If US sanctions under president Donald Trump achieve one thing, it will probably be accelerating the dollar’s decline as the dominant currency in the international system. After being slapped with sanctions for years, Russia is now moving to de-link its economy from the greenback in order to circumvent financial restrictions. Moscow intends to implement a means for banks and companies to convert dollar settlements into other currencies, and the plan is supported by other countries hoping to minimize their reliance on the greenback.
China and Turkey have welcomed the initiative, and they are not alone, as a concerted global push-back against US sanctions is gathering momentum. This was unequivocally shown during Trump’s speech at the UN General Assembly at the end of September. In an attempt to save the Iran nuclear deal that will come to an end once US sanctions are reinstated against Tehran in November, the European Union (EU), working in tandem with China and Russia, announced a new plan to sidestep the sanctions.
The plan, forged in Brussels, envisions a so-called Special Purpose Vehicle (SPV), a legal entity resembling a complex barter system, with Iranian oil being traded for European goods – similar to the conduits used by the Soviets to avoid American blockades during the Cold War. International companies would be able to do business with Tehran without needing to use dollars, making the transactions invisible to the US, and thereby undermining the legal ground for penalization.
The approach seems to be closely based on a paper published earlier this year by Esfandyar Batmanghelidj and Axel Hellman, which advocated “a new banking architecture” to avoid American sanctions, using “gateway banks” built on SPVs. Were this plan seen through to the end, the dollar’s decades-long hold on global transactions would take a grievous blow, serving as a blueprint for similar such moves.
New World Order?
EU officials have openly talked of breaking the greenback’s monopoly before: European Commission president Jean-Claude Juncker used his recent State of the Union address to suggest that the use of dollars in foreign trade should be abandoned. In addition to the Iran sanctions, the straw that broke the camel’s back for the EU were the sanctions imposed on Rusal, the Russian aluminium giant, in April this year.
The threat to bar Rusal from international markets, issued as part of a tirade against the company’s former president Oleg Deripaska, certainly hit home. As a major supplier of both aluminium and alumina for the European market, the sanctions are threatening smelters closures across the EU, causing prices to soar on the London Metal Exchange.
Given that global alumina supply – required for making aluminium – is already being squeezed by the shutdown of one of the world’s biggest smelters in Brazil, the sanctions are adding to a precarious situation. The prospect of shortages already sent the aluminium supply chain into a tailspin, and European policy-makers have scrambled frantically since April to find a solution to the problem.
Fearing potentially catastrophic impacts for European downstream industries – mostly consisting of small- and medium-sized companies contributing to numerous major sectors like car manufacturing – industry associations have warned of market shocks and the difficulties in finding new suppliers. The EU’s leaders, including Germany’s Merkel and France’s Macron, subsequently rushed to Washington to secure exemptions for their businesses in dealing with Rusal, but their concerns fell on deaf ears.
As a result, the fact that the EU would find willing allies in Russia and China, both themselves subject to sanctions and hawkish tariffs from Trump, during the UN meeting is not surprising. By weaponizing the greenback and adopting a consistently confrontational tone, Trump has successfully driven these disparate powers to unite against him.
US Policy Backfires
China reacted to American trade policies by proposing in July a trade alliance with the EU against Washington. Meanwhile Germany, Europe’s biggest economy, has refused to drop the NordStream 2 pipeline it is building with Russia. Trump dedicated part of his UN speech to the issue, warning Berlin against Russian “extortion and intimidation.” Reports suggest he even demanded an end to the project as a condition for foregoing punitive steel and aluminium tariffs on the EU. But Berlin has refused to backtrack, despite its frequent squabbles with Moscow: as economy minister Peter Altmaier pointedly told Trump, just as America protects its own interests, so will Europe.
Far from advancing American interests, Trump is therefore actively damaging the country’s international standing. His blunderbuss excuse for diplomacy has hurt allies and strengthened rivals, isolating the US and heralding the downfall of the dollar-based financial system. The reaction is understandable: if the international community wants to minimize sanctions and tariff fallout, establishing a new system circumventing the dollar may well be the only choice.