President Trump reinstated sanctions on Iran in May. (Photo by Chip Somodevilla/Getty Images)

Last May, the United States reinstated economic sanctions on Iran, despite vehement opposition from its European allies. The United States had already unilaterally pulled out of the Joint Comprehensive Plan of Action, where Iran agreed to give up on its nuclear ambitions in return for sanction relief and reintegration into the world economy. The new U.S. sanctions not only affected American firms, but European ones, even though Europe wanted to stick with the JCPOA deal.

Now, key European states have created a new body, a so-called Special Purpose Vehicle, which is intended to allow some European businesses to keep doing business with Iran. This may end up having enormous consequences for the world economy and for U.S. power.

Over the last decades, the United States has enjoyed unquestioned hegemony over the global financial system, allowing it to exert extraordinary pressure on other countries and foreign firms. This is because of its dominance over two key aspects of the global financial architecture: the dollar clearing system and the global financial messaging network SWIFT. Now, American allies are pushing back against the country’s unilateralism and creating an institution that may be the beginning of an alternative financial architecture.

The United States has successfully weaponized interdependence

As our forthcoming article in International Security discusses, the United States has figured out how to weaponize the networks of global interdependence to vastly increase its economic power. Most people, if they think about sanctions at all, see them as tools that a country uses to restrict access to its home markets, blocking imports and exports to their national economy. What the United States figured out soon after Sept. 11, 2001 was that it could take far more extensive measures. As well as blocking access to American markets, the United States and its allies could isolate businesses, and even entire states, from the world financial system.

They could do this because of their influence over global financial networks. The dollar plays a dominant role in global financial exchanges, which means that important global transactions take place through the dollar clearing system, which depends on U.S. correspondent banks and the U.S. financial system. This has provided the United States with an enormous degree of external influence. It can press foreign banks to implement its policy preferences, since if they do not, they will either face massive fines or exclusion from the dollar clearing system, which they need to do business. As a former U.S. Treasury official describes it:

U.S. national security policy and the international banking system have become inextricably intertwined. … That has meant, above all, an effort to work with banks to put pressure on states and other international actors that the United States otherwise has little ability to influence

Furthermore, the United States and its allies have been able to weaponize SWIFT, which plays a key role in international financial transactions. One key reason Iran signed up to the JCPOA was because the United States and the European Union had used SWIFT to cut Iran out of the global financial system, making it extremely difficult for Iranian exporters to get paid. SWIFT is based in Belgium, but its board includes U.S. financial heavy hitters.

Together, the dollar clearing system and SWIFT provided the United States and its allies with extremely powerful instruments to achieve their security goals. Other states, such as Russia and China, have worried that these instruments could be turned against them. However, neither is central enough in the global financial system to be able to effectively push back.

The United States may be overreaching

In the past, the United States has mostly been able to rely on its European allies for support. This is important, because these allies also play an important role in the global financial system. London is another major financial hub, while Frankfurt and Paris also have significant roles. E.U. regulators have increasing clout over international financial markets.

Now the United States is deliberately working against these allies — and threatening them with retaliation if they do not knuckle under to its demands that they take action against Iran. The United States threatened action against SWIFT if it did not cooperate in isolating Iran again from international networks. SWIFT has effectively agreed to comply with these U.S. demands. However, American unilateralism is pushing European states to begin to create new financial channels that are insulated from U.S. control. This helps them resist U.S. pressure on Iran in the short run. In the long run, it may create the beginnings of a new financial architecture that could undermine U.S. financial power.

This is the story behind the new Special Purpose Vehicle, which is being set up by France, Germany and the United Kingdom, with support from other E.U. member states. The vehicle creates an alternative system for European firms to do business with Iran, without exposing themselves to dollar transactions and the power of American sanctions. Its initial scope is modest — it is intended for small to medium-sized firms (which are less likely to be exposed to U.S. pressure) engaged in essential transactions (food and humanitarian provision), which are in theory not sanctionable anyway.

However, it is very likely to grow. As the German government public news agency Deutsche Welle reports: “The European side intends to use the channel initially only to sell food, medicine and medical devices in Iran. However, it will be possible to expand it in the future.”

It is clear that some European politicians, including the foreign minister of Germany, as well as many politicians in France, would like alternative financial arrangements, which would not only better insulate the European Union from U.S. pressure, but perhaps provide it with the beginnings of an alternative financial architecture. American officials are worried that the SPV will be expanded to cover other transactions, while former officials such as Jarrett Blanc (who played a key role in the JCPOA) warn:

This is a severe risk for U.S. financial dominance over the mid- to long term. It opens up the possibility of Europe developing a banking infrastructure that does not run through New York, threatening the tremendous influence the U.S. enjoys as the global backbone for even simple banking operations.

For a long time, the United States has been able to weaponize interdependence for its own security purposes without much in the way of effective challenge. However, this power has depended on a global financial architecture that provides the United States with unique leverage. Key American officials have worried in the past that if the United States is not careful, it might undermine this architecture by taking aggressive steps that would encourage states and other entities to create their own networks. We are about to discover whether their fears are justified.