EU Rebukes Trump, Will Create "Special Vehicle" to Bypass US Sanctions on Iran

Mike Mish Shedlock

The stage is set for a major confrontation between the US and EU over Trump's sanctions on Iran.

The Wall Street Journal reports Europe Plans ‘Special Vehicle’ to Maintain Companies’ Ties to Iran, Avoid U.S. Sanctions.

The European Union said late Monday that it would establish a special payment channel to allow European and other companies to legally continue financial transactions with Iran while avoiding exposure to U.S. sanctions.

> The move is a direct rebuke of President Trump’s policy on Iran and his decision to withdraw from the nuclear deal in May, and sets the stage for a confrontation between the U.S. and Europe in the days ahead at the U.N. General Assembly, where Iran is among the prominent themes.

> EU foreign-policy chief Federica Mogherini and Iran’s Foreign Minister Javad Zarif made the announcement of a “special purpose vehicle” jointly, in English and Farsi, after a meeting at the U.N. of the parties still committed to the deal—Iran, EU, U.K., France, Germany, Russia and China.

> The mechanism—the details of which would be set up in future meetings with technical experts—would facilitate payments related to Iran’s oil trade, exports and imports, and “reassure economic operators pursuing legitimate business with Iran,” the statement said.

> Ms. Mogherini said Iran has remained fully committed to its obligations under the nuclear deal, as certified by a dozen reports from U.N.’s nuclear watchdog, the International Atomic Energy Agency.

Europe has Excuse to Challenge the Dollar

Bloomberg writer Leonid Bershidsky says Europe Finally Has an Excuse to Challenge the Dollar

> 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.

> 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 Unveils "Special Purpose Vehicle" to Bypass SWIFT

ZeroHedge comments Europe Unveils "Special Purpose Vehicle" To Bypass SWIFT, Jeopardizing Dollar's Reserve Status

> According to Mogherini, the plan to create the SPV "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" despite Trump's opposition.

> And, in a potentially massive development, the system would be likely be open to Russia and China as well as it would enable the world's economies to trade with each other, fully independent of SWIFT.

> Europe would thus provide an infrastructure for legal, secure sanctions-busting — and a guarantee that the transactions would not be reported to American regulators.

> More importantly, it strikes at the heart of the current economic and financial system which is held together by the dollar. By providing an alternative, the global resistance sets the stage for what potentially could be the ascendancy of other global reserve currencies, and/or a world of bilateral trade agreements which bypass both the US Dollar and Swift entirely, eliminating Washington's "veto powers" on global trade.

> 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, in response to Trump's aggressive foreign policies and "weaponization" of the dollar, it is worthwhile for Europe, Russia and China to experiment with dollar-free business.

End of Dollar Dominance

Bershidsky concluded: "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."

I strongly disagree.

Attack on SWIFT and Sanctions Not the Dollar

No currency's dominance has lasted forever. The dollar will be no exception, eventually. But this is not a direct attack on the dollar, per se.

Neither China nor Germany want to have the world's reserve currency because it would disrupt their mercantilist export models.

Moreover, China is not remotely close to meeting the necessary conditions for the yuan to have any major role in international trade.

Backfired Already

Bershidsky is nearly correct about one aspect: "Trump's move could eventually backfire."

This is more accurate assessment: Trump's ill-advised sanctions have already backfired.

That the EU would go ahead with SWIFT-avoidance is proof. This is an attack on a US payment system and the ability of the US to single-handedly set sanction policy for the entire world.

It is absurd for one person, in this case Trump, to decide sanction policy for the entire world. That ability will soon end.

I applaud this effort by the EU. A global means to avoid idiotic US sanctions cannot happen soon enough.

Transition

  1. The SWIFT replacement system will be Euro-based. That part is certain. There would be no faith in a Russian or Chinese system or their currencies.
  2. Initially, the large European players will avoid it.
  3. Smaller European players that do little business with the US, as well as firms in India and Turkey, will step up right away. They have little fear of US sanctions.
  4. Eventually, the larger European players will use the system. "Eventually” will come sooner rather than later. Likely in steps unrelated to Iran simply to let the big players test the system. At some point, a big player will be willing to tell the US to go to hell.
  5. This progression is a good thing.

Related Ideas

The idea that the yuan will soon replace the dollar as the world's reserve currency is absurd for currency reasons, political reasons, and economic reasons.

For discussion and numerous reasons, please see Gold-Backed Petro-Yuan Silliness: Reserve Currency Curse?

Actually, the PetroYuan is a Huge US Success Story, Not a Chinese One

Finally, please consider Petroyuan's Crash at Birth

The above link also lists reasons why the Yuan is nowhere close to being capable of displacing the dollar. SWIFT avoidance maneuvers may eventually facilitate moves away from the dollar, that is not the immediate threat, nor what the EU's move is really about.

Regardless, I repeat:

I applaud this effort by the EU. A global means to avoid idiotic US sanctions cannot happen soon enough.

Mike "Mish" Shedlock

Comments (20)
No. 1-11
sunny129
sunny129

I agree solidly with you, Mish with regard inability of any other global currencies to challenge the US $ status as dominant global trade currency!

What;s the chances of another system successfully chalening the SWIFT, in the short term?

2banana
2banana

SWIFT transactions would be based on what? Euros? Swiss Francs? Gold (haha)?

Another made up fiat?

Like it or not - the US dollar is currently backed by the world's biggest economy and the world's most lethal military.

Taylor Swift has more backing than SWIFT...

abend237-04
abend237-04

May I suggest a second 'Special Vehicle'? This one would fund EU defense spending when we finally pull out of NATO and stop playing patsy for European defense.

Kinuachdrach
Kinuachdrach

Situation normal -- I am confused!

Is the EU Bad because it is conspiring with incompetent UK politicians to undermine UK citizens' narrow vote for separation? Or is the EU Good because it is conspiring with Russia and China to undermine President Trump's efforts to stop Iran becoming a threat to world peace?

But hold on! Hillary Clinton assured me that Russia conspired with candidate Trump to stop her from being crowned Queen. So is Russia for or against Trump? No wonder a poor guy can get so confused.

To be serious for a moment -- the EU is (as almost everyone agrees) run by incompetents. They are not going to be able to set up an alternative international payments system. And if they try, the case for the dissolution of NATO becomes overwhelming. Have a nice day, Eurotrash! There are some really good "Learn Russian" courses on-line.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

I added this transition to the article.

Transition

  1. The SWIFT replacement system will be Euro-based. That part is certain. There would be no faith in a Russian or Chinese system or their currencies.

  2. Initially, the large European players will avoid it.

  3. Smaller European players that do little business with the US, as well as firms in India and Turkey, will step up right away. They have little fear of US sanctions.

  4. Eventually, the larger European players will use the system. "Eventually” will come sooner rather than later. Likely in steps unrelated to Iran simply to let the big players test the system. At some point, a big player will be willing to tell the US to go to hell.

  5. This progression is a good thing.

ML1
ML1

Of course France and Germany would like to export lots of stuff to Iran and get paid. Iran needs lots of new Airbus aeroplanes for example.

My prediction is that this will cause Trump to invent other ways to sanction companies doing business with Iran.

Also about China's and Germany's Mercantilist economic model I have to state that China is more purely a mercantilistic economic model and Germany has many mercantilistic things but it is more germanic economic model.

Germany's germanic version of mercantilism:

Create a huge captive marketplace in Euro area.

Win efficiency and quality competition in this area leading to Germany's exports flowing inside Euro area while other Euro countries become unable to export outside of Euro area because high Euro takes their competitiveness away and those same other Euro countries also lose competitiveness inside Euro area because Germany is more efficient and China can export lots of stuff cheaply to Euro area because Euro is so much higher than Yuan which is tied to mostly dollar

Since the economies of several Euro countries would suffer due to the loss of competitiveness keep consumption party going by funding those countries through ECB buying their debt and ECB having a rule that all Euro area government debts are to be considered 100% secure so Euro area banks also buy that debt. So all Euro countries can buy german manufactured products with debt and the consumption party keeps going.

Even though German exports outside of Euro area are mostly based on high quality and original innovations Germany still gets huge benefits from Euro because Euro is LOWER than German Deutchmark would be.

Demand ECB makes Germany whole for all the debts while at the same time using the debt Germany has enabled EU countries to spend to take other EU countries more in EU control so they are also more in German control since Druncker does what Merkel tells him to do.

Germany has been the ONLY beneficiary from Euro...

Sechel
Sechel

ironic that trump withdraws from world alliances, organizations and treaties yet expects the Europeans to go along with him. We're not in a post world war ii europe where Germany and France are too weak to challenge the U.S. economically. While not even close to the u.s. in gdp they do have resources. The u.s. walking away and not working with our allies opens the door to this.

dwkeller
dwkeller

What happens with this new solidarity after Iran attacks the US on the high seas. Will Europe sell Iran warships? A dangerous game is being played here.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

"To be serious for a moment -- the EU is (as almost everyone agrees) run by incompetents. They are not going to be able to set up an alternative international payments system."

STOP

That is an ad hominem attack. It is similar to dismissing everything Krugman says just because two-thirds of it is garbage.

No one that I am aware of is always wrong. Mish

Stuki
Stuki

If the EU didn't set up a pathway for Europeans to trade with Iran, China and Russia would have. And then the Nannycrats wouldn't have nearly as much control over the process. And control is these leeches' obsession above all else.

Iran has oil. The rest of the world needs oil. Iranian oil will find it's way to that rest of the world which needs it. The rest are only technicalities and formalities.

ReadyKilowatt
ReadyKilowatt

It would be nice if we got away from the dollar-oil trade in a civilized way. If nothing else it would make the middle east Europe's problem again (the way it should be). But I guess if it takes a bull-in-the-china-shop solution, so be it. What's the quote on gold today?


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