The Dinar’s Dismal Future: Sell Now (Forbes)
It’s not looking good for the Iraqi dinar revaluation.
For those just tuning in, millions of Iraqi dinars have been sold to “investors” hoping to make a windfall when, and if, the currency is revalued in their favor. No one knows how many people have been sold this tale of overnight wealth since the dealers for these notes are not regulated.
As you’ve probably noted from the headlines, Iraq is in bad shape. Sunni insurgents have taken most of the northwestern part of the country; the central government and army are weak, abusive and indecisive; and the Kurds are asserting their virtual autonomy in the Northeast.
Iraq is basically enmeshed in a brutal civil war without any cohesive social fabric to pull it back together. Except for some military advisers, the U.S. and Western powers are staying out of the country. Iraq could very well break apart into three separate regions dominated by Sunnis, Shiites and Kurds. No one is sure what’s going to happen next.
Where does that leave the untold thousands holding dinars who are awaiting their payday? The endgame may be near for this currency, which probably won’t survive if the country breaks up.
Professor Cory Bunting, director of the Capital Markets Center at Virginia Commonwealth University in Richmond, Virginia, is not optimistic. Prof. Bunting has been watching the situation and offered me this blunt advice:
“In my opinion, the dinar will never ‘revalue’ to the rate the pro-dinar pundits lead people to believe. In fact, it remains to be seen if the country of Iraq, as we know it today, will even exist in its present form in 10 years time. Many people who currently hold dinars probably view them as a ‘sunk cost’ or a call option on a dream.
If I held dinar, I would sell them back to a currency dealer. You will likely lose about 20% as the bid price ( to sell to dealers) is far below what the price is to buy from them.
As an investor, I would just take the 20% loss and move on rather than sit on a stack of paper that will likely be worth nothing, or nearly nothing, in ten years time. That said, taking losses is hard for most people and hope springs eternal that wealth is just around the corner.”
What, sell a pile of potentially lucrative lottery tickets? Who in their right mind would want to do that?
The reason it’s so difficult to take a loss in dinar is that 1) they were oversold by currency dealers, 2) people believed the “story” that the dinar would be revalued upward, 3) they didn’t cost much to begin with and 4) losses are felt twice as intensely as gains. No one likes to take a loss and move again, although it’s the rational thing to do.
Although no regulator knows how many investors hold the dinar, Prof. Bunting estimates “that there are around 40 trillion Dinar in circulation and only about 5 trillion actually reside in Iraq so the rest in held by dinar speculators around the world. I guess you could say that the Dinar is Iraq’s largest export product).”
In the interim, heed this advice about currency dealers in general:
- “The Iraqi dinar scheme has been surprisingly long-lived, giving federal and state regulators and nonprofit consumer groups time to issue warnings about the dinar and other foreign currency investment opportunities. Take them seriously
- Read the prospectus or offering document. You should receive a written statement that provides all relevant information about the investment and the company selling it, including the company’s history, operations, financial conditions, and key personnel. No prospectus? Don’t invest.
- If I buy the investment, then what? Who is going to buy the dinars you have in a drawer in your house? While there are no guarantees in the return of, say, a mutual fund that invests in stocks, you can at least sell it the day after you bought it.”
Even though I’ve been warning about dinar buying for years, I have no idea what the Iraq Central Bank will do with this currency. It may very well revalue it in the favor of those who hold it. But it has to go through a lot of anguish and bloodshed before that happens.
Iraq is already splitting into three states (USA Today)
Ever since U.S. forces invaded Iraq and toppled Saddam Hussein in 2003, the U.S. government has worried that Iraq would splinter into three states — each representing the feuding religious and ethnic factions the dictator held together through his iron rule.
It may no longer be necessary to worry that Iraq will break apart. In many ways, it already has.
The radical Islamic State that seized a swath of western and central Iraq last month effectively left the nation in three pieces, government officials and analysts say.
The United States worries that a fractured Iraq could lead to a failed state, allowing the radical Islamists to establish a stronghold from which they can export terrorism to other parts of the region and world.
Ryan Crocker, who served as U.S. ambassador to Iraq from 2007 to 2009, described the divisions as “Shiastan,” “Jihadistan” and Kurdistan. The references are to the majority Shiite Muslims, who run the national government in Baghdad; the insurgent Sunni Muslim jihadists who make up the Islamic State; and the ethnic Kurds, who have long presided over an oil-rich, semiautonomous enclave in the north
“In a sense, it’s apocalypse now,” Crocker said.
“Iraq is not one Iraq anymore,” Fuad Hussein, chief of staff to Kurdistan Regional Government President Massoud Barzani, said at the Washington Institute for Near East Policy during a recent U.S. visit.
The challenge for Washington is determining whether — and how — the country can be pieced back together. The Obama administration says Iraq must stay united if it is to take back the country from the radical Islamists.
Ironically, Joe Biden had argued as a U.S. senator in 2006, when Iraq was in the throes of sectarian violence, that the country be divided into three autonomous regions with a weak central government . His idea never gained traction, and the administration in which he serves as vice president argues the opposite view.
“The strongest single blunt to that threat (division) would be a strong capable federal government in Iraq that is actually able to exert control and influence to push back on that threat,” Elissa Slotkin, a top Pentagon official, testified to Congress recently.
Politicians in Baghdad are haggling over formation of a unity government that can fulfill the mission outlined by Slotkin. By custom, the top three jobs are parceled out to the three factions.
Last week, Kurdish politician Fouad Massoum was named the new president of Iraq by Parliament. His selection followed lawmakers’ election of a Sunni, Salim al-Jabouri, as speaker of Parliament.
Lawmakers have a long way to go before creating a broad government that would lessen tensions among the Kurds, Sunnis and Shiites. Prime Minister Nouri al-Maliki, a Shiite, has been widely criticized within his country and the USA for limiting Sunni participation in his government and empowering Shiite militias that have targeted Sunnis during his eight-year rule. Al-Maliki is fighting to stay in office for a new four-year term.
One key to holding Iraq together is convincing the Kurds, who have long sought an independent state, to remain part of the central government. The Obama administration is trying to convince Kurdish leaders to remain part of Iraq.
“Without the Kurds, you’re going to have a struggle with all Sunni Arabs against an Iranian-backed Shiite rump state,” said James Jeffrey, a former U.S. ambassador to Iraq.
The Kurds have seized on the offensive by the radical Sunnis to further assert their independence. Kurdish forces have occupied territory abandoned by Iraq’s army, attempted to sell oil without Baghdad’s approval and announced plans for a referendum on independence.
“Division is the only solution, provided that this division should be consensual,” said Barzo Ibrahim, a civil engineer in Irbil, in Kurdistan. “This is the most difficult part of the task.”
The Kurds have the best chance of survival should they break away from Iraq’s central government. They have created an oasis of political stability in the north, fueled by their own oil reserves and protected by one of the most disciplined fighting forces in the region, the peshmerga.
The Kurds have used the crisis to expand their control over oil-rich Kirkuk in the north by taking over positions from Iraq’s army when it retreated in the face of attacks from Islamic militants. It’s not clear whether the Kurds will withdraw should the crisis subside.
“They are making the most of the current tactical situation,” said Mark Kimmit, a retired Army brigadier general and former State Department official with extensive experience in Iraq.
“They achieved on the ground what they were unable to achieve politically, by moving into positions abandoned by the Iraqi security forces,” he said.
The Kurdish regional government has begun pumping oil from the Kirkuk field into its own network, so it can sell it independently through its pipeline into Turkey, according to the Iraq Oil Report, which covers the industry. Baghdad considers the move illegal.
The Kurds have said Iraq’s central government hasn’t fulfilled its commitment to support the regional government’s budget, leaving the government with no choice but to sell its own oil.
Baghdad still has control over the bulk of Iraq’s oil wealth. The Kurdish region produces about 220,000 barrels per day, compared with about 2.6 million in the Shiite south.
The Sunnis, whose power center is in western Iraq, have little in the way of resources to fall back on. Their anger against al-Maliki’s Shiite-dominated government has driven many to support the Islamic State.
While the government’s forces are in disarray, al-Maliki has turned again to Shiite militias to help provide security, further heightening sectarian tensions.
Iraq has long had sectarian clashes and divisions. The Sunni minority held power for centuries until the United States ousted Saddam, a Sunni. Iraq’s mostly Sunni Baath Party, which ruled Iraq for decades, ruthlessly suppressed Shiites and Kurds.
Some Iraqis, such as Omar Mohammed, a dentist in Diyala in eastern Iraq, see a splintered Iraq as the only solution after so many episodes of sectarian bloodshed.
“I would accept any solution to stop the bloodshed,” he said, “even if it was a confederation or division.”