The current structure of the global financial system also provides a hedge against fortification from future sanctions. To be sure, U.S. sanctions against Iran were successful, in part, due to the United States’ dominance of the global financial system. U.S. monetary policy drives global capital markets, and the dollar is still the preferred global reserve currency, and will be for the foreseeable future— despite fears of a rising challengers. In recent years, China has continued to make significant strides in globalizing its currency, the renminbi. But, China’s ambitions to set the renminbi as a global reserve currency is still far off. Although globally the renminbi is the fifth most actively traded currency, it still only accounts for only two-percent of payments. Despite its rise in popularity both globally and regionally, however, most analysts do not believe the U.S. dollar will lose its primacy within the next decade.
The past twenty-five years have seen remarkable flexibility, adaptability, and innovation in the use of economic statecraft. From comprehensive, broad-based trade and financial sanctions imposed against Iraq, to the targeted asset freezes and travel bans used to target terrorist financiers post-9/11, the United States has an astonishing record of innovating and adapting new approaches to sanctions. The recently imposed “sectoral sanctions” against Russia for its annexation of Crimea in March 2014, for example, uniquely targets Russia’s ability to transact in long-term debt—effectively freezing Russia out of global capital markets. The results have been devastating: tanking the Ruble’s value, depleting its hard-currency reserves, and shaving three to five percent from Russia’s GDP. Clearly, the United States has taken a fluid approach to coercive economic measures, and will need to continue this approach as the global financial system adapts to Iran’s return to economic normalcy.
To be sure, uncertainties remain. Freezing Iran from the international financial system signaled to non-western states the need for viable alternatives. Both Russia and China, for example, are in the final stages of bringing their own financial messaging systems online to hedge against a ban from SWIFT—the Belgium-based company responsible for almost all global financial messaging. Also, the new Asian Infrastructure Investment Bank, which supports development projects in Asia-Pacific region, provides an alternative to western-dominated capital markets. Still though, a major structural re-shuffling of international markets, of the type that would spell catastrophe for imposing future sanctions is still far off, and may never happen. As others have pointed out, conditions in China do not yet exist for a truly international renminbi. After China’s recent stock market crash, for example, Beijing’s decision to cut interest rates, cap short-selling, and drive up the price of securities by suspending initial public offerings—all in an effort to prevent capital markets from drying-up— is a clear indicator that China might not be ready for a hands-off approach.
The lessons are clear—the United States and the EU should work to encourage Iran’s re-connection to a global economy, modernize its banking and financial system, and bring transparency and good governance to its trade and commerce practices. While counter-intuitive for some, fostering Iran’s economic growth does not undermine the capacity to impose sanctions after the JCPOA, as long as the U.S. maintains its dominance in global finance and continues to explore innovative coercive economic strategies.