LONDON (Reuters Breakingviews) - Plumbing is unseen but vital U.S. sanctions against Iran could affect key aspects of the pipework that flushes money around the world. The European Union, which is trying to save a 2015 nuclear deal with the Islamic Republic, is so irked that German Foreign Minister Heiko Maas on Tuesday called for a cross-border payments system independent of the United States. China stands a better chance than Europe of setting one up.
The EU wants companies to ignore U.S. sanctions, but faces a problem with Washington’s plan to proscribe the provision of financial messaging services to Iranian financial institutions. That is a quandary for EU-based SWIFT, which handles most global wholesale cross-border transfers and which is an important cog in the global financial system. SWIFT, owned by its member banks, would fall foul of the sanctions if it doesn’t cut off Iranian banks. But complying blocks financial channels seen as vital to saving the nuclear deal.
Setting up an alternative would require enough banks to use a system that might risk U.S. sanctions. Hefty fines imposed in the past, including one of nearly $9 billion on BNP Paribas, would make any institution wary. Any such initiative would also undermine Europe and the United States’ common fight against money laundering, as German Chancellor Angela Merkel acknowledged on Wednesday.
China might have more success. Ignoring intra-euro zone traffic, over 60 percent of cross-border SWIFT transfers involve dollars. But that’s partly because the greenback is the most liquid currency and often an intermediate leg in cross-border transfers that have nothing to do with the United States or the dollar. But the world’s second biggest economy and most populous nation could set up an alternative payments system and make its use mandatory for anyone who wants to transfer money in or out of the country. Persuading Russia and India to come aboard might not be too hard.
There are big stumbling blocks. China would have to make its currency convertible and dismantle capital controls – introducing unwanted market volatility. Technology for the new system has to avoid dependence on U.S. companies, which might face pressure from their government. And Beijing might promote its own interests rather than those of users. But none of these will prevent a new payments system if the United States keeps abusing its privileged position.