It isn’t surprising that both those directly targeted by the US sanctions – countries like China and Russia – and other third parties are all pursuing mechanisms for circumventing them.
China is promoting its own currency in its trade deals, particularly within Asia, along with an ambitious schedule for an imminent launch of a digital renminbi. China and Russia have been trying to use their own currencies in their direct trades – last year was the first time dollar-denominated trade between them fell below 50 per cent.
The Europeans were side-swiped by one of the earliest decisions of the Trump administration.
With the Obama administration, they had signed up to the Iran nuclear deal in 2012, in which US sanctions on Iran were lifted in exchange for constraints on Iran’s nuclear ambitions. Trump, unilaterally, took the US out of that deal and reimposed the sanctions.
The power of US sanctions lies in the dollar and the financial system infrastructure that facilitates its global usage – the SWIFT (the Society for Worldwide Interbank Telecommunication) secure messaging platform that enables financial institutions to send, receive, track and confirm transactions.
SWIFT is a co-operative controlled by about 3500 international banks (the Australian banks are represented on its board) and is arguably the key piece of global financial system architecture.
In response to the abrupt US change in stance towards Iran and its impact on Europe and European companies – they would be in breach of the sanctions and risk being sanctioned themselves and cut out of SWIFT and the global financial system if they continued to trade with Iran – the Europeans tried to develop a workaround.
The major European Union members created a special purpose vehicle, INSTEX (Instrument in Support of Trade Exchanges) to try to facilitate non-US dollar, non-SWIFT humanitarian transactions with Iran.
It was a clunky solution, more of a bartering platform than a SWIFT alternative. It allows buyers and sellers in Iranian transactions to be matched – Iranian companies or individuals in Iran and Europeans in Europe – and their deals netted off and settled in their own countries without any cross-border flows. It hasn’t been particularly popular.
The Iranian experience and US threats of sanctions – including threats against businesses working on or financing the Russian-sponsored Nord Stream 2 gas pipeline between Russia and Germany that included the prospect of “crushing” sanctions of a German port that was the logistical hub for the project – caused the Europeans to think more deeply about their vulnerability to the power of the dollar.
Earlier this week the Financial Times reported (and other mastheads subsequently confirmed) that there is a draft of a European Commission policy paper that refers to the difficulty of the EU asserting its independence and using the Iranian experience to argue for measures to shield the EU from the effects of “unlawful extraterritorial application” of US sanctions.
The efforts of China, Russia and the EU to reduce the extent of the US dollar’s dominance have gained momentum, thanks to the Trump administration.
The US sanctions not only impacted SWIFT but also European clearance and settlements platforms for domestic and international bonds, equities and derivatives so it isn’t at all surprising that the EU is searching for structural insulation from the threat of being caught up in future US sanctions.
Promotion of a greater use of the euro to settle transactions between European companies in traditionally US-dollar denominated trades, like commodities, and a shift from using US dollars in financial benchmarks to euros are among the paths being explored.
Network effects – the more the dollar is used in international transactions the more companies, individuals and countries have to use it – make any attempt to undermine the dollar’s reserve currency status problematic but the efforts of China, Russia and the EU to reduce the extent of its dominance have gained momentum, thanks to the Trump administration.
Longer term, the incentive for countries other than the US to develop something along the lines of the multi-polar digital currency advocated by former Bank of England governor, Mark Carney, will only increase.
It’s not just the sanctions. Dollar dominance reduces the economic and financial independence of economies and the sovereignty of nations. It reduces their flexibility to respond to their own circumstances and, for those with free-floating currencies, can generate external shocks and destabilisation that are difficult to respond to.
If there were a global, or at least international, digital currency with credibility sponsored by the key non-US central banks the dollar’s dominance would be reduced, along with the extraterritorial power and coercive influence of the US.
The resentment, particularly in Europe, of the dollar’s status – it is disproportionate to America’s actual scale in global trade and economic activity – and the consequent under-representation of the euro in global activity relative to the size of the eurozone, existed before Trump’s presidency.
The past four years, with Trump’s trade wars, threats and sanctions on even America’s traditional allies have, however, stressed and perhaps even broken the trans-Atlantic relationship and provided new and more powerful motivation for China, the EU and other economies to reduce their exposure to the dollar and undermine its dominance.
Start the day with major stories, exclusive coverage and expert opinion from our leading business journalists delivered to your inbox. Sign up here.
Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.