. We have localized it and we will establish in the Kish Financial Building.

Q: What will this market exchange?

A: Oil, gas and petrochemical products will be offered on this market but we will not market crude oil because of its specific nature. Of course, the swap-based 200,000 barrels of Caspian crude can be subject to marketing. We are purchasing necessary software to integrate our data. We will provide online information to dealers and we will not allow any misuse of funds.
Iran’s planned petroleum commodity market will be recognized at the international level. We can attract foreign investment if we can design the structure of this market appropriately. The oil stock market will be a decision-making element.

Q: Don’t you think that the tense Middle East conditions will keep the market from growing?

A: We should take advantage of the vast Middle East region and transform the threats into opportunities. Iran could not be eliminated from the Middle East. We are also joining the World Trade Organization and we have to modify our currency system. We should welcome globalization.

Q: Which organizations are tasked with providing the necessary capital?

A: The Pension Fund of the Ministry of Petroleum holds 70 percent of the stakes. The fund represents the National Iranian Oil Company, National Petrochemical Company and National Iranian Oil Products Distribution and Refining Company. The remaining 30 percent goes equally to Kish Stock Market, the Mostazafan and Janbazan Foundation and the Tehran Stock
Exchange


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Iran's oil bourse and the dollar monopoly

Iran Daily

Ending $ Monopoly

Azam Mohebbi

Once the much-publicized Oil Bourse is established--many say in April--the long-sought objective of replacing the US dollar with the euro in OPEC transactions will come one major step closer to reality.

For over 30 years now, the issue of replacing the greenback in oil deals has been discussed. However, the heated debates have not yet produced any concrete results. Nevertheless, the old proposal remains as a weapon at the hands of the Arab member-states of the Organization of Petroleum Exporting Countries to regulate their relations with the United States.

They raise the issue at one point, and then reject it to prove their loyalty to the superpower.
The Oil, Gas and Petrochemical Bourse, which will be established as envisaged in the Fourth Five-Year Plan (2005-2010), has received support from both the Parliament and the government. It will also enable oil-rich Iran to regulate prices at home without having to follow other countries’ dollar-based trading system.

Iran’s Oil Bourse can help the world oil market get rid of the present dollar monopoly--what many observers think will put the global status of the major currency at risk.

World oil prices are set in London and New York today where OPEC member-states do not have a decisive role.

Experts believe that once the Caspian Sea oil producing countries also join Iran’s Oil Bourse, world oil market is likely to experience a revolution. Proponents of the Oil Bourse believe that oil producing countries need to take such an important initiative notwithstanding the risks and barriers.

They believe that OPEC member-states have lost 72 percent of their nominal revenues on the fall in the value of the dollar and their declining purchasing power.

One thing to remember is that OPEC countries receive dollars for their oil exports and will have to spend the same dollars in trade transactions with countries whose currencies are rivaling the greenback all the time.

Kamal Daneshyar, a senior parliamentarian, contended that the Oil Bourse will help promote Iran’s petroleum business as it will attract customers from around the world.

Iranian authorities are optimistic that the Oil Bourse will provide many countries with an opportunity to trade oil with currencies other than the US dollar.

This optimism also applies to the European Union, which is one of the largest energy consumers in the world and whose currency the euro is the proposed alternative to the dollar.

Britain's dirty secret: How Israel was helped to make the A-bomb

13 March 2006
New Statesman

Britain's dirty secret

Meirion Jones

Exculsive - Secret papers show how Britain helped Israel make the A-bomb in the 1960s, supplying tons of vital chemicals including plutonium and uranium. And it looks as though Harold Wilson and his ministers knew nothing about it. By Meirion Jones

Mirage jets swoop from the sky to destroy the Egyptian air force before breakfast; tanks race across the desert to the Suez Canal; Moshe Dayan, the defence minister, poses with eyepatch after the Jerusalem brigade has fought its way into the Old City. These are the heroic images of the Six Day War and they defined Israeli daring: here was a people who, it seemed, risked everything on a throw of the dice. Years later the world discovered that there was an insurance policy.

They had a secret weapon - two, to be precise. In the weeks before Israel took on the Arab world in June 1967 it put together a pair of crude nuclear bombs, just in case things didn't go as planned. Making them required not only Israeli ingenuity but also plenty of help from abroad. It has been known for some time that the French helped build Israel's reactor and reprocessing plant at Dimona, but over the past year our research team at BBC Newsnight has unearthed something no less astonishing and much closer to home - top-secret files which show how Britain helped Israel get the atomic bomb.

We can reveal that while Harold Wilson was prime minister the UK supplied Israel with small quantities of plutonium despite a warning from British intelligence that it might "make a material contribution to an Israeli weapons programme". This, by enabling Israel to study the properties of plutonium before its own supplies came on line, could have taken months off the time it needed to make a weapon. Britain also sold Israel a whole range of other exotic chemicals, including uranium-235, beryllium and lithium-6, which are used in atom bombs and even hydrogen bombs. And in Harold Macmillan's time we supplied the heavy water that allowed Israel to start up its own plutonium production facility at Dimona - heavy water that British intelligence estimated would enable Israel to make "six nuclear weapons a year".

After we exposed the sale of the heavy water on Newsnight last August, the government assured the International Atomic Energy Agency (IAEA) that all Britain did was sell some heavy water back to Norway. Using the Freedom of Information Act, we have now obtained previously top-secret papers which show not only that Norway was a mere cover for the Israel deal, but that Britain made hundreds of other secret shipments of nuclear materials to Israel in the 1950s and 1960s.

Tony Benn became technology minister in 1966, while the plutonium deal was going through. Though the nuclear industry was part of his brief, nobody told him we were exporting atomic energy materials to Israel. "I'm not only surprised," he says, "I'm shocked." Neither he nor his predecessor Frank Cousins agreed to the sales, he insists, and though he always suspected civil servants of doing deals behind his back, "it never occurred to me they would authorise something so totally against the policy of the government".

The documentary evidence is backed by eyewitness testimony. Back in August 1960, when covert photographs of a mysterious site at Dimona in Israel arrived at Defence Intelligence Staff (DIS) in Whitehall, a brilliant analyst called Peter Kelly saw immediately that they showed a secret nuclear reactor. Today Kelly, physically frail but mentally acute, lives in retirement on the south coast, and as he leafs through the "UK Eyes Only" reports he wrote about Israel for MI5 and MI6, he smiles. "I was quite perceptive," he says. Kelly recognised that the Dimona reactor was a French design, and he very soon discovered where the heavy water needed to operate it had come from. When we explain that the government has told the IAEA that Britain thought it was selling the heavy water to Norway he laughs heartily.

What really happened was this: Britain had bought the heavy water from Norsk Hydro in Norway for its nuclear weapons programme, but found it was surplus to requirements and decided to sell. An arrangement was indeed made with a Norwegian company, Noratom, but crucially the papers show that Noratom was not the true buyer: the firm agreed to broker a deal with Israel in return for a 2 per cent commission. Israel paid the top price - £1m - to avoid having to give guarantees that the material would not be used to make nuclear weapons, but the papers leave no doubt that Britain knew all along that Israel wanted the heavy water "to produce plutonium". Kelly discovered that a charade was played out, with British and Israeli delegations sitting in adjacent rooms while Noratom ferried contracts between them to maintain the fiction that Britain had not done the deal with Israel.



The transaction was signed off for the Foreign Office by Donald Cape, whose job it was to make sure we didn't export materials that would help other countries get the atom bomb. He felt it would be "overzealous" to demand safeguards to prevent Israel using the chemical in weapons production. Cape is 82 now, tall, clear-headed and living in Surrey. He told us the deal was done because "nobody suspected the Israelis hoped to manufacture nuclear weapons", but his own declassified letters from March 1959 suggest otherwise. They show, for example, that the Foreign Office knew Israel had pulled out of a deal to buy uranium from South Africa when Pretoria asked for safeguards to prevent it being used for making nuclear weapons. It also knew the CIA was warning that "the Israelis must be expected to try and establish a nuclear weapons programme". Just weeks later, however, Britain started shipping heavy water direct to Israel: the first shipment left in June 1959 and the second in June 1960.

There was another problem: the Americans. There was no US-Israeli alliance in those days and Washington was determined to prevent nuclear weapons proliferation. If Britain told the Americans about the Israeli deal they would stop it. Donald Cape decided on discretion: "I would rather not tell the Americans." When Newsnight told Robert McNamara - John F Ken-nedy's defence secretary - about this he was amazed. "The fact Israel was trying to develop a nuclear bomb should not have come as a surprise, but that Britain should have supplied it with heavy water was indeed a surprise to me," he said.

Kelly's reports for the Joint Intelligence Committee (JIC) on "secret atomic activities in Israel" show that Britain's defence and espionage establishment had no doubt about what was going on in Israel. Kelly wrote of underground galleries at the Dimona complex; there were such galleries. He correctly described the French role in the project. He identified the importance of the heavy water: with 20 tons of this material, he estimated, Israel could have a reactor capable of producing "significant quantities of plutonium". British intelligence also knew about the reprocessing facility at Dimona and stated: "The separation of plutonium can only mean that Israel intends to produce nuclear weapons." Kelly even discovered that an Israeli observer had been allowed to watch one of the first French nuclear tests in Algeria.

Kelly and his colleagues, however, found their views were being challenged. Chief of the challengers was Michael Israel Michaels (such was his middle name, literally), who was a senior official at the science ministry under Lord Hailsham during the Macmillan government, and went on to serve at the technology ministry under Benn. He was also Britain's representative at the IAEA.

In 1961 Michaels was invited to Israel by the Israeli nuclear chief Ernst David Bergmann, and while there was given VIP treatment. He met not only Bergmann but Shimon Peres, the deputy defence minister, and David Ben-Gurion, the prime minister - the three fathers of the Israeli atomic bomb. Peter Kelly had warned his superiors that Israel might use the Michaels trip as part of a disinformation campaign to show "everything is above board", and this is what appears to have happened. Michaels's report gave Israel the all-clear, and he handed it to Hailsham at an important moment, two days before Ben-Gurion met Macmillan at Downing Street. Kelly later took the report apart line by line and concluded by offering his own prediction that Israel might have a "deliverable warhead" by 1967.

In 1962 the Dimona reactor started operating (thanks to the heavy water Britain had delivered), yet Michaels continued to protest Israel's innocence. The Israelis, meanwhile, were allowing the US to make inspection visits to Dimona once a year to demonstrate that it was not being used for military purposes, but Kelly saw that this, too, was a con. The tours were "heavily stage managed", he wrote in 1963, and "important developments were concealed". He was right: we now know that false walls screened parts of the plant from the inspectors.

Three years later, at the beginning of 1966, something extraordinary happened. The UK Atomic Energy Authority made what it called a "pretty harmless request" to the government: it wanted to export ten milligrams of plutonium to Israel. The Ministry of Defence strongly objected, with Defence Intelligence (Kelly's department) arguing that the sale might have "significant military value". The Foreign Office duly blocked it, ruling: "It is HMG's policy not to do anything which would assist Israel in the production of nuclear weapons."

Michaels was furious. He wrote "to protest strongly" against the decision, saying that small quantities of plutonium were not important and anyhow if we didn't sell it to the Israelis someone else would. Michaels could be a bulldozer - he was short and bald, described as pugnacious and hard-headed by colleagues - and he won his battle. Eventually the Foreign Office caved in and the sale went ahead.

What is most surprising about the position adopted by Michaels is that, as the new documents show, a few years earlier he had taken the direct opposite view of the value of small quantities of plutonium. In 1961 he received a JIC report suggesting that Israel would take at least three years to make enough plutonium and then another six months to work out how to make a bomb. In the margin beside the claim about the six months he wrote: "This surely is an understatement if the Israelis have no plutonium on which to experiment in advance." Then it occurred to him that a friendly power might give Israel a sample of plutonium to speed up the process: "Perhaps the French have supplied a small quantity for experimental purposes as we did to the French in like circumstances some years ago" (see panel, above). What this shows is that Michaels, in the full knowledge of how useful it could be for weapons development, went on to persuade the British government to sell Israel a sample of plutonium.

Today, Tony Benn can hardly believe that Michaels never referred the nuclear sales to him. Going through his diaries, Benn finds dozens of references to meetings with Michaels which show that he didn't trust him even then. "Michaels lied to me. I learned by bitter experience that the nuclear industry lied to me again and again." Kelly believes that Michaels knew all along what Israel was doing, but since he died in 1992 we can't ask him. According to his son Chris, after Michaels retired from the IAEA in 1971 the Israelis found him a job in London for a couple of years.

The atomic files give details of hundreds more nuclear deals with Israel. Many are small orders for compounds of uranium, beryllium and tritium, as well as other materials that can be used for both innocent and military purposes. In November 1959 someone at the Foreign Office allowed through the export of a small quantity of uranium-235 to Israel, apparently without realising that it was a core nuclear explosive material just like plutonium.

Some materials may have been for advanced bombs. In 1966 UKAEA supplied Israel with 1.25 grams of almost pure lithium-6. When combined with deuterium, this material provides the fusion fuel for hydrogen bombs. Britain also supplied two tons of unenriched lithium, from which lithium-6 is extracted - enough for several hydrogen bombs. Deuterium, incidentally, is normally extracted from heavy water, which, of course, Britain had already shipped to Israel.



Throughout this period, Defence Intelligence repeatedly complained that Israel was the only country getting nuclear export licences "on the basis of the meaningless phrase 'scientific and research purposes'". The Department of Trade tried to exempt Israeli deals completely on the grounds that these were government-to-government transactions, but DIS was outraged, saying such deals were meant only for "people like most of our Nato partners who can be trusted . . . Israel however is a very different kettle of fish." In August 1966 the Israeli armed forces ordered advanced radiation dosimeters. The Foreign Office said yes and overruled the strong objections of the British MoD that they were obviously for use by troops. DIS wanted to know why Israel was always given special treatment, adding: "We feel quite strongly about all this."

Tony Benn wonders whether these deals could have gone ahead without the knowledge of the British prime ministers of the time, Macmillan, Sir Alec Douglas-Home and Wilson. The evidence is unclear. The newly declassified papers show that in 1958 a member of the board of UKAEA said he was going to refer the heavy-water deal to the authority's executive, which reported directly to Macmillan, but there is no record that this happened. We know that Lord Hailsham learned about the heavy-water deal after it had gone through and concluded that Israel was "preparing for a weapons programme".

Benn's initial reaction to whether Wilson knew about the atomic exports to Israel was that it was "inconceivable". Then he hesitated, observing, "Harold was sympathetic to Israel," but concluded that no, he probably did not know. Benn believes that the exports were probably pushed through by civil servants working with the nuclear industry.

There was no plausible civilian use for heavy water, plutonium, U235, highly enriched lithium and many of the other materials shipped to Israel. The heavy water allowed Israel to fire up Dimona and produce the plutonium that still sits in Israel's missile warheads today. The small sample of plutonium could have shaved months off the development time of the Israeli atomic bomb in the run-up to the Six Day War.

In a letter this year to Sir Menzies Campbell, the Foreign Office minister Kim Howells has quietly conceded Britain knew the heavy water was going to Israel. He has yet to find time to tell the IAEA that, or indeed to tell it about the plutonium or the uranium-235 or the enriched lithium. Howells and his boss, Jack Straw, are too busy telling the IAEA about the dangers of nuclear proliferation in another corner of the Middle East.

Meirion Jones produced Michael Crick's report for Newsnight (BBC2) on the Israeli nuclear sales, which is broadcast on 9 March



How we helped the French

In May 1954 the French were fighting and losing their colonial war against Ho Chi Minh's armies in Vietnam. At home they were slowly establishing a nuclear infrastructure, but the setbacks in Indochina convinced some that they needed the atomic bomb and they needed it quickly.

On 6 May, therefore, as the final battle at Dien Bien Phu neared its climax, France's nuclear bosses sent a request to the chairman of the British Atomic Energy Authority. It was a shopping list of items that would help them build nuclear weapons, including a sample quantity of plutonium "so we can take the steps preparatory to the utilisation of our own plutonium". Britain knew about these things: it had exploded its own bomb less than two years earlier.

Before the letter even arrived the French had lost the battle and the war. Later that year the French prime minister, Pierre Mendes France, made the formal decision to build the atomic bomb. It took another year to negotiate the deal, but in the end Britain agreed to supply nuclear materials, including enriched uranium. Among the most important parts of the agreement was an arrangement for the British to check the blueprints and construction of French plutonium production reactors.

According to one source, this not only helped the French get their military plutonium reactor at Marcoule into operation quickly but it also averted a disaster, for the British found defects which could have caused a catastrophic explosion at the Rhone Valley site. The same source says that when Charles de Gaulle came to power in 1958 he personally thanked Harold Macmillan for the team's work.

There remained France's request for plutonium. In 1955 Britain agreed to export ten grams but "we would not tell the US that we were going to give the French plutonium nor about any similar cases". France exploded its first atomic bomb in 1960.




This article first appeared in the New Statesman. For the latest in current and cultural affairs subscribe to the New Statesman print edition.

Russia swaps Iran for WTO

Kommersant
MARCH 09, 2006

Iran Swapped for WTO

IAEA board of governors focused Wednesday on the report about the nuclear program of Iran. Predictably, the decision was to refer the report to the U.N. Security Council, which would canvass the matter already in early next week. This move of the nuclear watchdog could be attributed to the recent agreement reached during the visit of Russia’s Foreign Minister Sergey Lavrov to the United States. Moscow is apparently expecting Washington to ensure the WTO entry for Russia in exchange for support in Iranian issues.The last visit of Lavrov to Washington was unusually high in status just for the minister. The Thursday agenda, for instance, set forth Lavrov’s meeting in the Oval Office of the White House, the place traditionally used by the U.S. presidents for talking to their counterparts.

The meeting in the Oval Office roots in two achievements of Russia’s diplomats. In the past month, Moscow managed to position itself as the exclusive negotiator with Iran and Hamas.
What’s more, for Lavrov, most of the previous negotiations with the U.S. Secretary of State Condoleezza Rice were rather tough. But not on March 7, however. In the United States, they were so eager to learn the standing of Moscow in respect of Iran that Lavrov had a good chance to express the Kremlin’s wishes in the White House with the WTO entry as the most vital of them, of course.

The U.S. negotiations of Lavrov proved obviously effective for the parties involved but equally disastrous for Iran. Russia has no interests concerning Iran that would differ from the interests of our European partners and the United States, said Sergey Prikhodko, advisor of the president of Russia, despite that all previous statements of Russia were clearly pro-Iranian. “There’re some differences in approaches to these problems, but the target is shared – making Iran a predictable neighbor, not the source of the threat of disseminating weapons of mass destruction.”

Russia’s only proposal was creating a joint venture to meet Iranian needs in the nuclear fuel, Lavrov said Wednesday. “This initiative isn’t new. It was welcomed by all participants of the process. No compromise offers were made or could ever be made,” Lavrov said counting, perhaps, on the WTO entry.

Iran offers to suspend uranium enrichment

Iran offers to suspend uranium enrichment

Associated Press

Updated: Tue. Mar. 7 2006 11:37 PM ET

VIENNA, Austria — Iran is offering to suspend full-scale uranium enrichment for up to two years, a diplomat said Tuesday.

The proposal reflected Tehran's attempts to escape U.N. Security Council action over the activity, which can be used to make nuclear arms.

The diplomat told The Associated Press the offer was made Friday by chief Iranian negotiator Ali Larijani in Moscow in the context of contacts between Iran and Russia on moving Tehran's enrichment program to Russia.

The diplomat spoke on condition of anonymity because the information was confidential.

But Iran's envoy to the International Atomic Energy Agency said his country was not prepared to freeze small-scale enrichment, a key demand of Moscow, Washington and the European Union, along with dozens of other nations.

"We've spent a lot on this," said the envoy, Ali Asghar Soltanieh, outside a 35-nation IAEA board meeting that is preparing to focus on Iran.

Moscow has become the sole negotiating partner of the Iranians in recent months.

Diplomats familiar with those talks said Moscow was insisting on a full enrichment freeze of up to eight years, including small-scale activity.

In exchange, Russian negotiators promised to float a post-suspension resumption of limited work with centrifuges and other components of an enrichment program in talks with senior U.S. and European officials.

But strong U.S. opposition appeared close to sinking that Russian initiative.

Some diplomats spoke of a European rift, with Germany considering the Russian approach.

But Herbert Honsowitz, the chief German representative to the IAEA, told the AP that was a misinterpretation, with the Germans only expressing "appreciation" to the Russians for trying to come up with new approaches to the deadlock on enrichment.

A European official, in Vienna for the IAEA meeting, said that ultimately the Russian plan would fail if the Americans opposed it.

The dispute, which surfaced in the last few days, was driving a wedge into joint international efforts to wean Iran of all enrichment activity by moving it to Russia, thereby reducing its potential for misuse by Tehran as a way of making nuclear arms.

The original Russian plan that surfaced last year, which is backed by the Americans and the European Union, would have stripped the Iranians of all enrichment potential.

But the proposal carried Monday to Washington by Russian Foreign Minister Sergey Lavrov would allow the Iranians a yet-to-be-defined "research and development" capacity — including 20 uranium-enriching centrifuges.

The diplomats said IAEA chief Mohamed ElBaradei backed the plan. On Monday, he told reporters a deal on Iran's suspect nuclear program could be only a few days away, making U.N. Security Council action unneeded.

Although he did not elaborate, his optimism appeared linked to the Russian proposal on limited enrichment.

"I am still very much hopeful that in the next week an agreement could be reached," ElBaradei said.

The United States remained unconvinced. Undersecretary of State Nicholas Burns said in Washington that "unless Iran does a dramatic about face," he expected the issue to be taken up by the Security Council.

Later, State Department spokesman Tom Casey said Secretary of State Condoleezza Rice telephoned ElBaradei "to reiterate the U.S. position that Iran should cease all enrichment-related activity."

In response, ElBaradei agreed that Iran must not be allowed to have enrichment activity on its territory, said a U.S. official who spoke on condition of anonymity because he was not in position to speak for the IAEA.

There was no official IAEA response. But a diplomat familiar with ElBaradei's stance questioned the U.S. version of ElBaradei's position, saying the IAEA chief remained convinced there was no alternative to allowing Iran some enrichment activity as a way of reaching a deal.

The Russian proposal described by the diplomats would ask the IAEA to set the parameters of small-scale enrichment on Iranian soil to minimize the chances of abuse.

In return, Iran would be asked to recommit to in-depth IAEA probes of its program on short notice. Iran canceled such investigations last month after the IAEA's board put the U.N. Security Council on alert by passing on Iran's nuclear dossier.

France, Britain and Germany broke off negotiations on behalf of the European Union with Iran last year after it resumed enrichment-related activities, which can produce both nuclear fuel and the fissile core of warheads.

Since then, the Europeans as well as the United States, Canada, Australia and Japan have been at the forefront of efforts to have the U.N. Security Council take up the Iran issue.

All involved — whether or not they supported allowing Iran some control of enrichment — were firm on the need for Tehran to first return to a freeze of all such activities for a prolonged period.

The Vienna meeting is scheduled to hear a report by ElBaradei focusing on Iran's nuclear program, likely on Wednesday.

The last board meeting already had sent the complete Iran file to the Security Council.

This meeting is scheduled to pass the ElBaradei report on to the council, which then can decide whether to take action.

In Tehran, Iranian President Mahmoud Ahmadinejad called for the IAEA to compensate Iran for suspending its nuclear activities in 2003, saying the halt has damaged the development of its "science, technology and economy," state television reported.

Ahmadinejad's claim that the IAEA had a debt to Iran appeared to be another bid to put pressure on the world body as it considers its report on Iran to the Security Council.

In a second thrust at the diplomatic maneuvering over Tehran's nuclear program, Iranian Foreign Ministry spokesman Hamid Reza Asefi said the United States wanted the Russian and European mediation efforts to fail.

"It is evident that the United States has no interest in Iran's reaching an agreement with either of its negotiating partners (Russia or Europe)," state television quoted Asefi as saying.

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