In US-EU differences over Iran, the dollar proves to be a mighty weapon
European efforts to circumvent US sanctions on Iran look doomed to failure. Those efforts are running into a huge obstacle — the US dollar and the dominant status the United States has held in the global financial system for seven decades.
The fact that global trade runs largely on US dollars gives the United States immense extraterritorial power because any transaction in dollars or through a payments system linked to US banks is subject to American legal jurisdiction.
That means foreign entities must fall in line with US economic sanctions or risk fines or being shut out of the US market.
As US President Donald Trump tweeted after reimposing the sanctions on Iran that had been lifted as part of the 2015 nuclear deal: “Anyone doing business with Iran will NOT be doing business with the United States.”
That is a risk few entities or countries trading in dollars want to run, particularly not after France’s biggest bank, BNP Paribas, was fined $9 billion in 2014 for breaking sanctions against Iran, Cuba and Sudan.
To avoid such punishment, France, Britain and Germany — the three European signatories to the six-country Iran deal — began working on a way to bypass dollar transactions and the US financial system. Called INSTEX — Instrument in Support of Trade Exchanges — the system borrows from the hawala method long used in the Middle East and Africa — money transfer without money movement across borders.
INSTEX became operational this year but has not handled a single major transaction and is unlikely to be effective in easing the pain US sanctions are inflicting on Iran, whose economy has been badly battered since Trump walked away from the Iran deal and put back sanctions.
They have been tightened several times as Washington pursues a policy of “maximum pressure” aimed at driving Iran’s leaders to the negotiation table to work out a deal more to Trump’s liking.
It is a policy that has dismayed the other parties to the Iran deal, including China and Russia, which want to do business with Iran and objected to the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA).
INSTEX is a complex barter system. It works something like this: a British importer of Iranian pistachios would settle the invoice of an Iranian firm buying machinery through the INSTEX ledger. The payments would be mirrored in Iran. No money would leave or enter Iran.
The Europeans accelerated work on INSTEX after SWIFT, the Brussels-based financial messaging service that connects more than 11,000 financial institutions around the world, bowed to US pressure and disconnected Iranian banks, including the Central Bank of Iran, last November.
There had been angry reactions to assertions of US supremacy since the US departure from the JCPOA. “Europe should not allow the United States to act over our heads and at our expense,” German Foreign Minister Heiko Maas told German business newspaper Handelsblatt. “For that reason, it’s essential that we strengthen European autonomy by establishing payment channels that are independent of the United States.”
Can a parallel trading system really threaten the dollar’s long reign? Most experts say no but INSTEX and bilateral arrangements elsewhere using local currencies have prompted concern. “Dollar Rivals Emerge, Testing US Power,” said a front-page headline in the Wall Street Journal in May.
However, speculation about the dollar’s decline appears premature and, among big companies, the fear of US retribution is so pervasive that many left Iran even as work on a parallel system was under way. Those leaving included Siemens, the German engineering giant, and Total, the French oil and gas conglomerate. British Airways and Air France stopped flying to Tehran.
Resentment of American supremacy in the global financial system and anti-dollar grumbling predates the current crisis over Iran, which came close to all-out war between the United States and Iran in June when Trump called off air strikes as bombers were streaking towards Iranian targets to retaliate against Iran’s shooting down a US unmanned aerial vehicle.
Both China and Russia have set up their own versions of SWIFT and have long been trying to persuade their trading partners to abandon the dollar in favour of dealing in yuan or rubles. There is logic in promoting the use of the yuan in connection with China’s trillion-dollar Belt and Road Initiative. It would be easier for all countries in the sprawling collection of infrastructure projects to use the same currency.
However, the Chinese yuan has a long way to go. It ranks eighth on the list of most widely held currencies, with 1.2% of the total. The US dollar is first, with 63%, followed by the euro (20%), the Japanese yen (5%) and the British pound (4.5%).
And while anti-dollar sentiments have been spreading, for the foreseeable future an acronym familiar to experts applies: TINA. It stands for “There Is No Alternative.”