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Much of the United States foreign policy is focused on restructuring and ‘improving’ its trading relations around the globe. This is achieved through the threat and application of trade tariffs, ‘dollar’ sanctions and some hitherto new diplomatic language as demonstrated by the quotes given below.
“We will sanction their funds in the U.S. financial system, and we will prosecute them in the U.S. criminal system.”
US National Security Advisor John Bolton spelling out USA’s policy towards judges presiding over the International Criminal Court in The Hague, Netherlands.
“The United Nations is not a friend of democracy, it’s not a friend to freedom, it’s not a friend even to the United States of America…”
US President Donald Trump.
How and Why ‘Dollar’ Sanctions Work.
Dollar sanctions allow the US to withdraw US Dollar banking services to the intended target and their trade partners. The US Dollar is central to most international trade. It is hard to deal outside of your own country without Dollars. This is best explained using an example of a fictional Irish company – ABC Ltd. In order for ABC to import oil the first thing ABC needs to do is to buy Dollars. In order to buy Dollars ABC must have a US Dollar account. Although ABC may have a dollar account with an Irish bank, the Irish bank will in turn have an account with a US Bank and the US Bank must have an account with a Federal Reserve Bank. Herein lays US power in relation to the Dollar. Ultimately the Federal Reserve decides who can and who cannot trade in US Dollars. Not only can the US sanction ABC it can also sanction any third party companies that deal with ABC.
The popularity of the US Dollar is unquestionable. When it comes to international trade, the US Dollar is king. Consider the following ‘Dollar facts’:
· 40% of the worlds debt is issued in Dollars
· 62% of the world’s central banks’ assets are held in Dollars
· 65% of the US Dollars bills issued are used outside the United States
· 45% of foreign exchange transactions involve the Dollar
· Most internationally traded commodities are priced in Dollars
In a nutshell, global usage of the US Dollar gives the United States the power to exert enormous pressure on individuals, entities and or countries that rely on international trade. In addition to this the wider impact of sanctions should not be underestimated. Global supply chains and unrelated third party companies and countries are affected. For example, companies that import oil from Iran may struggle to find new suppliers just as exporters to Iran may struggle to find new customers. Third party service providers are also in the firing line, for example in April this year British bank Standard Chartered paid a $1.1Bn fine for facilitating access to the U.S. financial system on behalf of Iranian entities - a violation of sanctions.
According to the Economist magazine America sanctioned 1500 individuals and entities in 2018– almost three times as many as they sanctioned in 2016. The following is a list of the ‘dollar’ sanctions imposed by the US under the Trump administration.
· Numerous Russian individuals and Corporates.
· Venezuela
· Iran
· Cuba
· Belarus, Central African Republic, Congo, Iraq, Libya, Nicaragua, North Korea, Somalia, Sudan and Darfur, and Zimbabwe.
The Road to Perdition
US Dollar sanctions have a broad array of targets from the individual to the commercial entity right the way up to an entire nation state.
While there are strong ethical arguments for using the Dollar as a weapon against terrorist and drug cartels, these same ethical arguments are probably less effective when discussing ‘dollar’ sanctions against ‘otherwise legitimate’ companies. For example the European Union, China and Russia et al want to do business in Iran. The US has said that they will sanction any entity doing business in Iran. Thus companies like Airbus, Renault, Siemens, Lufthansa and other companies from all over the world have had to scale back their activities for fear of sanctions. A list of companies that have been affected is available on iranwatch.org. Essentially the US is unilaterally hitting third party companies in third party countries.
Sanctioning ‘bad’ countries appears to be motivated by mostly geopolitical ambitions. Ethical arguments put forward by the US to justify such sanctions are easily countered by pointing at other ‘bad’ countries that are not ‘dollar’ sanctioned.
Whatever about the immediate impact these ‘dollar’ sanctions have, there are clearly long term negative consequences for the USA. The more they use the Dollar as a weapon the more other individuals, entities and countries are forced to use alternative payment methods that circumvent the use of the almighty greenback and there is no shortage of alternatives. Important nation states like Russia and China have made clear their intentions to diminish the importance of the US Dollar in international trade by encouraging the use of the Rouble and Yuan in bilateral trade. The purpose of the Euro is, at least in part, to rival the Dollar in importance and usage. More recently a plethora of cryptocurrencies are vying for a top spot in international trade. However, in my view Gold (and Silver) will once again dominate the international payments system. Precious metals have a longer history than all of the aforementioned currencies. I suspect they will have a longer future.
Conclusion
The odds of the US Dollar losing its top spot as the world’s favourite currency in the near future are impossible to calculate. However the consequences for US power are easy to quantify. If the Dollar is used no more internationally than the British Pound the USA will have no more power than the UK has now to impose ‘pound’ sanctions on other countries. Furthermore much of the 65% of US currency held outside of the USA will no longer be needed. Thus it would be sold in exchange for a better or more popular international currency. This would cause a catastrophic loss in the purchasing power of the dollar and a concurrent loss of political and military power for the USA.
This commentary is not an attempt to forecast the demise of the dollar as an international currency. My objective is to highlight the fact that the over use of the Dollar as a weapon in geopolitics hastens its inevitable decline.
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