Financial sanctions are generally high-intensity economic sanctions through the obstruction of financial flows and the freezing of assets of the sanctioned party. Throughout the US sanctions against Iran and Russia, the US has long been the principal initiator of financial sanctions, taking advantage of the strong position of the US dollar, its important role in international trade and its political and military position. The US through freezing and confiscation of government officials of sanctioned country’s assets, restricting access to the US bond market by sanctioned country’s enterprises to finance, cutting off the ability of the sanctioned country to obtain US dollars, closing the US dollar trade settlement channel and other major measures, implements economic and financial measures against the sanctioned country, and causes significant direct economic losses to the sanctioned country. In the case of sanctions against Iran, the imposition of sanctions has resulted in a significant financial decline in Iran’s oil exports, a decline in its gross national product, and severe damage to its credit system, international trade, payments and settlements etc. Financial sanctions are primarily imposed by restricting the free movement of the sanctioned party's currency, ultimately forcing it to make concessions or compromises in line with the interests of the sanctions initiator. The settlement currency agreed upon by Chinese enterprises in their international trade has become a constraint for their future development, in particular the LNG international long-term resource procurement projects is likely to bear the brunt.
Risks of using USD as settlement currency
When Chinese enterprises conduct trade on a global scale, agreements entered into by the trading parties usually stipulate that the US dollar is the currency of settlement. This is also determined by the international monetary system centered on the US dollar. The US financial sanctions against Iran are effective because of the financial status of the US dollar in the global financial system, nearly half of all cross-border settlements are conducted in US dollars, and docking with the US banking system for clearing and other business is an indispensable part of every bank with international business. Due to the above, on the one hand, in the negotiation and formulation of future international trade agreements, especially for long-term LNG procurement agreements, since those agreements usually involve as long as 20 years of trade and involve large amount of trading finance, once the settlement currency is hard hit, it is likely to affect the effect and performance of the entire agreement, and affect China’s procurement of offshore energy resources. Chinese enterprises should therefore consider the issue of settlement currency in their future international trade projects, agreements and contracts etc. with trading parties.