Jun 1, 2013

Secondary economic/trade sanctions on Iran, some thoughts

Economic sanctions primarily consists of one nation preventing its citizens and corporations from doing business with the other targeted nation. Such basic economic sanctions are commonly called primary sanctions. However, if the first nation also tries to block foreigners or foreign organizations from dealing with the target nation, it becomes secondary sanctions. There are very few countries that can threaten with secondary sanctions today. In fact, only US can issue a credible threat with secondary sanctions, as things stand. And US has done it in the recent case with Iran when it imposed secondary sanctions on Iran's petroleum trade. 

Ideally, a non cooperating player in the international arena, can be brought to terms with  multilateral sanctions or actions. However, in case of Iran, US is not sufficiently happy with the UN imposed sanctions, mainly because the UN sanctions target only the nuclear program and not the overall economy in general. US believes that breaking the economy would automatically dismantle/slow down the nuclear program. Hence the need for primary and secondary sanctions. I won't get into the rights/wrongs/legality of the issue. US is the superpower and it can bulldoze resistance easily. Minions can split hair over the legality. People are evaluating if such secondary sanctions can be legally challenged at WTO. This blog won't go into that aspect. 
Given this, what are the options left to such a country like Iran? 

What the US did was simple. Firstly it told all the banks across the world that they would be banned from the US dollar payments system if they did business with Iran or banks from Iran. Then it also coerced the governing board of Brussels based SWIFT, or Society for Worldwide Interbank Financial Telecommunications, to exclude Iran's banks from participating. This meant that inter-bank money transfer in any globally convertible currency including Euro, Yen, GBP became difficult for Iran. US also targeted the insurance companies that cover the voyage risks, and the global shipping organizations sailing from Iran were not given  the insurance cover. That pulled out all the bigger shipping corporations away from Iran. And so on. The effect of this on Iran has been quite significant. One can read the details here. Briefly, the Iran's currency, Rial, plunged drastically. It's oil exports dropped. Currency reserves plunged. Iran had to put a ban on import of over 2000 consumer goods including items such as mobile phones, to preserve currency. Inflation shot up and affected the ordinary citizens adversely. 

Iran had few strong trading partners such as China, Japan, Russia, India, South Korea, Brazil etc. However, most of them towed the line of US. China and Russia mostly held out to Iran, with India coming on and off. Iran reached out to these countries to explore alternate financing mechanisms, including barter, gold exchange, accepting local currency etc. Countries even tried using faux front companies for inter-bank transactions, without naming the third beneficiary as Iran . SWIFT cannot determine if the third beneficiary is not declared in the inter-bank transactions, but it is against the rule-book. Also, SWIFT's governing board was not comfortable banning Iranian banks from the beginning, and probably, they too turned a blind eye. Alternate financing methods made use of such loopholes. Nevertheless, the effect has been profound. 

The point is, what if we are in the Iranian boots due to some cruel twist of fate in future. There is no alternate reserve currency today, with the depth of US Dollars. US seems to be misusing the pre-eminent position, and there is hardly much that the world can do about it, at this point. Debate is raging about IMF's SDRs as international currency, evolution of currency swap arrangements,. ideas such as BRIC bank and so on. But there is an urgent need to look at what can be done to make the economy risk-averse to such economic sanctions. India had faced sanctions just 15 years ago. And we can see a major oil exporter friend of India in trouble today. It's time we have some more ideas on this.