US sanctions will test the dollar ’s global standing

One of the surprises of a fast-changing world is that the US dollar is still king. American power is in relative decline due to the rise of new economic powers such as China and the failure of US armed forces to achieve victory in expeditionary wars. But still the dollar rules the world as the favoured currency for foreign reserves and major international transactions.

It was not always going to be like this. A little more than a decade ago the euro, the European common currency, was set to challenge the dollar. But the European sovereign debt crisis of 2008 highlighted the political fragility of the European Union and the euro remains a work in progress.

China was also planning to internationalise its currency, the RMB, to make it a competitor to the US dollar, crowning its spectacular economic rise. But progress has been slow and economic turbulence has led the communist party to prioritise stable growth at home over the glamorous prize of achieving reserve currency status.

So the dollar still rules, despite successive governments in Washington gorging on foreign debt to a level which would be considered reckless in any other country.

The power of the dollar matters because US President Donald Trump is now using sanctions and the threat of trade wars as his favoured means of exerting pressure abroad, to an extent not seen before.

Most recently, Washington’s raising of tariffs on imports of Turkish steel and aluminium and the sanctioning of two Turkish ministers over the detention of an American evangelical Christian preacher were a tipping point for a Turkish economy already in crisis.

Of course, Turkey’s heavy reliance on foreign investment to propel its growth was always destined to collide with President Recep Tayyip Erdogan’s view that a pious people can defy the laws of economics. But it was the sanctions which provoked a stampede away from the Turkish lira, which has lost at least 40 per cent of its value this year.

At the same time, US sanctions are also in force against Russia after its annexation of Crimea in 2014, and against Iran, following Mr Trump’s withdrawal from the Iran nuclear agreement negotiated by his predecessor, Barack Obama.

The ultimate aim of these sanctions is to choke Iran’s oil exports. The declared goal is making the regime “change its behaviour”, though given National Security Adviser John Bolton’s past support for regime change and with protests around the country at the collapse in value of the rial, many think that the US aim is more radical.

Sanctions have a mixed record of success at best. Saddam Hussein’s Iraq was subject to a near total trade and financial embargo by the United Nations from 1990 but this served only to impoverish the people and strengthen the regime, leaving the US the option of abandoning the sanctions or invading, which it did, with terrible consequences, in 2003.

Russia has, to all appearances, weathered the Crimea sanctions and put on a fine show for the football World Cup this summer, thanks to deepening its economic and diplomatic ties with China. Iran has been under various levels of US sanction for more than 30 years and has prior experience in finding ways around the net.

A notable exception is South Africa, which faced international sanctions in the mid1980s to force it to abandon its policy of apartheid, which it eventually did. But here the timing was key: the end of the Cold War meant that that the apartheid regime could no longer justify racial segregation on the bogus grounds of the “struggle against communism”.

The big question is whether Mr Trump’s “America First” policy – aggressively pursuing what he perceives to be the national interest, with scant regard for longstanding alliances or the stability of the global economy – is a game-changer as significant as the end of the Cold War.

Mr Erdogan has promised to widen his economic partners away from the US to Iran, Russia, China and some unspecified European countries. But he has no hope of a bailout from Russia, which has no money to spare and is more interested in having the US lift the Crimea sanctions than rescuing the Turkish president.

China may be keen to offer some gestures of support to a country facing trade threats from the US but is unlikely to want to aggravate its relationship with the US at a time when Mr Trump is promising ever more punitive taxes on the import of Chinese goods.

As for Iran, the hardliners seem to be in the ascendant again. They were persuaded to accept the 2015 nuclear deal, given the damage to the economy caused by the Obama-era sanctions. Now they are happy to tell President Hassan Rouhani that the Americans could not be trusted and he should have known it. How far China and Russia will go in supporting Iran is unknown.

Russia is perhaps the most interesting case. Vladimir Putin’s popularity soared after the annexation of Crimea in 2014 but now there are rising signs of discontent at the cost of his foreign policy ambitions and the attendant decline in living standards. Only 16 per cent support Mr Putin’s policy of confrontation with the West, according to the Levada Centre, a pollster.

It is clear that foreign powers are treating Mr Trump’s noholds-barred use of the power of the dollar with caution. But they also note that Mr Trump takes no interest in keeping his European and Japanese allies on board in his foreign policy – rather the opposite – and his global goals are unclear, to say the least.

How can a sanctions policy against Iran, for example, work if Russia, China and the European Union are not on board? they ask. They are waiting to see if Washington will pursue its pumped-up policy of sanctions with the vigour that Mr Trump has announced. That will be the test of whether the dollar really is still king.

The big question is whether the ‘America First’ policy with scant regard for loyal alliances is a game-changer