Iran Sanctions, Imperial problems

Trump's anti-Iran move on Tuesday was deeply worrying for allies of the US. It is a blow for those countries, especially in Europe, that were hoping to build on the big expansion of trade with and investment in Iran after the July 2015 nuclear deal was signed. But it is more than just an economic opportunity under threat. As Germany’s Zeit Online commented ‘with nationalism and protectionism, Donald Trump is gradually eliminating the world order shaped by the USA’. Here I look at some implications of the latest US policy and the reasons for its timing.

Holy orders

The extent of the new US sanctions is at present unclear, although there will be some delay before full implementation. What worries the Europeans is that they are unlikely to apply only to US companies, like Boeing.

On past form, any company not doing as the US wishes could be liable to suffer financial penalties. They could also face problems of access to the US market and its banking system – the latter being necessary for all international companies that use the US dollar. This extra-territoriality of US sanctions, in the words of France’s Finance Minister, Bruno Le Maire, makes the US ‘the economic policeman of the planet’, and that is ‘not acceptable’.

Last October, the now ex-Secretary of State Rex Tillerson claimed that the US will not interfere in Europe’s business dealings with Iran. But the newly appointed US ambassador to Germany, Richard Grenell, has taken a very different tack. He followed up Trump’s statement with a threatening tweet: ‘German companies doing business in Iran should wind down operations immediately’.

It would be hard to top that as a sign of imperial arrogance, something that has become ever more embarrassing for US allies under the Trump regime. To have a smoothy like Obama advance US interests after a chat among ‘friends’ was acceptable. Now the veneer is off and the modus operandi of the nincompoop POTUS is to fart, blame someone else and carry on regardless.[1]

The little, big problem

Following the long years of sanctions, Iran is far from being a big economic partner for the major western powers. Last year it was only number 33 in the ranking of external trading partners of the European Union. Trade between the EU and Iran was close to €21bn, with a little over €10bn of both exports and imports, but this made up less than 1% of the EU’s total external trade. EU trade with India is four times bigger, and it is more than seven times bigger with Turkey. US trade with Iran is much smaller still, roughly $200m last year, which is barely a rounding error in the statistics.

Nevertheless, there had been rapid growth in trade for the EU in recent years, mostly imports of fuel from Iran and exports to Iran of manufactured goods, especially machinery and transport equipment. From 2014 to 2017, EU exports grew by nearly 70% and EU imports by nearly nine times.

Much more trade growth has been in prospect, together with attractive investment opportunities, for EU companies such as Renault, PSA Group, Airbus, Siemens, Total, Alstom and others. Iran’s half-wrecked economy offered a cornucopia of deals in the tens of billions to refurbish, resupply and rebuild.

All that is at risk with the new US policy. More important, however, is that the Iran deal was the result of a longwinded negotiation involving all the major powers, and now the US has walked away from it. This calls into doubt the status of more or less anything else the US has signed up for in the past, and also the status of the US as the unquestioned leader of the western powers.

Why now?

Why did former president Obama’s signing of the joint agreement with Iran look like the ‘worst deal ever’ for Trump? First, note that the US has sustained hostility to a country that dared to step out of line in 1979, when the Shah was overthrown, and has since not been cooperative enough. While the US has come around to accepting other miscreants – notably Vietnam, which beat it in a war – this is very rare and is, in any case, a very slow process. Similarly for Cuba. The irony in Iran’s case is that, aside from sections of the elite who make gains from managing the sanctions regime to their advantage, the country was overwhelmingly in favour of doing a deal with the west as a means of gaining access to technology and development. Nevertheless, despite signing the 2015 deal, Obama was not exactly friendly to Iran. Even afterwards, US political prejudice hindered American business prospects in Iran, with the Europeans much quicker to take advantage.

What seems to have scuppered the Iran deal now is the problem that US policy faces in the Middle East region. This is behind Trump’s long signalled change of course.

Apart from its own direct military intervention, the US has had two elements of control in the Middle East: Israel and Saudi Arabia. Each of these has become more unstable and problematic in recent years, causing trouble for western policy and some embarrassment when it comes to ‘human rights’ in family plutocracy Saudi Arabia and Palestinian rights in the racist gangster state of Israel. Yet the US has not been able to find alternative local tools. After the disaster of US policy in Iraq, another adventure, to replace Assad in Syria, and so to undermine Russia, has failed. This now leaves the US with two dysfunctional supports in a region scarred by imperialism, a mess that it cannot sort out.

The US inability to get rid of Assad has raised Saudi Arabian and Israeli paranoia about Iran. Worried about the stability of their own regimes, they see a long shadow from the bogeyman who does not necessarily do what the US wants and use this to disturb the US’s own discontent. This is neatly summed up in the invention of the so-called ‘Shia crescent’ of Iranian power and influence from Iran through Iraq, Syria and into Lebanon and the Gaza Strip. Saudi Arabia even sees Iran in Yemen, while Netanyahu starred in his own special anti-Iran video for Trump. In an inversion of reality that only someone of his powers can provide, Trump even outdid them with his latest comment that Iran backs al-Qaeda and ISIS.

Trump will tweet and things may change again. But it looks like the foundations of the world order are crumbling further.

Tony Norfield, 9 May 2018

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[1] Apologies for lowering the tone, but the word ‘trump’ in colloquial English also means to break wind.

Brexit & the City of London

Brexit is a big economic and political mess for British imperialism. It also undermines some of the previous plans to boost the City of London’s operations, especially in deals with China. The City will not collapse. But it will lose business as other European Union countries are already aiming to divide up the soon to-be-deceased member’s estate while the body is still stumbling around.

A large proportion of City financial dealing is with the rest of Europe, although London has been pre-eminent because of its worldwide links – including with offshore financial centres, many of which sing God Save the Queen as their national anthem. These European ties formerly helped underpin the City’s growth, but have since been a factor in decline, even before the Brexit vote in June 2016. So problems for British-based finance due to Brexit now add to those resulting from a drop in European economic strength.

Shift in economic power from Europe to Asia

IMF data show that the European Union’s share of world GDP fell from 25 per cent to 22 per cent from 2011 to 2016, a sharp fall in just five years. This was offset by a higher share for the US, and especially so for China, based on their faster growth. Weak economies, massive debts and bad loans also undermined Europe’s banks and led to a cut in their dealing operations – most of which are in London.

A good example of the impact is seen from the global foreign exchange market, which reflects the cross-border deals in the currencies used for investment in bonds, equities and real estate, and the buying and selling of goods and services. From 2013 to 2016, the size of the foreign exchange market had declined for the first time in more than a decade, based on low world growth and problems in banks. The UK’s share of the foreign exchange market fell from 41 per cent in 2013 to 37 per cent in 2016. Although the City still remained by far the world’s biggest FX dealing centre, and the US in second place had a much lower 19 per cent, the US share rose a bit, helped by the better position of its banks.

By contrast, Asian financial trading centres were the clear winners. Singapore’s share of trading rose from 5.7 per cent to 7.9 per cent from 2013 to 2016. Taken together, China’s and Hong Kong’s rose from 4.8 per cent to 7.8 per cent. Though still a small share, this is an astonishing result for China, one backed by the near-doubling in the use of the renminbi in global FX dealing to 4 per cent. This made the renminbi the eighth largest trading currency in 2016, just behind the far more established Canadian dollar and the Swiss franc. Meanwhile, the euro, now the currency of nineteen countries, saw its share slip to the lowest since its inception.

UK politicians: dumber than you might think

The City had a falling share of a falling market even before Brexit,[1] but now faces the prospect of Brexit. A key problem it faces is how far will UK-based financial companies be able to conduct business with the European Union once the UK leaves. Implausible as it may seem, despite UK governments having promoted the financial sector for more than three decades, there is no sign that the current UK government has given this much attention.

Under the Labour governments from 1997-2010, there was also a clear pro-finance policy. This was seen as one of the few competitive UK ‘industries’, one that also provided lots of tax revenues to fund public spending, from income taxes on the high paying jobs and the various duties imposed. Finance supported millions of jobs related to trading in foreign exchange and all kinds of financial securities and insurance services. It also provided international revenues that covered nearly half of the UK’s record-breaking trade deficit in goods that in 2016 amounted to 7% of GDP. Even non-financial UK business services, from accountancy to information technology, are very closely tied into the financial sector, and offset another chunk of the trade deficit. Basically, without the City’s financial business, UK living standards would be lower.

In more recent years, the UK political class has had trouble maintaining support from a disgruntled electorate. Voters worried about pressure on living standards focused on immigration from the EU, so this has led the two main parties, Conservative and Labour, to accept the referendum vote and reject EU membership. They obviously want free access for all UK business to the EU market, but this is not possible under EU treaties for a non-member, unless, at a minimum, that country also accepts the free movement of labour, ie no restrictions on migration from the EU. UK politicians can grandstand as much as they like, declaring what they want from a deal, but the end result will come from a negotiation

With the UK a member of the EU, City-based financial firms can freely do business across the rest of the EU single market, due to so-called ‘passporting’. This means that banks or other financial institutions in the UK can sell their services in all other EU countries, as these are considered part of the same market. Without the ‘passport’, or something very similar when the UK leaves the EU, that ability will either cease or become much more restricted.

More than 5,000 UK-based firms rely on these passport agreements, and some 8,000 European companies also need them to offer services in the UK. So there may be some compromise. But it is in the interests of the remaining EU-27 countries not to make this a favourable one for the UK, or else the longstanding European Union project would risk being unravelled as others considered the exit too.

How to get a piece of the financial action?

Whatever the wider economic and political issues for the UK and the rest of Europe, the UK’s financial business is an area coveted by some of the major EU players. Already, many UK and international banks and other financial institutions have said that they plan to relocate some business into the EU-27. So far it is only on a small scale, and as a precaution so as not to be left high and dry if there are barriers to their UK-based operations doing business in the EU. If it becomes clear that full access to EU financial markets will be difficult, more will follow.

The likely outcome is a piecemeal lopping off of some parts of City business into several other EU locations rather than into one new rival centre. Frankfurt, home of the European Central Bank, is one of the favoured alternatives, but there is also Dublin, Paris, Amsterdam, Luxembourg and others, depending upon where a financial company might already have some existing business.

Ironically, Frankfurt, the main financial centre for Europe’s largest economy, Germany, is a rather provincial town, not particularly attractive to financiers, and is based in country whose politicians have shown little orientation to finance. They have instead been able to benefit from the prowess of German engineering business and have had other ways of promoting German capitalists on their minds.

I do not think that the Brexit effect by itself is likely to add up to a dramatic reduction in the City’s operations. London has built up a series of reinforcing advantages that are difficult to replicate elsewhere, as shown by the several directions in which alternatives are sought. For now, at least, London has very many more international connections than rival financial centres, plus a broad range of financial services and personnel skills that other centres lack. English is the main business language and English commercial law is the foundation for many financial contracts, for example interest rate swaps, the largest traded financial derivatives contract.

The commercial law issue is more important than one might think. Lawyers based in other countries, or sent from the UK, might be trained in the relevant aspects of English commercial law, but legal judgements are based on court decisions. Being part of the relevant legal network is important. It would also take a long time before contracts are changed into another legal system, and that system may not have the specific aspects necessary that have been developed over decades within the UK legal set up.

Furthermore, most other possible centres have also had governments that have been advocates of a financial transactions tax. This will not help them make a convincing case for expanding their role as a financial business centre. Nevertheless, the incompetence of the present British government could make them question favouring London.

What next for the City?

Despite the impact of Brexit and the recent decline in the growth of financial dealing, it will not be easy to dislodge the City of London from its pre-eminent position. London will almost certainly lose business to other financial centres, but it is costly for banks to move even some operations from London to the rest of Europe, estimated at anything from $30-$50bn.[2]

As these decisions play themselves out, British financial elites are planning to secure for the London Stock Exchange the flotation of Saudi Aramco’s shares. This state-owned Saudi Arabian oil company is the world’s largest and the deal would produce big revenues for the exchange and banks handling it. Around five percent of the company might be on sale, but even this is expected to raise some $100bn.

Only a major stock exchange could handle such a large deal. But although New York is the biggest, and Trump’s pro-Saudi politics are supportive, US financial regulations could be a barrier since the Saudis do not like giving much information. London is more lax on that score and has also changed its rules to help its bid for the deal. Furthermore, there could be US legal claims against the Saudis regarding the 9/11 attacks that would impact Saudi Aramco, and this kind of trouble looks more likely to occur in a US court than any such thing in British courts.

One deal, no matter how big, would not point to sunlit uplands ahead for British finance. But the outcome for Saudi Aramco’s deal will be an interesting signal of how far a Brexit-hobbled City can have a future outside the European club. It would also indicate how far Britain’s status as a key player in world politics has been damaged, since the Saudi decision will certainly have that in mind.

Tony Norfield, 1 August 2017

Notes:

A fuller discussion of City finances in relation to British imperialism, plus Brexit and Trump is available in the paperback edition of my book, The City, available from these sources.

For a brief article on this blog covering the background to the City’s business relating to British imperialism, see here.

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[1] The Bank for International Settlements surveys from which this information is taken are conducted in April of the relevant years, so in 2016 it was before the June Brexit vote. Similarly, the UK’s share of the trade in financial derivatives fell back between 2013 and 2016, based largely upon a drop in the volume of dealing in euros.

[2] See this Bloomberg story: https://www.bloomberg.com/news/articles/2017-07-31/banks-may-be-hit-with-50-billion-capital-needs-after-brexit