Friday, April 8, 2016

Subtle Sanctions Against Iran Remain in Place

Reuters and are both reporting bad news this week about the relationship between the US and Iran. Although many US sanctions were formally lifted off Iran this January as part of the nuclear inspection deal, the US continues to subtly block Iran from being reintegrated into the global economic system. In particular, the US is denying Iranian companies and their partners access to use the US dollar or the US financial system.

This may not sound like a big deal on its face, but it's actually a very significant barrier. Since the dollar still currently serves as the world's reserve currency, many international transactions are actually transacted in dollars at some point (as an intermediate currency). And these transactions generally flow through the US financial system. Accordingly, this seemingly small action can have a major effect. And to hear the State Department talk about it, it sounds like there are no plans to consider loosening up on these restrictions anytime soon. It appears. the US is complying with the letter of the Iran Deal, but is still actively trying to prevent Iran from becoming a normal nation in the international community.

In the short-run, this is pretty much bad news across-the-board. The US's actions are understandably perceived by some in Iran as yet more evidence the US can't be trusted; we effectively exploited a loophole in the agreement to get out of providing more sanctions relief, so it's hard to blame anyone who takes that view. This, in turn, means that there will be more hostility between the two countries, and the chances of a flare-up in tensions down the road is higher than it needs to be. Of course, the inability to fully integrate in the global economy is also direct bad news for the Iranian people. This limitation will continue to inhibit trade and needlessly stunt their economic growth.

Another short-run consequence, albeit of less significance, is that US companies won't be able to benefit from the new trade with Iran. The inability to use the US financial system, means that Iran will look more towards Europe instead. European companies would seem to be the only real major beneficiaries of this behavior by the US.

If we look in the longer-term, however, this latest episode might have an accidental silver lining. The US is basically overplaying its hand here. Most of developed world was on board with the Iran nuclear inspection deal and lifting sanctions. The US's decision to leave some significant sanctions in place, arguably violating the spirit of the agreement, will only help speed the transition toward a global financial system that less heavily influenced by the US. This would then reduce the US's power to use sanctions as a threat and could eventually weaken the US's foreign policy tools more generally. Given the US's historical willingness to abuse such tools, this is probably good thing.

In this sense, we can look at the dollar and the US financial system's commanding hold on global commerce much the same way that Austrian economists look at monopolies. When the US pulls a stunt where it appears to unjustly use its influence in the financial system, it's like when a monopoly tries to raise its prices above a reasonable level. In the short-run, everyone has little choice but to pay. But each time this happens, it moves the world and the market one step closer to openly challenging the monopoly with a better, more independent, alternative. This process makes monopoly and empire alike relatively unstable over the long-term. Because each time someone tries to gain an advantage from exploiting their monopoly / empire position, they are actively working towards their own demise.

None of this is likely to be much consolation to Iran as US policy is going to continue to inhibit the development of the Iranian economy in the near-term. But at least for me, it is reassuring to know that in the market, as with diplomacy, bad policy does eventually backfire on the issuer. Let's hope it happens soon.

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