Politico | JARRETT BLANC: President Donald Trump’s Iran policy has been reckless as regards Iran—it all but invites Tehran to return to an unconstrained nuclear program, and it reduces U.S. credibility to bargain on other contentious issues. But it has been far more reckless on the far more consequential matter of America’s relationships with allies and partners and especially the U.S.’s central role in the world financial system. Iran can be a problem, but it is not worth gambling the economic and political benefits the U.S. receives as the world’s banker.
The administration now has an opportunity—maybe its best remaining opportunity—to minimize the risk to U.S. financial centrality.
The European Union is inching closer to establishing a new financial mechanism to facilitate trade with Iran despite tightening U.S. sanctions. The EU is likely to make announcements this month, tied to the third anniversary of the nuclear deal’s full implementation in January 2016.
This is a severe risk for U.S. financial dominance over the mid- to long term. It opens up the possibility of Europe developing a banking infrastructure that does not run through New York, threatening the tremendous influence the U.S. enjoys as the global backbone for even simple banking operations. If the Trump administration perceives and responds to this danger, it can reduce the risk with minimal changes to its “maximum pressure” approach to Iran.
EU foreign policy chief Federica Mogherini’s announcement of this financial mechanism, called the Special Purpose Vehicle, was the most important thing to emerge from the U.N. General Assembly in September—though it was easy to miss in the circus atmosphere of word leaders laughing at Trump’s claim to have “accomplished more than almost any administration in the history of our country” or Trump’s dramatic isolation in his failed effort to persuade the Security Council to join his pressure campaign against Iran.
Mogherini did not provide much detail on the SPV, but its shape is starting to become clear. European states will enlist state financial institutions to allow “net clearance” of transactions with Iran, collecting debits and credits from multiple transactions to minimize contact with the banking system, which is scared off Iran trade by the powerful threat of U.S. secondary sanctions. France and Germany will take the lead, not a smaller country with historical trade ties to Iran, such as Austria. The SPV will probably launch in mid-January, around the third anniversary of the implementation of the nuclear deal. Essentially, the EU is setting up a pseudobank to manage Iran transactions; it will be resistant to U.S. pressure because of its links to key allied governments that cannot be sanctioned without risking political chaos and another Great Recession—or worse.
Unsurprisingly, establishing the SPV has not been easy. The EU and its member states do not do this kind of financial engineering every day, and Europe’s financial system is so intertwined with the U.S. that it is difficult to find any individuals or institutions willing to take on even a small risk of being designated for U.S. sanctions. But that they are seeking to establish this at all is a signal that Europe understands that the U.S. withdrawal from the Iran deal signifies a level of instability, unpredictability and disregard for allies’ interests that shakes global faith in the U.S. as the world’s financier and the dollar as the global currency.
Still, the SPV will start with a relatively modest mandate—not to “bust” U.S. sanctions, but to facilitate unsanctioned transactions, like sales to Iran of food, medicines and some consumer goods. Although European officials will certainly hold out the prospect of a broader SPV emerging over time that would handle trade permitted under EU law but sanctionable by the U.S., there is probably not sufficient commercial interest in the European private sector to make such a mechanism work.
The Trump administration might think it can ignore—or even welcome—a sanctions-compliant SPV. It would reduce pressure on Washington to create realistic channels for humanitarian trade with Iran. Although the administration claims that this is “not our problem,” it will continue to strain alliance relationships if innocent Iranian civilians fail to receive medicines. A limited SPV could both minimize some of the negative effects of sanctions and spread the blame for them to Europe.
But leaving unsanctioned humanitarian trade to the SPV would be a terrible mistake.
An SPV for Iran trade is unlikely to mean much for Iran’s economy or the U.S.’ ability to marshal pressure. Iran is politically important but commercially trivial, and that is not sufficient for European governments and firms to rewire their relationships with the U.S. The Iran SPV, though, will teach its managers lessons that can be applied to other cases in the future. For example, how to include non-EU trade partners, like China with its deep pockets. The higher the volume of transactions, the more lessons European officials will learn.
It is very easy to imagine where this might go. The U.S. has already applied sanctions to Russia either without consulting Europe or over European objections, and both Trump and bipartisan majorities in Congress have suggested that more financial pressure could be applied on contentious cases like the Nord Stream pipeline.
If the U.S. breaks with Europe on a sanctions issue where both political and economic interests are at stake, like Russia, European governments and firms will be able to use the more refined structure of the SPV developed for Iran to facilitate transactions the U.S. is committed to blocking with other, more economically significant states. This is the nightmare scenario of the U.S. pushing its financial power so far that our allies and partners feel compelled to build financial alternatives to New York and the dollar, with profound political and economic effects. In the worst case, the U.S. could lose the capacity to sanction transactions that threaten our interests and the profit centers that accrue from providing global services for simple banking.
Fortunately, there is an alternative. In previous cases of severe sanctions—including the sanctions that led to the Iran nuclear deal—the U.S. Treasury Department worked closely with foreign counterparts and banks, providing comfort that these banks could service nonsanctionable transactions. The administration could easily do the same this time, helping banks devise mechanisms to draw on the escrowed proceeds of permitted Iranian oil sales to fund humanitarian trade. Switzerland has announced a finance channel for humanitarian transactions with Iran. Treasury can work with this and similar initiatives to allow payments for humanitarian sales to Iran that are currently being strangled by the lack of banking options.
If European firms have a choice between using an untested SPV and using financial channels approved by the U.S., they will almost always choose the approved channels, leaving the SPV a paper vehicle without enough transaction volume to become more sophisticated and appealing for future use.
Facilitating humanitarian trade is a lot of work for Treasury officials, and it does not fit Secretary of State Mike Pompeo’s “not our problem” bluster, but Trump and his administration should realize the consequences of pushing allies into creating alternatives to U.S. financial markets. American dominance in global economics is underpinned by its dominance in finance and the dollar as the preferred global currency. By needlessly giving our allies excuses to look elsewhere, President Trump risks the long-term economic power of the United States.