The American Interest
Analysis by Walter Russell Mead & Staff
Iran And China Macgyver A Way Around US Sanctions

We are living through a golden age of financial sanctions, but golden ages come to an end. Because the US has such a big role in world finance, the United States government can use access to its financial system as a stick to force other countries to comply with US policy. This fact gives the US a unique ability to affect the behavior of foreign firms and even central banks, and it has played a key role in the development of effective sanctions against Iran that go beyond the limited restrictions that pass Russian and Chinese scrutiny on the Security Council.

Via Meadia isn’t shy about using the instruments of national power but we have to realize there is a cost to this — the more we use sanctions on financial transactions, the more incentives we create for others to find new channels to conduct their business which will be harder for us to monitor and to block.

And sure enough, the Financial Times reports that China and Iran – with a little help from the Russians – have put on their thinking caps and developed an alternative payment system that allows Iranian oil to flow to Beijing without a greenback passing between them. Iran is accepting payment for some of its oil in renminbi, but since the renminbi is not freely convertible like the dollar or the euro, a kind of barter system has sprung up that allows Iran to spend the currency on goods and services from Chinese companies.

The system works even though domestic banks, like the Bank of China, have stopped dealing with Iran as a result of American pressure. Instead, Russian banks have stepped in as intermediaries that handle the renminbi and send it on to its final destination in Tehran. (Naturally, the Russians take large commissions for providing this service.)

China is Iran’s largest oil market – 21 per cent of its crude oil exports are purchased by Beijing – which makes it a vital component in American efforts to constrict Tehran’s economy and force it to the negotiating table. And while this new payment system is balky and imposes additional transaction costs on both China and Iran, it also highlights the limitations the US faces as it tries to maintain pressure on Iran.

In the medium to long term, we have to understand that China and Russia (along with a number of other powers) will look for ways to diminish America’s ability to use the global financial system to get its way. Financial sanctions are an important policy tool, and the case of Iran is grave enough to justify the inevitable costs of using them in this way, but the more we turn to them, the less useful they will ultimately become. Worse, some of the steps that other countries take to weaken this tool of American policy are likely to have side effects (such as making the global financial system harder to regulate and police) that we do not like.

Published on May 9, 2012 8:56 am
  • Cunctator

    “Financial sanctions are an important policy tool, and the case of Iran is grave enough to justify the inevitable costs of using them in this way, but the more we turn to them, the less useful they will ultimately become.”

    This is absolutely true. But it is even more so when the target of sanctions, and other affected countries, recognise that sanctions are often an excuse by the US not to do anything else. If sanctions were but one rung in a ladder of escalation, the incentive to maneuver around them would be diminished.

  • http://facingzionwards.blogspot.com/ Luke Lea

    “In the medium to long term, we have to understand that China and Russia (along with a number of other powers) will look for ways to diminish America’s ability to use the global financial system to get its way”

    This merely illustrates the folly of our go-it-alone financial strategy. If the West is serious about guarding its most precious jewel — let us call it the liberal idea — then it will band together (all the industrial democracies, including Japan, South Korea, etc) and leverage its collective industrial and economic as well as financial strength to enforce certain civilized norms. That means tariffs, collective policing of the high seas, as well as access to the international banking system. It’s not too late — we still have the preponderance of power — but it might become too late if we wait much longer.

  • Brett

    Iran is accepting payment for some of its oil in renminbi, but since the renminbi is not freely convertible like the dollar or the euro, a kind of barter system has sprung up that allows Iran to spend the currency on goods and services from Chinese companies.

    It sounds like China came out the better in that particular negotiation. They get oil, and pay for it with what amounts to coupons to buy Chinese goods and services. It’s sort of like how the US will give military “aid” in the form of vouchers to buy US military products (both Egypt and Israel have this type of aid agreement with the US).

  • Mrs. Davis

    Admitting China to the WTO before it became a reasonably liberal polity was an error. Why it was done will be a matter of scholarly debate for a long time. In the long run, or short if possible, we are going to have to decide whether we want murderous, lawless dictatorships to be within our trading sphere. We should not have let Russia in either, after the example of China demonstrated that liberalised trade does not lead to liberalised governance.

  • http://facingzionwards.blogspot.com/ Luke Lea

    Some background: How the Chinese Communist Party First Split on Falun Gong

    http://tinyurl.com/88rscg3

    Why is this important? You figure it out.

  • Kris

    Luke@5: “Why is this important? You figure it out.”

    Because it encourages us to be skeptical of Bloomberg’s anti-sodium initiative? :-)

  • Corlyss

    Raise your hands, all of you who were surprised by this.

    Sanctions=patty cake

    @Mrs. Davis

    Scholars debate what is obvious to the rest of us. There’s a faction in the US that thinks you give perks to tyrants to encourage good behavior. That faction is called stupid cosmopolitan internationalists who never seem to learn anything whatever from their failures.