Tuesday, Oct 04, 2022

Non-dollar based trading regime holds key to breaking US stranglehold over oil trade

One of several reasons for America’s economic leverage is that it sits at the epicenter of the global financial system. The dollar is a reserve currency. Global trade is preponderantly carried out in dollars. Oil is priced in dollars.

donald trump, mike pompeo, global financial system, world news, sanctions to iran, iran sanctions, us electtions, indian express US President has but one concern — to keep his domestic constituency intact and to win the 2020 elections. (Photo: Reuters)

One should not be surprised by US President Donald Trump’s imperious approach to the rest of the world. He has but one concern. To keep his domestic constituency intact and to win the 2020 elections. He may not even care if in the process, the “rest “go to hell in a hand basket”. His latest missive against Iran is manifestation of this attitude. The question that one must ask is what can the “rest” do to prevent such an outcome.

On April 22, Mike Pompeo announced that the exemptions granted to seven countries (and Taiwan) from the US sanctions law, CAATSA (Countering American Adversaries through Sanctions Act) against Iran would be withdrawn on May 3. He said these countries would have to bring their imports of Iranian oil/gas down to zero within the next two weeks and the policy objective was to choke off the outlaw regimes’ principal source of revenue .

Pompeo’s announcement should not have come as a surprise. The exemptions had been granted for six months and were to expire on May 3. It did rattle the market, though, because of the impracticality of the demand. How were these countries going to reduce their purchase to zero at such short notice? Together, they were purchasing one million barrels of oil daily and Turkey imported almost 15 per cent of its gas requirement via the pipeline from Iran. It was also not clear what the US would do if China, Turkey and India cocked a snook at this diktat. Would the government prevent US banks from financing US business in these countries? If so, what and how would these restrictions be implemented? Anyway, the uncertainties led to a tightening of the oil market despite Trump’s characteristic tweet that he had “spoken to OPEC to make up the shortfall”.

On hearing this announcement, the issue that concerned me was not the impact on the oil market or on India. It was the reaction of Iran and whether this might trigger actions and decisions that could lead to a broader conflagration. I knew that India had already substantially reduced its petroleum imports from Iran and that whilst the costs of making up the 11 per cent that it still imported would push its import bill higher, this increase was affordable and it would not create a major economic disruption. Of course, I did wonder whether India would readily accede to the diktat or whether, on a matter of principle, it would signal to America that it could not compromise its principles and be seen as a fair weather friend. After all, India and Iran have had long standing strategic, cultural and trading relations. But these were subsidiary thoughts to the contours of a possible disaster scenario taking shape in my mind. It was also subsidiary to the follow up question: What, if anything, can the rest of the world do to prevent Trumpian foreign policy from disproportionately and adversely impacting the people in the region?

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Consider the following. The relatively moderate government of President Hassan Rouhani collapses because of public disaffection with the dire state of the domestic economy, and because of an emboldened opposition. It is replaced by a hardline government opposed to the JCPOA — the multi- nation agreement that had placed constraints on Iran’s nuclear programme — which resumes work on the nuclear programme. John Bolton, President Trump’s national security adviser and arguably the architect of Trump’s hardline policy towards Iran finds he now has the excuse to “ bomb” Iran. He has often expressed this wish. Trump signs off on this act of muscularity because he believes it will go down well with his domestic constituency. Iran reacts along multiple fronts. It endeavours to block the Straits of Hormuz through which flow 22 million barrels of oil every day, it intensifies support to anti-American Shia factions in the region and reaches out to China for support. The price of oil shoots up, the global economy hits the skids and…

So what, if anything, can the global community do to avoid such a scenario? The answer clearly does not lie in a “jaw jaw” with Trump, Bolton and Pompeo. They have set their stakes in the ground. They will not ease off until, as Pompeo put it, Iran learns “to behave like a normal country”. Moreover, they are persuaded that the portrayal of Iran as “an outlaw regime” plays well with their Republican base?

So, what are the other possibilities? One of several reasons for America’s economic leverage is that it sits at the epicenter of the global financial system. The dollar is a reserve currency. Global trade is preponderantly carried out in dollars. Oil is priced in dollars. The US treasury is the favoured haven for risk averse investors. And, it controls the financial messaging system (SWIFT). Banks, financial intermediaries and corporates would not be able to function if they did not have access to this system. This latter reality is the threat that hangs over every entity that continues to trade with Iran after May 3.


Clearly, this threat would lose its edge if there were an alternative messaging system that enabled non-dollar transactions without SWIFT. The European signatories of JCPOA (Germany, France and the UK) have created such a system. They announced in January the establishment of a SPV “Instrument in support of Trade Exchange” (INSTEX ) to enable companies to trade with Iran without having to deal with dollar-based US banks. It remains to be seen whether companies will avail of this mechanism. Also, the threat would dilute if the countries decided to engage in barter but this is not a sustainable alternative.

I am sure there is more that can be done. The larger point is that the “rest” must find ways of creating a non-dollar based trading system, particularly regards petroleum and thereby weakening America’s stranglehold over the global financial system. For Trump is pushing the Middle East onto a collision course and the consequences for everyone could be severe.

This article first appeared in the May 6, 2019 print edition under the title ‘America versus the rest’. The writer is chairman and senior fellow, Brookings India

First published on: 06-05-2019 at 01:00:17 am
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