Last week we reported Barack Obama was planning to give the Iranian regime a new concession above and beyond what was negotiated in the P5+1 nuclear deal. But the Obama administration has been clear about all the ways it’s not going to allow Iran to dollarize transactions: no clearing dollars through New York, no transactions between U.S. and Iranian banks, no financing relationships, etc. On Sunday the President again declared that Iran will not be allowed to get access to dollars through U.S. banks . So what gives? Was the story reported earlier untrue?
No, the president and his administration are using exacting words so he doesn’t have to tell the full story. The administration has come up with a scheme to allow Iran to access the U.S. Dollar that would be called money laundering if an average American did the same thing.
It took weeks of work by journalists and analysts to get a sense of what the White House is setting up, but as usual, Matt Lee of the Associated Press was the first to report the scheme.
Here’s how it works the administration’s wants to Iranian companies who are converting from rials (their currency) to a foreign currency by going through the dollar. This would reassure foreign banks they’re allowed to do business with Iran and insulate the transactions because the dollar is a relatively stable currency.
If there were no sanctions on allowing Iran to trade in dollars, an Iranian company buying from a Swiss company could use a U.S. bank to directly convert rials to dollars: rials –> dollars –> francs. But that’s not this world. Letting Iran access U.S. banks or letting the rial touch the dollar are terrible ideas for a range of reasons, and so the U.S. has prohibited those activities for years. Treasury officials specifically name-checked those restrictions when they promised Congress last summer that the nuclear deal will not give Iran access to the dollar.
So to keep their promise (sort of) the administration has come up with scheme that smacks of something they saw in a TV crime drama, Iran gets to play with dollars but not directly. This is how it works:
- First U.S. banks will provide dollars to non-U.S. currency clearing houses (businesses that trade in different currencies)
- Next those facilities that get the dollars won’t directly trade rials for dollars, instead an additional step is added. So instead of something like rials –> dollars –> francs , the currency exchange can look something like rials –> euros –> dollars –> francs. And to insure “cleanliness” the euros–>dollars part will happen offshore and not via a U.S. bank.
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