When the Trump administration unilaterally pulled out of the Iran nuclear agreement in May 2018 and announced it would reimpose sanctions against Iran, the European Union (EU) declared its commitment to preserving the agreement and finding ways for its companies to circumvent U.S. sanctions. Now, eight months later, the Europeans finally announced the creation of INSTEX (Instrument In Support Of Trade Exchanges) as an alternative payment system so that European firms can do business with Iran. This mechanism might be too little and too late to salvage the Iran nuclear deal but it marks a milestone in an inevitable transition of epic proportions: the end of the global hegemony of the dollar.
INSTEX is a complicated mechanism registered in France and headed by a German banker, with shareholders from the three European countries that were signatories to the Iran nuclear deal: France, Germany and the UK. It will initially be used for non-sanctionable trade, such as medicine, food and medical devices, and is also likely to only attract smaller businesses, not large companies with significant exposure to U.S. markets.It has had an 8-month difficult birth because no one country wanted to claim maternity rights for fear of a U.S. backlash. Indeed, the U.S. threatened to devour it before it was born.
While other countries use economic sanctions as weapons in international disputes, the U.S. is the only country that imposes secondary sanctions on third country citizens and institutions. The U.S. government uses the role of the dollar as an international reserve currency and the central role of U.S. banks and institutions in the international financial system to present third country firms with an insidious either/or choice: cut off business ties with Iran (or Russia, North Korea, Turkey, etc.), or lose far more lucrative business with the U.S. and risk financial penalties in U.S. courts. For most companies, the choice is clear.
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