The Chinese Minister Ma Zhaoxu visited Iran to persuade it to engage in talks. It affirms that United States diplomacy under Obama has been far more successful than under his predecessor, Bush. The US has persuaded all of Europe and other western countries to isolate Iran, making it extremely difficult for Iran to trade on the international market. Obama's approach is gradual and effective pressure on Iran hoping for a regime change or mind change from within expecting the Mullahs dropping their nuclear ambitions altogether. But the Ayatollahs could outwit the United States, weakening it further.
The sanctions policy is obviously banking on Iranian middle classes breaking under the strain of inflation, drop in living standards and inability to buy commodities around the world. A rebellion or a revolution will satisfy the Pentagon.
But there is another scenario. Perhaps the State department and Pentagon have war- gamed it. Western sanctions against oil and dollar exchange could have two implications. China, India and Russia have made it abundantly clear that they are not going to stop trading with Iranian oil industry. Russian Gazprom and Lukoil are involved in several projects in Iran.
China and India will negotiate cheaper deals on Iranian oil as Iran's options are limited in the open market. The 20% of its oil exported to the EU will now be available cheaply to the two Asian Giants (AG2). India has already increased its oil from Iran. Which means their manufacturing will be even cheaper .They will be able to flood western markets with more cheaper goods to satisfy decreasing buying power in the west.
The west will be buying oil at inflated price from other suppliers. Oil prices are predicted to increase. That means manufacturing and delivery costs in the west become more expensive, almost outpricing themselves both in the domestic and international markets. Central Banks will have to do even more Quantitative Easing. Suddenly it doesn't seem like a clever policy.
The west might think it can weather this. But there is another direction the entire sanctions effect could take. Iran's central Bank can no longer trade in dollars. Which means China, India and Russia cannot pay for the oil in dollars and Iran cannot buy goods around the world in dollars. That is a pincer or it seems.
But all three countries have started to find alternative payment methods such as a mixture of barter, gold and local currency. However the Yuan (Chinese currency) is not yet ready for worldwide exchange mechanism and the fluctuating rupee is not that attractive. Nevertheless Iran has agreed with India for 45% payments in Rupees through an Indian bank that does not trade in USA.
The four countries could develop an alternative to the dollar as the world's reserve currency. For instance, China, India and Russia could agree to accept each other's currencies in regard to Iran. Alternatively they could persuade China to offer the Yuan as a reserve currency among themselves, since it is the strongest and even rising against the Dollar. Some countries (Chile, Nigeria) already hold Yuan as reserves and some trading alrady takes place. Others might join. But they could even finally set up a wider reserve currency system to replace the near monopoly of the dollar. China has often hinted at this.
If these alternatives start formalising, the non-Dollar trading system could become available to other countries facing sanctions. It would make the dollar less important than it is. The United States will lose one of its most potent and remaining weapons. In fact Iran has already set up an alternative in 2008, called the Iran Oil Bourse in the Island of Kish which it designated free trade zone.
The USA cannot threaten to stop trading with China or India in retaliation for them buying Iranian oil. World economy will go into a spin if that happens. Trade between Iran and the big three is quite high. India is on the verge of finally joining in the IPI (Iran-Pakistan-India) gas pipeline which the US tried to stop.
This crises for Iran could hasten the inevitable emergence of the Renminbi (Yuan) as a reserve currency, although China had hoped to keep it off until 2020. This would impact on America's remaining ability to impose its will without brute force. But more importantly, the American economy's ability to weather economic storms on the strength of its dollar, which continues to attract bond buying, may be severely affected. That will further erode US influence.
In the last decade China increased its political influence around the world before its time and enhanced its economic might while the US fought pointless and expensive wars in Afghanistan and Iraq. These sanctions could force China to fill another emerging power vacuum and push for the alternative to the dollar as the world's reserve currency before its time; Not because of Chinese ambition but because of US policies. The world will never be the same again. Empires are often the victims of their own privileges.
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