In 2018, this essay was chosen as the winner of a 500 person competition within Deloitte’s State Department. I was asked to give a talk on my essay at a quarterly leadership meeting among the senior Deloitte partners and managing directors at the State Department.
Following the talk, I was recommended and selected to a national presentation forum at Deloitte to give this talk to a wider audience spanning the government and commercial practices given the salience of the issues across industries that Deloitte supports. This talk gives a historical perspective into how the U.S. emerged to become the world’s most dominant economy, and how it uses economic instruments today to compete with other countries on the global stage.
President Trump’s decision in May to unilaterally withdraw the United States from the 2015 nuclear deal with Iran has set the stage for a consequential showdown with our global partners. The other countries who helped negotiate the agreement with the U.S., known as the P5+1, (U.S., Britain, France, Russia, China, and Germany), have resoundingly expressed their desire to stay in the deal and not break the agreement[1].
The question now is whether U.S.-imposed economic sanctions will compel the rest of the international community to follow our lead. The decision to comply with, or defy, U.S. sanctions will not only pose a critical test of our alliances, but will serve as a referendum on the strength of U.S. sanction power to affect the other major economies[2].
The State Department will play a leading role in defining the scope of the sanctions targets, building international support for these measures, and providing guidance to the Department of Treasury and Commerce on their implementation.
One of the primary sectors that sanctions will target is Iran’s oil and gas industry. The State Department announced last month that all countries importing oil from Iran must stop by November 4th or face sanctions themselves[3]. These will be the “strongest sanctions in history by the time we are complete”, Secretary of State Mike Pompeo announced on May 21st [4].
The core of the U.S.’s sanctions strength lies in the power of the U.S. dollar and the central role that the U.S. plays in global financial markets. However, countries may attempt to circumvent sanctions by importing Iranian oil through alternative currencies.
Since the 1970s, oil has been sold in global markets almost exclusively in U.S. dollars[5]. This gives the U.S. enormous leverage against other countries, all of whom need oil to power their economies. The U.S. used this leverage as part of the sanctions regime from 2010-2015 where the U.S. cut off Iran from using the international payment system SWIFT to trade oil in dollar currency with other countries[6].
The core of the U.S.’s sanctions strength lies in the power of the U.S. dollar and the central role that the U.S. plays in global financial markets.
Considering this economic vulnerability, countries have been seeking alternatives to the dollar in international trade. In March of this year, China launched a yuan-denominated oil futures benchmark as a mechanism to buy and sell oil outside of the dollar payments system[7]. The new U.S. sanctions on Iran have already given the impetus for other countries to trade for oil in yuan rather than dollars[8]. European countries have also suggested that they will look for ways to subvert U.S. sanctions by creating alternate mechanisms to trade with Iran in euros instead of dollars[9].
The cryptocurrency phenomenon sits at the center of this burgeoning movement away from the U.S. dollar. Countries like Venezuela and Russia openly declared this year that they are developing a state-sponsored digital token to evade U.S. sanctions and conduct international transactions outside the control of any central authority[10]. These movements have already influenced Iran whose central bank has just recently begun development on an indigenous Iranian cryptocurrency to insulate themselves from the new sanctions[11].
Ultimately, the ability for the U.S. to bring Iran back to the negotiating table for “a better deal” will depend on Europe and China’s willingness to comply with U.S. sanctions and cut Iran off from the global economy. This time around it looks as though the State Department will not only face far steeper challenges in deploying sanctions to coerce other countries into following our lead, but now must grapple with the emerging technologies that are being used to circumvent the global financial system entirely.
[1] Reuters, “Europe, Iran pledge to uphold pact without United States”, https://www.reuters.com/article/us-iran-nuclear-reaction/europe-iran-pledge-to-uphold-pact-without-united-states-idUSKBN1I92TT
[2] Holland, Ben, “U.S. Sanction Power May Be Reaching Its Limit”, https://www.bloomberg.com/news/articles/2018-05-22/u-s-sanction-power-may-be-reaching-its-limit
[3] Talley, Ian, “U.S. Toughens Stance on Future Iran Oil Exports”, https://www.wsj.com/articles/u-s-signals-zero-tolerance-on-future-iran-oil-exports-1530028859
[4] Nelson, Louis, “Pompeo threatens Iran with ‘strongest sanctions in history’”, https://www.politico.com/story/2018/05/21/mike-pompeo-iran-sanctions-600922
[5] Islam, Faisal, “When will we buy oil in euros?”, https://www.theguardian.com/business/2003/feb/23/oilandpetrol.theeuro
[6] Carter, Barry and Farha, Ryan, “Overview and Operation of U.S. Financial Sanctions, Including the Example of Iran”, https://scholarship.law.georgetown.edu/cgi/viewcontent.cgi?article=2267&context=facpub
[7] Johnson, Keith, “China’s Bid to Upend the Global Oil Market”, https://foreignpolicy.com/2018/01/18/chinas-bid-upend-global-oil-market-petroyuan-shanghai/
[8] Tan, Huileng, “Trump’s sanctions on Iran may be creating an oil trading boom — in China”, https://www.cnbc.com/2018/05/16/iran-oil-trumps-sanctions-create-crude-trading-boom-in-china.html
[9]Nasseri, Ladane, “Iran’s Dollar Shift Offers Little Comfort as U.S. Exits Deal” https://www.bloomberg.com/news/articles/2018-05-10/iran-s-dollar-shift-offers-little-comfort-as-u-s-exits-deal
[10] Popper, Nathaniel et al, “Russia and Venezuela’s Plan to Sidestep Sanctions: Virtual Currencies”, https://www.nytimes.com/2018/01/03/technology/russia-venezuela-virtual-currencies.html
[11] Reuters, “Iran cryptocurrency project on track despite cenbank ban, minister says”, https://www.reuters.com/article/uk-crypto-currency-iran/iran-cryptocurrency-project-on-track-despite-cenbank-ban-minister-says-idUSKBN1HZ0O6
About The Author
Chetan Hebbale is currently a graduate student at the Johns Hopkins School of Advanced International Studies (SAIS) in Washington, D.C. focused on international economics, climate change, and sustainability.
Prior to this, he spent over 4 years at Deloitte Consulting working on technology and strategy projects at the CDC and U.S. Treasury Department.
He is a native of Atlanta, GA and attended the University of Georgia.
Chetan Hebbale 