Historical experience in international politics confirms that economic sanctions rarely produce the specific policy outcomes intended by the imposing actors. The new set of economic sanctions to be imposed by the Donald Trump administration against Iran as of Nov. 4 will probably not constitute an exception to this general rule; however, there is a serious possibility they might produce totally unintended outcomes by triggering the formation of a new international banking architecture thanks to the initiatives of the EU, Britain, Russia and China, searching for innovative ways of averting the sanctions via a prospective system called the Special Purpose Vehicle (SPV).
When it was concluded in 2015, the crux of the Tehran agreement on the nuclear deal with Iran was based on restraining the nuclear program in return for a gradual relaxation of comprehensive sanctions that had crippled its economy over the course of several years.
Obviously, both the more compromising political atmosphere prevalent in the international community and the power balance in American domestic politics favoring liberal values were more radical than what we observe today. The nuclear deal was tensely negotiated between Iran and six world powers – namely the US, Russia, China, Britain, France and Germany – for almost two years during the President Barack Obama administration and was hailed as a great success aimed at reintegrating Tehran into the global political and economic system. The “Trump effect” on the nuclear deal led to a total rejection on the part of the US, citing the agreement as flawed in that it did not curb Iran’s ballistic missiles program or its support for proxies in Syria, Yemen, Lebanon and Iraq.
The decision to restore comprehensive economic sanctions on Iran, including those that seek to force its major oil customers to stop buying Iranian crude, were in conjunction with a series of provocative foreign policy decisions taken by the Trump administration; however, despite the odds, the remaining parties of the Iran nuclear deal, namely Britain, China, France, Germany and Russia, reached an agreement to maintain trade with Tehran by developing alternative payment mechanisms, such as the SPV, despite strong objections from Washington.
It seems likely that the SPV model will reflect an updated and more sophisticated version of the Soviet barter system, which was extensively used during the Cold War to avert US trade sanctions.
The European Union, Iran, China and Russia will be the initial stakeholders to allow the trade of Iranian oil in exchange for goods without any financial transactions with Iranian banks or conventional banking institutions. Emerging powers such as India and Turkey have also expressed their willingness to join the pact in future stages.
To this end, a multinational European state-funded financial institution would be set up for intermediate deals with private companies interested in handling transactions with Iran and related counter-parties. There is no doubt that the SPV initiative represents an extraordinary collective response to the aggressive unilateralism and unambiguous adoption of trade wars by the Trump administration.
While Washington has called for a policy of all-out financial war against Iran and threatened to sanction even European central banks and the Brussels-based SWIFT interbank payments network if they maintained transactions with Tehran, the EU responded by asserting its policy autonomy and triggered the formation of an alternative banking architecture. How far the EU is willing to go to defy Washington’s restrictions on trade with Iran remains to be seen.
This incident might stimulate a broader strategic divergence between the US and the EU through which European economies try to insulate themselves from the effects of illegal extraterritorial sanctions predominantly imposed by the US. It is therefore not surprising to see Germany and France seeking to extend the SPV mechanism to other cases as an economic sovereignty tool that would protect European companies from illegal extraterritorial sanctions.
Consequently, the reckless policies of the Trump administration designed to punish certain actors and raise tension in global geopolitics might well be producing results that directly contradict their original intentions. Washington’s hasty decision to abandon the Iran nuclear deal and impose comprehensive sanctions on companies trading Iranian crude as of Nov. 4 seems to have created new venues for international cooperation among the rest of the global and emerging powers. The EU’s latest SPV and similar initiatives designed to legally avoid the use of US dollars in the oil trade and avert unilateral US sanctions might just spell the beginning of a new era in the dollar-dominated global economic system.