Why you should care
The sanctions are forcing American friends and foes alike to bend their trade policies to ancient practices — while also uniting them against Washington.
The presidency of Donald Trump has been marked by his willingness to shatter traditional alliances to create new geopolitical battle lines. But when it comes to global trade, the influence of his blunt, unilateral approach is increasingly showing up in an even more unexpected form. It is forcing U.S. partners and rivals alike to resurrect the oldest, simplest currency exchange known to man: the barter system.
Yes, the direct exchange of goods and services without money, a trade model predating human mastery over fire and the discovery of gravity, is experiencing a comeback — in many cases as a direct reaction to sanctions imposed by the U.S. against Iran, Russia, Venezuela and those who deal with these regimes.
At a meeting in New York on the margins of the U.N. General Assembly in September, leaders of China, Russia and the European Union publicly proposed a banking mechanism that would allow the exchange of European goods for Iranian crude oil through Russian territory. That same month, Turkey met with leaders in Tehran to discuss how it could maintain trade relations with Iran, even discussing the creation of a separate Islamic banking system.
In 2017, Indonesia agreed to buy weapons from Russia in exchange for commodities such as palm oil and coffee. India is exploring a similar barter system with Venezuela: rice and drugs in exchange for oil from the South American nation. And the world’s largest democracy, a traditional partner of the U.S. much like the EU, is devising a strategy with Tehran whereby New Delhi will park cash in its currency, the rupee, in five Indian bank accounts in exchange for Iranian oil. Iran can’t actually take the money — but can use it to buy Indian goods that it can then ship home.
What you now have are unilateral sanctions, with the U.S. trying to use its global clout to clobber other people into going along.
James Dorsey, S. Rajaratnam School of International Studies, Singapore
These bartering mechanisms have a common aim: to skirt the American dollar, protecting banks and bankrollers from secondary sanctions the Trump administration has threatened against countries and entities purchasing Iranian, Venezuelan and Russian goods. That the Trump administration has forced nations to adopt archaic economic strategies shows the continuing clout of the U.S. dollar. Equally, the administration’s measures are bringing traditional U.S. friends and foes together with a common goal of evading what, especially in the case of Iran, are mostly sanctions imposed only by Washington.
“What you now have are unilateral sanctions, with the U.S. trying to use its global clout to clobber other people into going along,” says James Dorsey, a senior fellow specializing in Middle East affairs at the S. Rajaratnam School of International Studies in Singapore.
Historically, the barter system died out because of an inefficiency economists call the “double coincidence of wants” — it works only when both sides want what the other has to offer. But when money can’t be relied upon, and countries know what they want from one another, barter can still work.
For sure, some countries have tried unconventional approaches to circumvent sanctions in the past. During the Obama administration, India briefly attempted a rupee-rial mechanism with Iran: The countries traded in their currencies instead of the dollar. However, the effort was short-lived, in part because it still exposed the financial institutions used for these transactions to sanctions, but more because the sanctions against Iran then had broad international buy-in — including, eventually, from New Delhi. The common aim was to get Iran to agree to a deal capping its military nuclear ambitions.
But the current round of U.S. sanctions against Iran does not enjoy international support and came after Trump pulled out of the Iran nuclear deal. That’s why traditional partners like the EU and India are less uncomfortable working out strategies to continue trade with Iran. “No sovereign country or organization can accept that somebody else decides with whom you are allowed to do trade,” Federica Mogherini, the foreign policy chief of the European Union, said after the September meeting in New York.
It’s unclear whether Trump’s sanctions are a long-term win — or if bartering and other sanction-avoidance maneuvers will significantly undermine them. “You appreciate the power, but you use the power prudently,” says Behnam Ben Taleblu, an Iran-focused research fellow at the Washington think tank Foundation for Defense of Democracies. The sanctions will succeed if they translate into a humbled Iranian leadership approaching the U.S. for a deal — after a domestic economic collapse. “That’s the only way you’ll know an Iranian offer to negotiate is not hoodwinking, but genuine,” says Taleblu.
However, the fact that nations are establishing barter economies could weaken that strategy by keeping the Iranian economy afloat. The World Bank projects the Iranian economy will grow 4 percent in 2019.
Keeping trade with Iran open makes sense for many of these countries from a macro-economic perspective, by not cutting off a major oil source. And countries don’t like being bullied. But ordinary lenders from these countries are much less willing to risk American backlash just to enter the relatively small Iranian market. That’s why most of the bartering proposals have come from politicians, not the business community, up till this point.
That could change if Trump ramps up sanctions against the much larger Russian market. Germany, for instance, might reluctantly sit out of Iran, but cutting off business with Russia — which it has a years-long pipeline deal with and depends on for much of its energy needs — would be harder. What’s more, the sanctions sometimes stand at odds with America’s other political aims.
The U.S. wants to stabilize Iraq’s economy, but it also wants to make sure Baghdad doesn’t maintain economic relations with what would naturally be its biggest trading partner: Iran. Turkey, a potentially key ally in the Middle East and a teetering NATO member, has helped bust Iran sanctions before and likely will continue to do so, adding strife to an already-tumultuous relationship that Washington would prefer to smooth over. “They cannot divorce sanctions from those interests,” Dorsey says.
Trying to balance those goals, the U.S. has shielded certain allies from some of the economic pain, allowing Iraq a 90-day waiver to continue importing electricity from Iran and signing off on Indian investment into the Iranian port in Chabahar. India’s investment in Chabahar helps the U.S. strategically too, as it serves as a counter to a Chinese port in Gwadar, Pakistan, just 43 miles away. The Gwadar port is considered “the crown jewel,” as Dorsey puts it, of China’s Belt and Road Initiative.
For the moment, the countries engaging in barter mechanisms also want to balance that with strong economic relations with the U.S. But while Trump has shown the American dollar’s might, he may also have exposed it. The proliferation of barter deals allows the world to, for the first time in decades, imagine a global economy not undergirded by American currency.
There’s growing interest in dealing in the strengthening Chinese yuan, particularly as Beijing creates “swap deals” of the kind India tried with Iran during the Obama era, including one with Indonesia this fall. As India continues growing as the fastest-developing nation, the rupee could also flourish regionally. “The world may be rebalancing,” Dorsey says, although he quickly adds that “at the very least, the Americans are the first among equals.”
For how much longer may depend on which wins out: Trump’s sanctions or a trade model developed during the Stone Age.