Tuesday, August 7, 2018

Trade war merry-go-round as sanctions against Iran end up being beneficial to China's Yuan denominated oil market

One would hope that President Trump's reinstitution of economics sanctions against Iran would have a much greater long-term outlook than what we see on the surface because this isn't 2006 when sanctions were last imposed on the OPEC state, and the world is a much different place in regards to markets and alliances.

Over the decade that Iran was under UN and U.S. based sanctions meant to crush their economy by cutting them off from SWIFT and the dollar, Tehran simply created a new scheme in which they sold oil to India and received gold payments via Turkey.  Thus while the sanctions did have some real effects on the Iranian economy, only Europe was willing to be bound by the sanctions which in the end led Iran began a transition towards nuclear energy.

Now however, the global financial and monetary systems are no longer bound only through dollar hegemony as the emergence of the BRICS coalition has helped create new financial infrastructures that are outside the control of U.S. and dollar authority.  And with China's creation of a yuan denominated oil futures contract earlier this year, Iran now has an alternative to the dollar and to the old benchmarks of WTI and Brent.


And perhaps unsurprisingly, this was proven out just last night as China's oil futures market jumped 5% almost instantly the moment new U.S. sanctions against Iran took effect.

Chinese oil futures contracts denominated in yuan hit their daily limit with a 5-percent spike on Tuesday as the US kicked off the first round of sanctions against Iran.
Washington’s decision to withdraw from the Iran nuclear deal and target the country's oil sector with sanctions is expected to significantly boost China's leverage to demand crude imports be priced in yuan. 
The first round of anti-Iran sanctions, targeting the country’s automotive sector and metals trading, took effect on Tuesday after midnight US Eastern Standard Time (4:01am GMT). Tougher restrictions, scheduled for early November, will reportedly be focused on Iran's oil and shipping industries. 
China is expected to become a chief beneficiary of the US unilateral sanctions against the world’s biggest energy producers, including Russia, Iran and Venezuela. The petro-yuan would save China the cost of exchanging dollars, the main global currency used in oil trade. It would also increase the use of the Chinese national currency in global financial trade, challenging the greenback. - Russia Today
The irony of course in all of this is that President Trump is attempting a multi-front economic war, with sanctions against Iran and Russia, and tariffs against China and the EU.  And as any military commander with two brain cells will tell you, fighting a two front war is folly, but fighting a three front war is suicide.  And through his actions against Iran last night, Trump is already benefiting China and turning his European allies against him..

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