By Adel Mostowfi
Sanctions and economic problems for the mass of the population have played an important part in the opposition to the Iranian regime over recent years. Living standards have fallen and there is a shortage in Iran of many basic necessities, like pharmaceuticals. Here, Adel Mostowfi looks at why it was possible for the USA to successfully apply sanctions and the reason why the dollar – the ‘petrodollar’ – is so significant.
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Why do sanctions on Iran work ? Why can’t Iran just exchange in yuan or through yuan with euro and dollar ? The answer is the Petrodollar system.
After the second world war so much gold was exported to the United states the world monetary system was based on the Bretton Woods where the US dollar was convertible to gold at $35/oz. However after the collapse of the Bretton Woods system in 1971 because the United States was running large fiscal and trade deficits partly due to spending on the Vietnam War which caused an oversupply of dollars circulating globally and the amount of the global dollar circulating became larger that the global amount of gold.
Foreign governments accumulated these dollars and increasingly demanded conversion into gold at the fixed rate of $35 per ounce, threatening to drain US gold reserves. To stop this, Richard Nixon ended the dollar’s convertibility to gold in 1971, effectively ending the Bretton Woods system of fixed exchange rates.
In order to regain the value of the dollar United asked OPEC to increase the oil prices. Shortly after, the 1973 oil crisis erupted when members of OPEC imposed an oil embargo on countries supporting Israel during the Yom Kippur War, causing oil prices to quadruple and triggering a global economic shock. OPEC itself had been founded in 1960 by five oil-producing countries—Iran, Iraq, Kuwait, Saudi Arabia, and (you guessed it) Venezuela—to coordinate oil production and increase their control over oil pricings.
In the aftermath of the oil crisis, the United States reached strategic agreements with Gulf producers to price oil in US dollars and invest their oil revenues in US financial markets (notably today in openAI and Nasdaq companies), creating the Petrodollar system and helping preserve global demand for the dollar even after the end of gold convertibility and protected the dollar hegemony.
In exchange, the United States offered military protection, arms sales, and political support to key Gulf producers notably Saudi Arabia, Emirates, Qatar, Bahrain, Kuwait.
All these countries are today under the attacks of Iran. And in an historic event Iran took back control of the strait Hormoz again ever since 1507 where it was occupied by the Portuguese colonialists. The failure of military protection of the gulf countries by the United States is the end of the Petrodollar system.
While the IRGC has decided to sell certificates to gain economic rent from passing the ships from the straits of Hormuz and allowing only the countries without US bases to pass. the end of the petrodollar system would mean the end of the economic sanctions.
Some signs of the fall of the system are already apparent: India is now buying Russian gas again, few US sanctions on european to buy Russian gas are relieved and Hungarian opposition in the week’s election is pro-Russia. Because of the current crisis in oil prices, some sanctions on Russian oil have been eased. So the stock market of Russia is rising while that of the US is falling, and it may be that Russia has by far won the most in this war.
Given the high national debt of the US, it cannot easily afford a significant reduction in global demand for US debt instruments as the result weakens the petrodollar system. Thus the US has strong incentives to restore its military control over the Gulf states, which could make a ceasefire less likely and instead encourage deeper strategic commitment, possibly involving ground forces.
