Sanctions Hasten Other Nations' Exit from the Dollar
by John Lawrence, January 11, 2020
The US threatened to put sanctions on any nation buying Iranian oil. So far this strategy doesn't appear to be working since some other nations don't agree with this US policy and are willing to go ahead and buy Iranian oil anyway although they are probably not paying in US dollars. In 1971 President Nixon made a deal with Saudi Arabia that it would accept payment for oil only in dollars. This made the US dollar the world's reserve currency. Since the beginning of 2003, Iran has required payment in euros for exports to Asia and Europe. The government opened an Iranian Oil Bourse on the free trade zone on the island of Kish, for the express purpose of trading oil priced in other currencies, including euros. So even before the sanctions, Iran broke ranks with the US-Saudi agreement and was willing to exchange oil for other currencies.
This is how Iran got in trouble with the US originally when in 1951 Iran nationalized the Anglo-Persian Oil Company. Foreign companies owned most of Iran's oil prior to that time. In August 1953, the government of Mosaddegh, who had spearheaded the nationalization of Iranian oil, was overthrown by a military coup d'état orchestrated by the United States Central Intelligence Agency and the British Secret Intelligence Service. Mosaddegh was sentenced to three years in prison and then kept under house arrest until his death in 1967. This ushered in the era of the notorious Shah of Iran who immediately unnationalized Iranian oil and gave control of its oil back to the US and Britain.
Now that the US is sanctioning all exports of Iranian oil, Iran is selling oil anyway on the "gray market." Essentially it is smuggling Iranian oil to willing buyers who are paying Iran much less than they would be paying other countries in dollars for the same oil. China is the main nation willing to defy US sanctions and buy Iranian oil. However, the US is hesitant to put sanctions on China, a major trading partner, which has become too powerful to bow to US demands. This is all leading to dedollarization in world markets and the use of other currencies for trading. Since the US has weaponized the dollar, the result will be that other currencies will take on perhaps a shared role in becoming world reserve currencies.
In August 2018, Venezuela joined the group of countries that allow their oil to be purchased in currencies other than US Dollars, thus allowing purchases in Euros, Yuan and other directly convertible currencies. This tendency will be increasing around the world as the US tries to bully other countries by using sanctions. This means that petrodollar recycling which has allowed the US to run huge budget deficits will decline. The US will probably continue to run huge budget deficits with the Federal Reserve just printing the money to make up the difference between the deficits and diminished petrodollar recycling.
Another trend that will diminish the role of the dollar as the world's reserve currency is the conversion from fossil fuel products to renewable energy sources which must be done at a faster rate if the earth is to be protected from global warming. As the Fed ramps up its printing of dollars, the dollar will, inevitably lose value even if it doesn't result in inflation in the US. But inflation is in the eyes of the beholder. Already the increased money printing has caused tremendous inflation in asset prices, namely the stock market and real estate. It's just that the government excludes these assets from its inflation index so it seems like there is low inflation. Those experiencing skyrocketing rents would probably disagree.
China became the world's largest trading nation in 2013, overtaking the US. This means that the US can hardly threaten a more powerful nation economically with sanctions. In 2018, China was the world's largest economy for the fourth year in a row. It produced $25.3 trillion in economic output according to estimates by the International Monetary Fund. It contributed 19% of the world's total gross domestic product of $135.2 trillion. The European Union was in second place, generating $22 trillion. Together, China and the EU generate 35% of the world's economic output. The United States remained in third place, producing $20.5 trillion.
The US is losing its ability to push other nations around because the dollar is the world's reserve currency. The dollar is fast losing even that status so, if China wants to buy Iranian oil, they will do so, sanctions or no sanctions. Even the EU is defying US sanctions as Germany continues developing the Nord Stream 2 pipeline which will deliver natural gas from Russia to Germany. The US has no hesitation in sanctioning Russia, but it will back off from sanctioning a major NATO ally, Germany, over this deal which Germany badly wants. The sanctions amount to no more than a slight delay in the completion of the pipeline.