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There’s a lot at stake in the recent Iran nuclear deal.
In this deal, Tehran is looking for sanctions relief.
The West is willing to oblige. That is, if the Iranian leadership relinquishes a large stockpile of enriched uranium, eliminates a large number of centrifuges, limits enrichment capacity, and submits to invasive inspections by the International Atomic Energy Agency.
A failure of this Iran nuclear deal wouldn’t just cause hard feelings.
Nor would a failure necessarily mean Iran is prepared to enrich uranium to weapons-grade potential.
The United States can stomach the hard feelings – those aren’t new to policymakers in Washington. They have colored the relationship since the hostage crisis in 1979.
And as far as the recent Iran nuclear deal unraveling in such a way that it emboldens Tehran to follow North Korea’s lead – rebuffing the IAEA, refusing inspections, abandoning nonproliferation agreements, and building a bomb – the international community still hasn’t produced the kind of airtight, smoking gun case to prove Iran wants to do this.
No, what the United States should fear is the dollar. A breakdown of this Iran nuclear deal could affect the global economy, oil markets, and U.S. dollar hegemony.
We’ve seen what punishing international sanctions and dollar warfare can do to a disgruntled regime.
In 1991, the United Nations Security Council, chiefly at the behest of the United States and the UK, passed Resolution 687. This resolution demanded that Iraqi President Saddam Hussein dismantle his weapons programs. The punishment for the alleged non-compliance to follow was crushing international sanctions responsible for the degradation of Iraqi infrastructure and society.
Hussein eventually pushed back.
The UN attempted to provide sanctions relief while still disarming Hussein with the Oil-for-Food Programme. Hussein looked to use this program as a vehicle for mounting an attack on the U.S. dollar.
“The regime of Saddam Hussein sought to take the dollar away as the sole vehicle on which oil was traded and, under Oil-for-Food, mandated that a certain amount of the oil transactions be done using the euro,” Scott Ritter, former UN chief weapons inspector, told Money Morning.
The dollar assault was short-lived. The United States eventually invaded Iraq anyway in March 2003.
While Hussein couldn’t take down the dollar, it sent an important message about U.S.-led international sanctions regimes. Namely, they chase smaller countries into the arms of the dollar’s much bigger adversaries, such as Russia and China. And this builds a much larger, international consensus in opposition to the dollar.
Iran is much the same, but is also very different – which makes the success of the recent Iran nuclear deal so important…
Why Iran Nuclear Deal Failure Could Disrupt U.S. Economy
The demand for the dollar is buoyed right now in international markets because it is used to settle global oil transactions. Its value is inflated even as the United States continues to pile on more debt.
Hussein’s gambit to undermine the dollar didn’t work.
But he was operating from a position of weakness. According to a 1999 UN report, sanctions led to “continuing degradation of the Iraqi economy with an acute deterioration in the living conditions of the Iraqi population and severe strains on its social fabric.”
Iran handled sanctions differently. Iran was forging massive multi-billion dollar energy deals with China. It circumvented the global dollar payments system in 2004.
Iran leaned on India, China, and Russia.
India swapped gold for oil. Gold that Iran then used to buy food and manufactured goods from China and Russia.
It wasn’t enough to upend dollar hegemony or unravel the petrodollar system.
It did send a message, though. The dollar’s adversaries weren’t content to abide by the U.S. Treasury’s rules should it use its currency as a weapon.
Iran also created an oil trading exchange, the Iranian Oil Bourse. This exchange ceased to trade oil in dollars in March 2012.
The Iran nuclear deal could help to reverse this ill will toward the dollar. Strengthened U.S.-Iranian ties could help save the dollar from its demise.
“Now that Iran is plugging back into the global economy, the dollar is there to stay,” Ritter said. “They’ll be trading in dollars, they’ll be using dollars, and I don’t think there’s any threat of Iran disrupting that horse cart.”
That is, if the current Iran nuclear deal stays as is…
What Could Disrupt the Iran Nuclear Deal?
U.S. President Barack Obama is going to have to make the case for this deal to U.S. Congress in the coming months. Many hawks in Congress aren’t willing to take the pressure off what they see as a radical Islamic regime. A regime they see cheating their way to a bomb.
And Tehran hasn’t exactly been playing nice since the deal was announced.
“The Security Council’s unanimous vote in favor of the pact should have bolstered the chances of the agreement’s approval by Iran,” Money Morning Global Energy Strategist Dr. Kent Moors said. “Instead, it has unleashed highly provocative statements from the leadership.”
This could very well be bluster. Ayatollah Ali Khamenei is no stranger to telling his people to rally behind the Islamic leadership while meaning the opposite.
Just look at the hollow “Death to America” rhetoric the theocracy nurtures. This is despite the fact that such rhetoric is a poor reflection of actual Iranian sentiment toward the United States.
“Iran’s a political state just like every other state and certain issues are exploited for political value and hyped up,” Ritter said. “I think the ‘Death to America,’ ‘Great Satan’ – it plays well with the generation of Iranian males who came into viability in the 1970s and early 1980s. But that generation is dying.”
The problem, as Moors said, is that “some of these folks have been reading their own press releases and have begun to believe what is written in them.”
There’s still a lot of political posturing from the United States, Iran, and even Israel and Saudi Arabia. This could all serve to reignite tensions.
And if that happens, we could see Iran resurrecting its former plans to undermine the dollar vis-à-vis China and Russia.
Iran is not short of leverage. It’s emerging as an important power-broker in the region. It’s not an international pariah like Hussein’s Iraq was.
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The post A Failure of Iran Nuclear Deal Could Upset Global Dollar Hegemony appeared first on Money Morning. Reposted with permission.
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