US sanctions seek to target Iran’s anti-dollar policy

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Tensions between the US and Iran have escalated dramatically in the last week after a potentially pivotal chain of events. Iran officials confirmed that an uranium enrichment site stationed beneath a mountain in the city of Qom is now fully operational and the IAEA confirms is now enriching uranium towards the 20% level needed for a nuclear warhead. This comes just days after Iran revealed that they would be sidestepping the US dollar in their relationship with Russia. Russian President Medvedev made the suggestion to Iranian President Ahmadinejad to have the two countries use their own currencies, the Russian ruble and the Iranian rial, for Russian-Iranian trade.

If both Russia and China, two of the top five global economies, are no longer forced to hold dollars as a means of purchasing oil, the US policy of continually pumping liquidity (printing dollars) may come home to roost in the form of hyper-inflation.

The new US sanctions against Iran's central bank was part of the NDAA bill that Obama signed into law on New Year's Eve and are no doubt seeking to isolate Iran for their anti-dollar behavior. To garner support for the new sanctions US Treasury Secretary Timothy Geithner traveled to China to attempt to persuade the Chinese government to take part in the sanctions on Iran's banking system.

In response to US pressure to reduce or eliminate Iranian oil imports, China's deputy foreign minister has said he does not believe the issues of Iran's nuclear program and China's economic ties to Iran are connected. And therefore China will not stop or even reduce the oil they import from Iran.

Sec. 1245 of the NDAA lays out the exact language for the US sanctions on Iran:

"The financial sector of Iran, including the Central Bank of Iran, is designated as of primary money laundering concern for purposes of section 5318A of title 31, United States Code, because of the threat to government and financial institutions resulting from the illicit activities of the Government of Iran, including its pursuit of nuclear weapons, support for international terrorism, and efforts to deceive responsible financial institutions and evade sanctions."

The bold portion of the above quote is interesting because it does not define a clear threat to US security as a pretext for the sanctions. This ties in with my previous post where I laid out the evidence that the Pentagon believes the Iran nuclear program serve primarily as a deterrent to a Western attack.

According to the language laid out in the sanctions transactions between a US based account and Iran's central bank or any Iranian financial institution can be blocked by the US Treasury Department. The sanctions on Iran will extend to any foreign central bank that knowingly purchases petroleum from Iran. Obama can pass 120 day waivers to nations wishing to buy Iranian oil if he can prove it is in US interests to do so. In the meantime he will encourage Saudi Arabia, Kuwait and the United Arab Emirates to increase production to offset the lack of oil that will be coming onto the world market via Iran because of the sanction.

The one substantial hurdle for the US sanctions is that China and Russia are calling the United States bluff and continuing to buy oil from Iran. And to add insult to injury they are doing it without the US dollar.

It is perhaps with this support from Russia and China that Iran is exhibiting a new found confidence to carry out grand military exercises to practice shutting down the Strait of Hormuz, which is the gateway/choke-point to 20% of the world's petroleum supply.

Additional Reading:

Currency Wars: The Making of the Next Global Crisis by James Rickards

Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown