One of our longstanding arguments about the folly of American policy on Iran-related sanctions is that it is incentivizing rising powers like China and the other BRICS countries (Brazil, Russia, India, and South Africa, along with China) to develop alternatives to U.S.-controlled mechanisms for conducting, financing, and settling the international exchange of goods, services, and capital. As the latest sets of U.S. and European Union sanctions against the Islamic Republic were going into effect, Neelam Deo (a former Indian diplomat who now directs Gateway House, the Indian Council on Global Relations) and Akshay Mathur (head of research and geoeconomics fellow at Gateway House) published a brilliant opinion piece in The Financial Times outlining precisely how such alternative mechanisms are likely to emerge, see here.
Deo and Mathur note at the outset of their article that “two recent developments—the $75 billion bailout contribution from the BRICS countries to the IMF, and the Western push for sanctions against Iran—show how exposed the BRICS economies are to Western financial policies. For decades, they have been successfully co-opted to submit to Western-dominated institutions, leaving them with little motivation to build their own.”
Now, however, “the BRICS must urgently organize to build institutions of mutual economic benefit”; the newest round of Iran-related sanctions from the United States “highlights the urgency of the issue.” The BRICS are “hostage to Western sanctions because the conduits of international finance, trade and transportation use[d] for crude oil trade are controlled by the West. The entire pricing framework is U.S. dollar based. The New York Mercantile Exchange (NYMEX) and London’s International Commodities Exchange (ICE) conduct the largest trade for crude oil futures contracts… There is SWIFT, the global code for electronic banking transactions. In March, SWIFT banned Iran’s banks from conducting business, leaving oil importers like India lurching for payment mechanisms. Ditto with transportation [and insurance] options.”
Deo and Mathur note that “the BRICS are finding creative ways to pay Iran” and to provide insurance coverage for shipments of Iranian crude. But rising powers nonetheless face a daunting structural challenge. Deo and Mathur warn that “the sanctions are an issue for energy exporters like Brazil and Russia too. The Western-dominated system that is strangling Iran, can do the same to others should their geopolitics be deemed inconvenient. Iran today, could be Russia or Brazil tomorrow.”
So what, then, can the BRICS do to rectify these structural imbalances that the United States and its European partners seem all too ready to leverage as a way of keeping rising powers subordinated to Western preferences? Deo and Mathur offer some genuinely creative answers:
“Apart from the already proposed multilateral BRICS Bank, should be a clearing union and insurance club to facilitate international trade, finance and transporation. For instance, though China and India have a deficit with Iran, Brazil and Russia do not. If a new trade settlement system is created—like the Asian Clearing Union establishied in Tehran in 1974 or the International Clearing Union proposed at Bretton Woods in 1944—but with BRICS currencies, Iran can use the Rupees or Renminbi [it earns from exporting oil to India and China] to pay Brazil, and not amass rice and toys. Brazil can use the same system to pay India for its bilateral trade, thereby facilitating multilateral local currency swaps for intra- and inter-BRICS trade. New commodity exchanges can be promoted to enable alternate means of price discovery and benchmarking in currencies.”
Deo and Mathur acknowledge that “activating these regimes will require adjustments. China’s reserves are in dollars; it will have to balance preserving that value with internationalizing the Renminbi—a stated Chinese goal achievable under a new system. External partners like Iran will have to make an effort to increase trade with BRICS to avail of the new system’s benefits. Net importer India will have to offer more competitive products and services within BRICS. In return, net exporters China and Russia may have to patiently hold weaker currencies like the Rupee until a balanced equation is achieved.
Deo and Mathur also acknowledge that “there will be resistance from the U.S. and Europe,” out to preserve “the almighty dollar” and their ability to leverage non-Western powers through hegemonic extraterritorial sanctions—in our assessment, clearly illegal, see here. More broadly, Deo and Mathur admit that “the West has dismissed the workability” of BRICS-led international economic institutions. “But,” they conclude, “if 28 countries in NATO could unite to contain Russia, surely the five nations of BRICS can come together to ensure their geo-economic future.”
Read their article and get a glimpse at what is likely to be an important part of the future.
- Chile Is Latest Country To Launch Renminbi Swaps And Settlement (zerohedge.com)
- BRICS to Announce IMF Contribution at G-20 Meeting, Brazil Says – Bloomberg (bloomberg.com)
- Could sanctions on Iran bolster the renminbi? (wantchinatimes.com)
- Iran, the BRICS and Why Gold is Now Money (beta.fool.com)
- India, Iran plan talks to bypass Western sanctions on Tehran (thehindu.com)
Pretoria – Amidst reports that pro-Israeli lobbies in the United States have secured an assurance from the Obama administration to relentlessly pursue countries seen to be wavering in their compliance with rigorous sanctions on Iran, South Africa has been singled out for punishment. Though largely under-reported in the local media, pressure is building on the ANC-led government to immediately suspend its economic ties with Iran or risk being barred from the US economy.
While there were initial signs of panic with different government departments giving contradictory statements on this highly contentious US demand to shut off the country’s petroleum lifeline from the Islamic Republic, very little is currently known about South Africa’s ultimate decision as the deadline grows closer. However, a recent statement issued by the South African Petroleum Industry Association [PIA] gives a clue of frantic behind-the-scenes talks. Claiming that it sought to expedite requests to the United States for a postponement and temporary exemption from the sanctions, it also clearly alludes to political pressure.
PIA Executive Director Avhapfani Tshifularo is reported to have said: “This is not a business decision for us. It involves a political decision about political pressure”. Following the initial flurry of uncertainty as to whether the SA government had succumbed to demands made by clandestine visits by senior US Treasury Department officials, it now appears that a formal decision by the Zuma Cabinet has yet to be made.
What may have irked Israeli lobbyists in America is that South Africa’s crude oil imports from Iran have increased to $434.8 million in March from $364 million in February. Instead of a reduction, imports from the Islamic Republic represent 32% of the country’s total crude oil supplies, suggesting that the ANC-led government is reluctant to have America dictate its economic policy.
While these figures project a country unwilling to disrupt its trade with a stable reliable source such as Iran, it is aware of the enormous power possessed by Israeli-lobbies that in effect have manipulated US domestic and foreign policies. It certainly would be aware that the push for war on Iran is high on the agenda of these lobbies and that unilaterally imposed sanctions by the US therefore cannot be treated lightly.
While this conundrum confronts decision makers in Pretoria, it is equally intriguing that the European Union has called on South Africa for funding to bolster the banking systems of some EU member states on the brink of collapse. Commenting on this, the convener of UCT’s Applied Economics for Smart Decision Making course Pierre Heistein, said that there is something inherently perverse about this situation.
He explains that looking for $400 billion to prevent the collapse of a few EU member economies causing the others to fold like a pack of cards, the International Monetary Fund [IMF] has turned to Brics for aid after the US and Canada refused to contribute. It appears that Brics economies of Brazil, Russia, India, China and South Africa have between them agreed to provide funding to the tune of $72bn, though exact individual amounts will only be released next month, according to Heistein.
He speculates that South Africa’s proportionate share of the Brics amount could amount to R16bn. Though not a “crippling sum of money” it could increase spending on economic infrastructure by as much as 10 percent or lift health and education by 5 percent. “But does it make sense that a country as poor as South Africa should be contributing funds to traditionally wealthy European states? Consider that in order for South African farmers to export to Spain they have to compete with annual farming subsidies amounting to more than E7 billion [R72.7bn] and now Spain is calling for South Africa’s financial aid”, is the all important question posed by Heistein.
This question alongside others including whether President Zuma and his cabinet will succumb to Washington’s blackmail ought to feature in the national discourse related to socio-economic challenges. Global disparities as they exist in both political and economic spheres make it imperative for emerging economies to jealously guard their capacity to grow. This means that they must shun foreign interference especially if such meddling undermines job creation and service delivery.
While the IMF’s stretched hand may provide South Africa [a means] to enhance its leverage within this seat of power, it may be short-lived if American pressure becomes more ruthless to force it to abandon Iran. Unfortunately, the current malaise in which the ANC finds itself – both as a formidable political formation and as the de facto government, may not allow it to snub either the US or the IMF. After all such firmness of principle requires a strong moral underpinning.
- Iqbal Jassat is an executive member of the advocacy group, the Media Review Network.
- South Africa may be hit with US sanctions over Iran oil imports (alethonews.wordpress.com)
- South Africa Must Resist Sanctions on Iran (alethonews.wordpress.com)
- South African telecom to face US sanctions over Iran, Syria operations (alethonews.wordpress.com)
The BRICS – Brazil, Russia, India, China and South Africa – have agreed to provide credit to each other in local currencies. Officials say the deal will facilitate economic growth in times of crisis.
The currency swap deal is aimed at promoting trade and investment in local currencies as well as to cut transaction costs. It’s also seen as a step to replace the dollar as a reserve currency in trade between BRICS.
“The idea is in line with many interests and economic exigencies in the world economy,” Yaroslav Lissovolik, the chief economist at Deutsche Bank told RT. “The euro and dollar are no longer seen as unquestionable monopolies in the role of reserve currencies. Clearly the world needs more reserve currencies.”
The deal would also increase the BRICS influence on the international arena and will make their cooperation less sensitive to sanctions from the West, experts say.
“The BRICS countries are in the first rank to do the job that international financial system now needs. What the BRICS said was a very welcomed wake up call,” John Kirton, the Co-Director of the BRICS Research Group told RT.
Russia and China have been trading in the ruble and yuan for several years, now Russia plans to expand local currency settlement with India.
“With China it took us three years to (evolve) from initial conversations to trading in local currencies,” Vladimir Dmitriev, the chairman of Russia’ s VEB told reporters. “I think we will meet similar terms with India”.
Meanwhile the swap requires a lot of technical work by each country such as the synchronization of national banking legislation, according to Mr. Dmitriev.
The BRICS countries are also going to announce plans on a joint development bank which is considered a possible rival to the World Bank and the IMF. If established, it would function as a lending agency and would provide finance for joint BRICS projects.
“They made it very clear it would be built to benefit not only BRICS countries themselves, but developing countries more broadly,” said KIrton. “But the big message was to give the World Bank more resources, only then would they see how the BRICS bank would fit in the supplement what they’ve already got.”
Imagine this scenario: A developing nation decides to selectively share its precious natural resource, selling only to “friendly” countries and not “hostile” ones. Now imagine this is oil we’re talking about and the nation in question is the Islamic Republic of Iran…
Early news reports on Wednesday claimed that Iran pre-empted European Union sanctions by turning off the oil spigot to six member-states: the Netherlands, Spain, Italy, France, Greece and Portugal.
The reports were premature. According to a highly-placed source in the country, Iran will only stop its oil supply to these nations if they fail to adopt new trading conditions: 1) signing 3 to 5-year contracts to import Iranian oil, with all agreements concluded prior to March 21, and 2) payment for the oil will no longer be accepted within 60-day cycles, as in the past, and must instead be honored immediately.
Negotiations are currently underway with all six nations. Iran, says the source, expects to cut oil supplies to at least two nations based on their current positions. These are likely to be Holland and France.
Meanwhile, the other four EU member-states are in dire financial straits. They are knee-deep in the kind of fiscal crisis that has no hope of resolution unless they exit the union and go back to banana republic basics. Yet, they found the time to sanction Iran over some convoluted American-Israeli theory that the Islamic Republic may one day decide to build a nuclear weapon. I am sure arm-twisting was involved – the kind that involves dollars for votes.
But I digress. This blog is really about ideas. And not just ideas, but really ridiculous ideas.
New World Order Jump-Started by Iran?
Alternative sources of oil will be found in a jiffy for these beleaguered EU economies. But this isn’t so much about a few barrels of the stuff that fuels the world’s engines.
This is about the idea that a singular action taken amidst the political and economic re-set about to take place globally, can propel us in a whole new direction overnight.
The past few years have shown that there is no global financial leadership capable of pulling us back from the abyss. The US national debt hovers around the $15.3 Trillion mark. Its GDP in 2011 was just under $15 Trillion. You do the math – there is no fixing that one. The only next-big-thing coming out of that dead end will be the complete transformation of the current global economic order.
But how will that take place without leadership and clear direction? I’m betting hard that It will not come from the top, nor will it be directed. The new global economic order will be organic, regional and quite sudden.
What do I mean? Imagine: Iran stops selling oil to the EU; China tells the US to take a hike on currency values; India starts trading in large quantities of rupees; Russia’s central bank becomes a depot for holding dollars that don’t need to pass through New York; the creation of a global payment messaging system competing with SWIFT. Now imagine that a combination of actions – triggered only by an attempt to circumvent some really very silly sanctions – can suddenly unleash some unexpected possibilities that were beyond the realm of imagination a mere few years ago.
Imagine the emergence, say, of regional economic hubs, powered by the currencies of the local hegemonic powers, where bartering natural resources, goods and services becomes as commonplace as transactions involving currency transfers. Because of the frailty inherent in dealing with these new local currencies and a bartering system, nations tend to trade most with those closest to them in geography and culture. Shocking? Maybe not. Sometimes it just takes a need for change…and a handy tipping point.
“This is not the time to fan the flames,” someone should have told the United States. “You and your pals are sitting in a jalopy tottering on the cliff’s edge – why risk making moves now?” they should have warned. “Be a little less arrogant,” would have been sage advice.
But Washington is absolutely, irrevocably, dangerously fixated on showing Iran who’s boss, and spends a good part of every day trying to tighten the screws around the Islamic Republic. For the most part, the US’s pursuit of this dubious objective has instead stripped it of the vital political tools it once wielded. No more UN Security Council resolutions, no more unscrutinized military adventures. The only thing left is the nefarious tentacles of the United States Department of Treasury and its financial weapons. “The new tools of imperialism,” as once US-friendly central banker in the Mideast bluntly put it to me.
I only hear shrill desperation when politicos now parrot the “sanctions are biting” line. Here’s a juicy tidbit for those rolling their eyes right now: Goldman Sachs – America’s premier investment bank and Wall-Street God – has identified the Islamic Republic as one of the “Next 11” growth drivers of the global economy after the BRIC (Brazil, Russia, India, China) nations. BRIC was a term coined by Goldman Sachs, if you recall, and boy, were they right about that one.
Thirty years of “biting” sanctions and sanctions “with teeth” have achieved the following: “Strong or improving growth conditions,” said Goldman Sachs just last year, “combined with favorable demographics, form the foundation of the N-11 growth story.” The investment bank, furthermore, estimates “a measurable increase in the N-11’s share of global GDP, from roughly 12% in the current decade to 17% in 2040-2049.”
It’s a bad global economy we are facing right now, but Goldman Sachs’ charts illustrate that Iran is still one of five nations in the N-11 pot whose “productivity and sustainability of growth” is above average.
Shrugging off Dollar Dominance
A British investment research firm wrote in January: “Sanctions on the Central Bank of Iran effectively restricts Iranian oil sales to barter contracts or to state-to-state agreements utilizing non-G8 currencies…It represents a major irritation to the Iranians, rather than a chokehold.”
The authors specify the Chinese Yuan as the non-G8 currency, but in the past few days that scenario has busted open with the addition of the Indian Rupee into the mix.
The new trade deal inked between Iran and India ensures Rupee payment for 45% of Iranian oil imports, with the balance remaining in Indian banks to pay for exports to the Islamic Republic. This achieves two important things that are an unintended consequence of US sanctions: firstly, it eliminates the Dollar as the trading currency (note that oil prices have traditionally been priced in US Dollars); secondly, it significantly accelerates economic integration between Iran and one of the four largest emerging economies in the world.
D.S. Rawat, head of the Associated Chambers of Commerce and Industry in India, says of the agreement: “The potential of trade and economic relations between the two countries can touch the level of $30 billion by 2015 from the current level of $13.7 billion dollars in 2010-11.”
There’s more. During the course of the past two weeks, Iran has purchased around 1.1 million tons of cereals and wheat from international markets – including products originating in Germany, Canada, Brazil and Australia – which it has paid for entirely in currencies other than the Dollar.
The US Dollar, which has been the international reserve currency for close to a century, is on its way out anyway. America’s huge balance of payments deficit has weakened US fundamentals and made investors wary. The downside of the Dollar’s changing status is that the Federal Reserve loses a lot of flexibility in managing its currency and the US economy. That does not bode well for keeping the US competitive against the BRIC nations and other emerging economies.
Iran Sanctions Biting the US Right Back?
It takes one solid idea, in a world desperately seeking them, to start the creaky shift to a new global order. Emerging economies have been nipping at the heels of the world’s governing bodies for decades, demanding entry into the hallowed halls of the UN Security Council’s permanent members; insisting on a seat at the main table at the IMF, World Bank, World Trade Organization.
When European leaders went begging for scraps at the last G-20 meeting, the BRICs found their feet and yawned a collective “no.” It signaled a reversal of fortunes, that meeting, and the idea that they can forge their own path was born. The BRICs then announced their first joint foreign policy statement last November – on Syria, of all places. The idea matured.
But US/EU sanctions against Iran are giving the idea steam. One has to act when faced with a dilemma, after all – and that dilemma has been literally foisted in the faces of nonaligned countries the world around: “sanction Iran or else.”
Now they are just shrugging and finding ways around the maze of traps set up by the Department of Treasury. Why should they care much? What is the United States today but an unwieldy bully with few arrows left in its quiver?
This week the US is putting the screws on Belgian-based SWIFT. If you’ve ever wired money to another country, you have used SWIFT – it is essentially the messaging system between banks that alerts them to money transfers. The US wants to cut Iranian banks out of the SWIFT system, in effect making it practically impossible for anyone inside or outside Iran to send or receive funds.
Who knows what Iran will do if this comes to pass? It will probably just join non-aligned countries to create an alternative SWIFT, further undermining the western grip on global finance. Iran, after all, decided last year not to put up with the prospect of perpetual cyberwar with the west, and is forging ahead with plans to create a closed internet system for itself.
Each step the US and EU take to hinder Iran’s flexibility is countered with an innovative solution – one that includes more and more non-western players who are keen to craft a new global order. They used to worry about that kind of confrontation with the west, but the collapse of the current order has left few obstacles in their paths – and even offers incentives.
Like the proverbial finger in the dyke to block a leak…the water will always find another way out and possibly even bust open the dam. A warning to Washington: the burden of anxiety will always fall on the one who needs the dam most.
Sharmine Narwani is a commentary writer and political analyst covering the Middle East. You can follow her on twitter @snarwani.
“In the financial world, the United States cannot order SWIFT to kick Iran out. But it has leverage in that it can punish the Brussels-based organization’s board of directors individually, possibly freezing their assets or limiting their travel.”