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Non-Dollar Trade Threatens American Dominance

The U.S. is facing a changing world in which financial innovation, shifts in global economic activity, and new geopolitical challenges are redefining how economic power can be used to support national security objectives.

This picture in Moscow, shows Russian ruble coins and banknotes pictured next to the Russian ruble sign.
This picture taken on August 13, 2021, in Moscow, shows Russian ruble coins and banknotes pictured next to the Russian ruble sign. (Photo by KIRILL KUDRYAVTSEV/AFP via Getty Images)

When President Putin met with the leaders of Iran and Turkey last week in Tehran, the corporate media was fixated on a storyline triggered by the White House: Russia was rapidly depleting its weapons inventory and was seeking hundreds of surveillance drones from Iran, including those capable of firing missiles.

Trilateral talks are rarely about one issue and what the media failed to cover adequately was how the three countries advanced cooperation to bypass the U.S. dollar in mutual transactions.

The trade volume between Turkey and Russia reached $26 billion in 2019, most of it in Russian energy imports. Under the current system, at least until before Western sanctions crippled Russian banks, nearly all of this commerce would be dollarized through the use of correspondent banks. A correspondent bank - such as Citibank or Deutsche Bank - is a safe third-party financial institution that acts as a go-between between buyer and seller to conduct cross-border payments and work primarily through SWIFT messaging. All the correspondent banks have accounts at the Federal Reserve Bank.

This is how it would work. A Russian buyer of Turkish carpets instructs his local bank to search the SWIFT system to find a correspondent bank that works with the Turkish seller's bank. Rubles are converted to dollars, and the dollars are reconverted to Lira with the entire transaction recorded at the Fed.

Nearly 90% of all such cross-border commerce, even when a United States entity is not involved, is still routed through the Fed. This fact gives the Treasury Department's Office of Foreign Assets Controls (OFAC) enormous power to block fund transfers to countries, groups, or individuals subject to American sanctions. In a 2021 paper, the Treasury reported that an incredible 9,421 sanctions designations were active, a 933% increase since 9/11 as American administrations, both Republican and Democrat, have used sanctions as a primary diplomatic weapon.

Each country that America considers unworthy of membership in the global family of nations until they change their behavior - Venezuela, Iran, Russia, North Korea, Iraq, Syria - is a target of American sanctions. Even countries crucial to American long-term geopolitical interests - India, Brazil, South Africa, and China - invite America's ire if these nations deal with sanctioned countries.

As the American sanctions regime grows more extensive and unwieldy, target nations have begun to retaliate by devising ways to bypass sanctions altogether. While digital currencies, alternative payment platforms to SWIFT, and new ways of hiding cross-border transactions all matter, establishing barter-like national currency systems is the most powerful threat yet to American hegemony.

In 2019, Russia and Turkey inked a deal in which all trade between the two countries would be directly in Lira or Ruble, bypassing the dollar entirely. In March, Russia offered India an agreement wherein it could buy Russian oil and weapons in Rupees, even as the U.S. sanctions regime was tightening. In June, an Indian cement maker bought Russian coal in Chinese yuan, settling the trade through a Shanghai correspondent bank. Monthly yuan-ruble volumes rose 1,067% to just under $4 billion since Russia invaded Ukraine in late February, Bloomberg said in May. If this pace keeps up, yuan-ruble trades could reach 25% of commerce between the two countries, up from 7% in 2013 and 18% in 2017, according to the Wall Street Journal.

The trend is worrisome. Beijing is most likely paying close attention to the flailing sanctions attack on Russia. These lessons could come in handy, if and when China finally decides to act on Taiwan.

Iran's regime has developed immunity to sanctions. Iran has figured out how to avoid them and survive. Tehran is also spreading its tactics to countries such as Venezuela and other rogue regimes.

Last week, Iran launched the Iranian rial-Russian ruble trading platform in its foreign exchange market after the two countries agreed on a $40 billion deal to step up oil and gas exploration, the entire arrangement to be consummated in rial or ruble.

Even the Treasury admits that such approaches could undermine the effectiveness of U.S. sanctions. "The United States faces a changing world where financial innovation, shifts in global economic activity, and new geopolitical challenges are redefining how economic power can be used to support national security objectives. To effectively confront these changes, Treasury must modernize and adapt its sanctions policy and operational framework."

While America has imposed the harshest sanctions on Russia in history - isolating Russian banks, groups, and individuals, freezing Russian foreign exchange reserves, and even engineering Russia's default - the intended outcome has fallen far short of expectations. Russia has continued to finance its war through energy trades with non-Western countries. The ruble is 33% stronger than at the beginning of the war, even as the Euro, Pound, and yen have fallen to historic lows against the dollar.

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