The US dollar’s long global dominance in trade took a blow this week, as the European Union unveiled plans to bypass the American financial system in order to continue to trade with Iran amid a ramping-up of sanctions by the US.
On Monday, standing shoulder-to-shoulder with Iran’s foreign affairs minister Mohammad Javad Zarif at the sidelines of the UN General Assembly, Federica Mogherini, the EU’s high representative for foreign affairs, announced the creation of a special purpose vehicle (SPV) designed to allow trade with Tehran in euros.
“EU member states will set up a legal entity to facilitate legitimate financial transactions with Iran and this will allow European companies to continue trade with Iran, in accordance with European Union law, and could be opened to other partners in the world,” she said.
The UK, France and Germany have said they will put the SPV into practice, with China and Russia also agreeing to lend their support. Details are so far sparse on what the SPV would entail, but speaking to the press after the announcement, a spokesperson for the German finance ministry said that the German government is working on “maintaining financial payment channels” with Iran in the face of US sanctions, adding that there are different models under consideration.
It comes on the heels of European Commission president Jean-Claude Juncker’s call in his recent State of the Union speech for a strengthening of the euro’s international role and a shift away from traditional dollar invoicing in foreign trade. The move is the latest serious challenge by Europe to the US’ supremacy in the global trade system. Indeed, asked by the press if the SPV presents a challenge to the dollar’s role in international trade, Mogherini said: “It is still an initial stage, but this could be a result of that. For sure, [US sanctions] have made us and other parts of the world wonder what kind of financial autonomy we have.”
Renewed US sanctions on Iran came into effect in August this year, restricting Iran’s trade in precious metals, its sale of car and airplane parts and its purchase of US currency. A further set of restrictions targeting the country’s oil sector will come into force in November. These sanctions are extraterritorial, meaning they will impact any non-US company that deals with Iran. This has led to the exit of French oil major Total and Danish shipping firm Maersk, among others, from the Iranian market.
Speaking to GTR, Rebecca Harding, independent economist and CEO of Coriolis Technologies, says the “first cracks” have started to show in the standard acceptance of the US dollar as the currency of choice for trade finance. “We are beginning to see the first explicit sign that people are moving away from the US dollar,” she says.
“By choosing to use a currency other than dollars, businesses can legitimately exclude US jurisdiction from what they’re doing,” says Daniel Martin, a sanctions lawyer and partner at HFW. “This is important for European firms because, in the case of Iran and other sanctioned countries, the US restrictions that affect US persons are much more onerous than the restrictions that affect non-US persons. De-dollarisation is a way to ensure that you don’t accidentally create US jurisdiction over people who haven’t got any connection with the US.”
Trade de-dollarisation has for many years been the last resort for countries subjected to trade restrictions. Today, as the US’ global ties continue to crumble as the result of an often-antagonistic trade policy on the part of President Donald Trump, a growing – and increasingly powerful – group of countries are looking at ways to trade without the dollar, reaching what could become a critical mass.
At a trilateral meeting on September 7, Turkey, Russia and Iran announced a joint step towards dropping the dollar in trade in favour of national currencies. It came after the lira fell to an all-time low against the dollar following the Trump administration’s doubling of import tariffs on Turkish steel and aluminium. At the meeting, which brought together the three Syrian ceasefire guarantor states to discuss a potential peace settlement process, Iranian news agency ILNA reported the Iranian Central Bank governor Abdolnaser Hemmati as saying he had agreed with Turkish and Russian representatives “to proceed with further work” on moving away from the dollar.
“For Turkey, this move is partly a liquidity play and partly a debt play, because it has a huge amount of debt that is dollar-denominated, and so it needs to trade in other currencies, otherwise it won’t get credit lines,” says Harding. “Russia and Iran are both highly sanctioned countries. Turkey is becoming a highly sanctioned country. So, if they are going to carry on trading with Europe, for example, there is a need for solutions such as this.”
Meanwhile, China is using its trillion-dollar-worth Belt and Road Initiative as a tool to internationalise the renminbi – Pakistan and Iran have already announced they will transact in yuan terms instead of dollars – and India has agreed to pay for Iranian oil in rupees through its state-run UCO Bank.
As more and more countries seek to shield their companies from the effects of US sanctions, a non-dollar alternative to trade – once unthinkable – is becoming ever more feasible.
However, the day when the dollar is not the first option for the world’s importers and exporters is unlikely to come any time soon: simply dropping the dollar for trade isn’t an easy task. “The reason that corporates choose dollars are issues around stability and currency fluctuation, and the ease of trade without large forex exposure and the need to hedge against forex risk,” says Martin.
He continues: “One of the challenges is that businesses which primarily trade in dollars, and therefore have structured all of their incomings and outgoings so that they are primarily in dollars, need to know that they are essentially hedged within the trades by buying in the same currency. Furthermore, Germany, for example, is not in a position to mandate to German corporates what currency they can use. That is not the current economic and political model.”
Ultimately, he concludes, trade de-dollarisation will be an economic decision made by economic entities rather than a political one.