The United States has been going aggressively against Iran, in the recent times. In its latest move, the Trump administration has been targeting the financial system of Islamic republic.
Washington has been considering the enhanced sanctions to expel Iran from the international banking system. However, the European diplomats are warning these financial sanctions carry a major risk, where the rest of the world might create alternative banking systems. The diplomats also highlighted that this could even emasculate the long-time dominance of the US dollar.
As the deadline for sanctioning oil industry of Iran is nearing, the focus shifted to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) —an entity led by representatives of major banks from the world’s 10 largest economies that helps banks around the world communicate with each other on transactions.
Last week, the Treasury Secretary Steven Mnuchin had confirmed that the US is already working on disconnecting Iran from the SWIFT network. The move is being considered as potent, because SWIFT provides the financial industry a secure way of communicating, and thus “facilitate[s] global and local financial flows.”
Although the US doesn’t control the global group, it is likely that Trump could threaten to ban the board members, if they help Iranian banks defy the sanctions, from working in the US financial system. It is being speculated that the pressure on SWIFT from US could suffocate the economy of the regime.
Considering that possibility, questions about how the world might react are also being raised. A western diplomat stated that the move could be enough to precipitate talks about the need for alternative systems, which don’t rely on the US dollar and its policies. He highlighted that such a move could eventually end up undermining the US dollar.
The diplomat told the Washington Examiner, “At the moment, sanctions are effective because of US financial dominance as the global reserve currency — forcing SWIFT out of Iran could incentivize China or Russia to establish their own SWIFT system, which is not in any of our interests.”
A European diplomat said, “What is going on with SWIFT could also be applied to Russia or China, and then what is going to happen to the financial system as a whole?”
Rep. Peter Roskam, R-Ill told the Washington Examiner, “SWIFT sanctions are a necessary move to keep the renewed US sanctions airtight. Without SWIFT sanctions, Iran would have a far easier time withstanding or avoiding our re-imposed sanctions.”
Russian President Vladimir Putin also fuelled the fears that if the US went too hard against Iran, the value of its dollar would be weakened.
During a July diplomatic summit in South Africa, Putin said, “We are seeing what is happening with the sanctions that are essentially illegal restrictions. I believe this is a big strategic mistake on their behalf because they are thus undermining confidence in the dollar as a reserve currency. This is the bottom line.”
Speaking about the discussion on condition of anonymity, the Iranian sanctions expert told the Washington Examiner,“There will be a panic in the Iranian markets, and the Iranian currency will collapse.”
Despite these warnings, many Iran hawks in the US are keen to pressure SWIFT to cease its dealing with Iran. They think that that is “political bluster” from the leader of a weak economy.
The Iran sanctions expert said, “It’s a political tactic to try to scare us into not taking action. US sanctions power today is still the dominant force in the world. Will there be a point in 20 or 30 years where the dollar is not dominant? I hope not. We should take steps to prevent that.”
The Foundation for Defense of Democracies also warned, “Threatening to expel a country’s banks from SWIFT is one of the most serious financial sanctions possible. While threats posed by Iran and North Korea may rise to a threshold meriting expulsion from SWIFT as a tool to protect American and indeed global security, policymakers should be hesitant to use this tool as a response to fluid geopolitical crises.”
While the diplomats are warning and speculating the other side of the picture, Trump has not yet made any comment. It is yet to be seen whether the big move will be executed on the fast-approaching deadline, despite its estimated ill-effects on the US dollar.