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Europe Finally Has an Excuse to Challenge the Dollar

Plan for “special purpose vehicle” to bypass U.S. sanctions on Iran could test American dominance of the global financial system.

Europe Finally Has an Excuse to Challenge the Dollar
A stack of ten euro banknotes sit on a pile of U.S. dollar bills. (Photographer: Simon Dawson/Bloomberg)

(Bloomberg Opinion) -- With more and more European companies fleeing Iran following the re-imposition of U.S. sanctions, it may be tempting for Americans to write off Europe’s efforts to save the Iran nuclear deal. It would be wiser to resist the temptation. A new plan by Germany, France, Britain, China and Russia to create special financial infrastructure to work with Iran could be a credible challenge to the U.S. dollar’s long global dominance. 
Federica Mogherini, the European Union’s top foreign-policy official, said in New York on Monday that the plan to create a “special purpose vehicle” for trade with Iran “will mean that 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.” The technical details are still to be worked out, but her wording provides some useful hints on how the scheme will work.
The U.S. sanctions, reimposed after President Donald Trump pulled his country out of the 2016 agreement that severely restricted the Iranian nuclear program, make it virtually impossible for an entity with any U.S. exposure — including correspondent accounts with U.S. banks — to do business with Iran. The cost of defying American sanctions can be steep: in 2015, BNP Paribas SA, the French bank, paid a penalty of  almost $9 billion for violating U.S. sanctions against Iran, Cuba and Sudan. The French government’s angry protests over the “disproportional” punishment were ignored.
Now sanctions are back, it is clear to the Europeans (as well as the Chinese and Russians) that any future transactions with Iran must go through entities insulated from the American financial system. In a July 2018 report, Axel Hellman of the European Leadership Network think tank and Esfandyar Batmanghelidj of the Iranian company Bourse & Bazaar proposed “a new banking architecture” in response to the U.S. sanctions, relying on the existing system of “gateway banks,” such as the Hamburg-based Europaeisch-Iranische Handelsbank, and the European branches of private Iranian bank. “A further third category of gateway banks can be envisioned,” they wrote, “which would comprise of special purpose vehicles established by European governments, or as part of public-private partnerships in order to facilitate Iran trade and investment.”
The new plan appears to focus on this third option. Mogherini indicated that Germany, France and the U.K. would set up a multinational state-backed financial intermediary that would deal with companies interested in Iran transactions and with Iranian counter-parties. Such transactions, presumably in euros and pounds sterling, would not be transparent to American authorities. European companies dealing with the state-owned intermediary technically might not even be in violation of the U.S. sanctions as currently written. The system would be likely be open to Russia and China as well.
Europe would thus provide an infrastructure for legal, secure sanctions-busting — and a guarantee that the transactions would not be reported to American regulators. 
It would be pointless to sanction the special purpose vehicle because the U.S. would have no way of knowing who deals with it, and why. All the U.S. could do is sanction the participating countries’ central banks or SWIFT, the Brussels-based financial messaging system, for facilitating the transactions (if the special purpose vehicle uses SWIFT, rather than ad hoc messaging). That, Hellman and Batmanghelidj wrote, would be self-defeating: “There are two possible outcomes if these institutions proceed to work with Iran despite U.S. secondary sanctions. Either U.S. authorities fail to take enforcement action given the massive consequences for the operations and integrity of the American financial system, serving to “defang” the enforcement threats and reduce the risk of European self-sanctioning on the basis of fear, or U.S. authorities take such an enforcement action, a step that would only serve to accelerate European efforts to create a defensible banking architecture that goes beyond the Iran issue alone.”
Creating “a defensible banking architecture” may well be the end goal for the Europeans, China and Russia, anyway. Iran is only a convenient pretext: the nuclear agreement is one of the few things that unite the EU, China and Russia against the U.S. But working to undermine the dollar’s global dominance isn’t ultimately about Iran at all. In his recent State of the European Union speech, European Commission President Jean-Claude Juncker called for strengthening the euro’s international role and moving away from traditional dollar invoicing in foreign trade. China and Russia have long sought the same thing, but it’s only with Europe, home of the world’s second biggest reserve currency, that they stand a chance of challenging American dominance. 
Whether or not the “special purpose vehicle” would entice European companies such as France's Total or Germany's Daimler to get back into business with Iran remains to be seen. Given U.S. law enforcement’s wide reach, there would still be a risk involved, and European governments may not be able to protect the companies from it. Some firms will be tempted to try the new infrastructure, however, and the public isn't likely to find out if they do.  In any case, it’s worthwhile for Europe, Russia and China to experiment with dollar-free business.
No currency’s international dominance has lasted forever, and there’s no reason for the U.S. dollar to be the exception to this rule. Trump’s confidence in his ability to weaponize the dollar against adversaries and stubborn allies alike could eventually backfire for the U.S. as efforts to push the dollar off its pedestal grow ever more serious.

To contact the editor responsible for this story: Bobby Ghosh at aghosh73@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is a Bloomberg Opinion columnist covering European politics and business. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

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