Back in September, following months of absurd anti-Iran bombast from the administration and just days ahead of what would end up being a predictably over-the-top address to the UN General Assembly from Donald Trump, the EU, China and Russia tipped plans to set up an SPV that would theoretically allow everyone to simply circumvent American sanctions on Tehran.
A joint statement from foreign ministers of China, Russia, Germany, the UK and France said the deal would be designed to “assist and reassure economic operators pursuing legitimate business with Iran” and as you might expect, US officials were not amused.
“[Anyone who establishes financing vehicles] does so at their own risk,” John Bolton declared, while speaking to United Against Nuclear Iran in New York on September 25. SWIFT, he went on to warn, should “take a good hard look at their business with Iran.”
Speaking at the same event, Pompeo called the SPV idea “one of the most counterproductive measures imaginable for regional and global peace and security”.
The proposal was met with quite a bit of skepticism in financial circles for the simple reason that trying to get around US sanctions is an endeavor that’s virtually guaranteed to fail as it sounds like transactions will have to be conducted in something other than dollars. Admittedly, I haven’t kept myself apprised of the operational details, but presumably, the effort would be designed (at least tacitly) to promote the internationalization of the euro. Again, I could be completely mistaken about that, but it’s hard to imagine how it would work if everything were denominated in dollars. Here’s what we said six months ago:
If the European powers view this as an opportunity to de-dollarize at a time when the U.S. is seen as an increasingly unreliable partner for France and Germany, well then Europe’s resolve might be stronger than Washington anticipates.
More broadly, Europe, Russia and China are presumably trying ensure that US sanctions don’t end up causing an outright economic calamity for Iran that then leaves the regime with no choice but to restart its nuclear program in order to gain leverage over the US.
It’s also likely that despite the world’s generalized disdain for the Iranian regime, nobody (with the exception of John Bolton, Mike Pompeo, the Saudis the Israelis) wants to see a scenario where the country is thrown into chaos by some kind of haphazard coup attempt orchestrated by loosely-organized opposition groups. Remember, this ain’t Venezuela – so to speak. Regime change in Iran would be a nightmare of epic proportions in the near- to medium-term and there’s no telling what the political ramifications would be for Iraq.
In any event, the EU is pushing ahead with the SPV. In fact, Bloomberg has seen a draft version of a statement announcing the official establishment of the vehicle. According to two diplomats who spoke on the condition of anonymity, France, Germany and the UK will likely make the announcement this week.
“[The EU welcomes the move] to operationalize the Special Purpose Vehicle, which has now been registered as a private entity, with a view to providing a positive impact on trade and economic relations with Iran, but most importantly on the lives of Iranian people”, the statement reads, adding that the SPV is aimed at “support[ing] European economic operators engaged in legitimate trade with Iran, in accordance with EU law and with UN Security Council resolution 2231.”
And see, this is yet another example of Trump getting himself into trouble by flouting international agreements and resorting to the free-wheeling weaponization of the dollar when he can’t marshal legitimate support from traditional allies.
The dollar’s reserve status and the economic clout that comes with it is highly effective when it comes to supporting America’s foreign policy goals. But as with any powerful weapon, it has to be wielded carefully and strategically (e.g., turning the screws on Venezuela) to avoid scaring everybody to death.
When you start throwing the dollar’s weight around willy- nilly you incentivize de-dollarization. JPMorgan’s Marko Kolanovic wrote about this in the days following the original announcement of the SPV back in September. To wit:
Recently, there are developments that suggest such a diversification could take place, and is being catalyzed by policies of the current US administration. The EU foreign affairs chief announced this week the creation of a ‘special vehicle’ for trade despite US sanctions, and similar ideas were promoted by Germany’s foreign minister. US unilateral policies risk bringing major powers of China, Europe and Russia closer, and such an alliance could profoundly impact the USD-centric financial system. While the current US administration may be a catalyst for long-term de-dollarization, such diversification may be prudent even if Washington policies change. For instance, currency/rate diversification might be in the best interest of Emerging Market economies, time and time again left at mercy of US Federal Reserve rate cycles.
It’ll be interesting – to say the least – to see how Trump responds to the establishment of the SPV.
If the US were to make good on threats to hold anyone and everyone who deals with Iran responsible for efforts to undermine the sanctions, it would presumably entail chastising Germany, France and the UK.