Today’s video sort of unintentionally ended up being the second video in a series dealing with the ramifications of Donald Trump’s destruction of the Iran Nuclear Deal last year. The more I think about it, the better an “Iran Sanctions” series sounds. It’s interesting how much that one terrible decision will end up driving world politics for the next couple years, if not the next couple decades. Almost every day we see things happening that can in part be traced back to it, including Germany’s reluctance to act against Huawei the way the US wants, reported today.
Today’s video focuses on INSTEX, the new European exchange that is the first stab at building a post-dollar trading and banking system. It may seem like a boring topic, but if you understand it, whole volumes of current and future geopolitical maneuvering will be revealed to you. Today’s video does what very few do, and attempts to describe the history of the secondary sanctions imposed by the US in an engaging way. Supposedly journalism is a first draft of history. I’m kind of excited by the fact that nobody else is attempting that draft this way. I could be wrong, but I’m guessing that a history focusing through the lens of the Iran Sanctions will provide a clearer picture of the 2020s than anything else.
Video Transcript after the jump…
Hey There, something happened on January 31st, 2019 that got a few small headlines, then quickly faded away into the eternal dumpster fire that is the news cycle in the Donald Trump era. But I think it may be the most important thing that has happened so far this year, and quite possibly the most important thing that has happened this decade. In effect the European Union just declared independence from the United States.
On the 31st in Bucharest, the foreign ministers of Germany, France and the United Kingdom announced the formation of a special purpose vehicle called INSTEX to conduct trade with Iran. Now a special purpose vehicle is a generic legal term that is largely self explanatory. What makes this SPV interesting is the fact that it’s special purpose is defying the United States government.
Now this may seem boring. But I assure you it’s not. The United States is famous for its military, and the size of its economy and population, but the most important components of its power today are financial and legal. That boredom that may be setting in right now as I talk about this stuff now is actually a key component of this power. People not having the time or motivation to understand the US’s financial power is one of the key things maintaining it. So pay attention!
Traditional sanctions policy has become less and less useful to the United States. In the decades after world war two, the US Office of Foreign Assets Control could cause significant pain to any party that displeased the US government, especially if they were combined with sanctions from the United Nations, an organization the US used to control much more directly.
As Europe and Japan recovered from World War II, however, and later as China, Russia and other countries joined in on the capitalist free for all, the power of US unilateral sanctions began to decline mightily. If the US wouldn’t do business with you, you could do business with someone else. This was frustrating for the US government, so it came up with another card to play.
The economic power of other states was growing, but history was important too. The US has a powerful first mover advantage. The symbols and tools of economic success in 2019 are still American. A bank headquarters in New York, an apartment on Manhattan’s billionaire’s row, and most importantly the US dollar, remain key elements of financial success the world over.
What’s more, as the banks of every country have become larger and more sophisticated they have become more interrelated. Complex international trade between institutions has become a larger slice of the business for banks, other multinationals, and even for companies that don’t have much exposure outside their own home markets. The United States sits at the center of this web of interactions. DERIVATIVE MARKETS
All this gives OFAC a lever. It’s called the secondary sanction, and it’s what we are talking about when we deal with Iran sanctions. The US government isn’t just trying to block US companies from doing business with Iran, it is trying to block every country’s businesses from doing business with Iran. OFAC imposes fines on foreign companies, to punish them for actions taken outside of the United States.
This is seen as normal now, in the US media anyway, but not too long ago, secondary sanctions were seen as outrageous. Ronald Reagan tried them against a Soviet pipeline in the 1980s and was forced to back down by our European allies after just a few months. In the 1990s, the US tried to introduce secondary sanctions against foreign companies dealing with Iran and Cuba, and the result was another embarrassing climb down. And then, as with So many other things, 9-11 changed everything.
The Patriot Act and a range of other US, European and other legislation dramatically stepped up the invasiveness and power of financial compliance laws. Strangely, as we learned in Syria, this never really did much to slow down the funding of terrorism, but it made OFAC and other US agencies a lot more powerful. 9-11 supercharged national security freaks everywhere, and dramatically widened the government’s picture of what is going on financially speaking.
Power tends to accumulate and Washington DC’s powers have already gone far beyond anti terrorism. 2010’s FATCA, the foreign account tax compliance act, turned the IRS into a sort of supercharged OFAC. Other doctrines and agencies, like the Foreign Corrupt Practices Act and the DOJ have been dusted off and employed to make the US ever more powerful, reaching ridiculous heights like the arrest of a Chinese businesswoman in Canada a couple months back.
So far, Washington DC’s power over the world has mostly just grown since 9-11. As I pointed out in the last video on this topic, the US gov benefits from complexity and consent. OFAC and FATCA, and other regulations are so absurdly complex that you almost need a law degree to see why they are outrageous. And with attractive, internationally respected figures like Obama claiming these measures are necessary, consent isn’t hard to come by. A year and a half ago, I predicted why these new Iran sanctions would be different.
So the best case scenario is the complete disappearance of US leadership on this issue. The worst case scenario is that the United States decides to unilaterally force the world to adopt Iran sanctions that the world does not want. Whether we’re successful in that endeavor or not, we will create a world wide coalition of people that are sick of US leadership. And they might get together and start thinking about how to end that US leadership.
When the US empire is told to take it’s ball and go home, it will be a worldwide coalition that does it. This moment should have been decades off. The United States has actually done a pretty good job of providing benefits to a wide range of people, and playing natural enemies off of each other. Most of the components of any broad US alliance have more reason to be suspicious of each other than they do of the United States. Sane leadership from the US presidency should have meant decades before we had to worry about a Suez moment. But this Iran deal issue risks creating a real international, anti-US coalition today, not decades from now.
And it’s already started to happen. This INSTEX is a small beginning, but it’s an important one. It creates a sort of exchange through which companies can trade with Iran without using the established banking system. In doing so it creates a whole different dollar free system of exchange. By having the German, French and British governments act as its owners INSTEX may be legally and politically invulnerable. The US government can go after a French or British company, but it almost certainly can’t go after the sovereign governments of its two oldest allies. INSTEX is starting small, with the humanitarian trade in food and medicine that the US claims it doesn’t want to block. But INSTEX is designed to grow, both in terms of the trade goods and the countries involved.
Will INSTEX save the Iran Nuclear deal? My hunch is probably not. Iran just isn’t important enough to European businesses to antagonize the US government, and with the current low oil prices, China and India aren’t really going to be clamoring for the headache of using INSTEX either. But don’t let people sell this short. This is the EUs declaration of independence.
As politico pointed out recently, Iran isn’t that important to Europeans, but another US hate object, Russia, certainly is. More and more Europeans want to ditch sanctions on Russia, while the next Democratic administration in the US may want to do more to crack down on Putin. INSTEX is creating a framework that can be applied to this situation as well. INSTEX will probably fail in its main goal, but I am pretty sure it’s a turning point.
Back in 1770, when some British troops killed five colonists in Massachusetts, it really didn’t look like a big deal. 13 years later, when the British found themselves signing a treaty with the newly independent United States of America, it looked a lot more important.
The Boston Massacre is probably now the best known event that happened in 1770. The founding of INSTEX could prove to be a similarly historically important moment.
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