America's Sanctions Backfired—Iran Turned Them Into Weapon Against U.S. Dollar || Prof. Jiang Xueqin

[00:00:00]The first thing many people assume about sanctions is that there are economic weapons designed to weaken an adversary until it has no choice but to surrender.

[00:00:10]On paper, the logic appears straightforward. Restrict a country's access to international finance, isolate its banks, cut off its trade, freeze its foreign assets, and eventually its economy slows, its currency weakens, and political pressure builds from within.

[00:00:28]For decades, the United States has relied on this strategy more than any other nation because it possesses something no previous empire enjoyed to the same extent. Control over the world's dominant reserve currency. The US dollar has been far more than money.

[00:00:43]It has been a geopolitical instrument.

[00:00:46]Every international bank that settles in dollars, every energy contract priced in dollars, and every country holding dollar reserves has in one way or another participated in a financial system whose rules are heavily influenced by Washington. That extraordinary position made sanctions incredibly powerful. When Washington decided that a country had violated international norms or challenged American interests, it rarely needed to deploy a military force first. Instead, it could disconnect banks from dollar clearing systems, pressure allies to halt investment, discourage multinational corporations from doing business, and make it extraordinarily expensive for targeted nations to participate in global commerce. Iran became one of the most prominent examples of this strategy. Year after year, wave after wave, sanctions targeted its oil exports, shipping industry, banking sector, technology imports, and access to international finance. The expectation was clear.

[00:01:51]Sustained economic isolation would eventually force Thrron to fundamentally change its policies. But history has a habit of producing outcomes that strategists never anticipated.

[00:02:03]Sometimes pressure breaks a country.

[00:02:05]Sometimes it transforms it. And occasionally the very weapon designed to weaken an opponent becomes the catalyst for a much larger structural change that ultimately challenges the power of the country using that weapon. That possibility is what makes Iran's experience far more significant than many headlines suggest. The story is not simply about whether sanctions damage Iran's economy. They unquestionably imposed enormous costs on businesses, consumers, and the broader economy. The more interesting question is, what happened after years of adaptation?

[00:02:42]What does a nation do when it concludes that access to the dollar-based financial system may never again be reliable? Does it continue hoping for acceptance or does it begin building alternatives? The answer increasingly has been the second option. Economics is often compared to water. Water always seeks another path when one route is blocked. Financial systems behave much the same way. If conventional payment channels are closed, traders search for indirect ones. If banks refuse to cooperate, new banking relationships emerge elsewhere. If the dominant currency becomes politically risky, participants begin experimenting with alternatives. Iran had little choice but to innovate. Unable to rely consistently on western financial institutions, it expanded barter arrangements, accepted payments in local currencies, strengthened financial ties with neighboring countries, explored digital payment mechanisms, and increasingly looked east rather than west for economic partnerships. None of these individual measures immediately replace the efficiency of the dollar system, but together they accomplish something Washington may not have intended. They reduce dependence on it. At first glance, this may appear to concern only Iran. Yet, geopolitical shifts rarely remain confined within national borders.

[00:04:06]Other countries watched carefully.

[00:04:09]Governments that were not under sanctions observed how financial restrictions could be imposed not merely because of commercial disputes but because of broader political disagreements. They began asking an uncomfortable question. If it happened repeatedly to Iran today, could it happen to someone else tomorrow? This question gradually spread across capitals from Asia to the Middle East, from Africa to Latin America. Nations with very different political systems reached a surprisingly similar conclusion. Excessive dependence on a single currency creates strategic vulnerability. Notice how the conversation itself has changed two decades ago. Debates centered almost entirely on how effective sanctions were at punishing targeted economies. Today, the discussion increasingly includes another issue altogether. whether repeated use of financial sanctions encourages countries to accelerate efforts to reduce reliance on the dollar itself.

[00:05:11]This is where the situation becomes much larger than Iran. The dollar became the world's dominant currency because of deep financial markets, legal stability, economic scale, military strength, and decades of international confidence.

[00:05:27]Those advantages remain substantial. Yet confidence is not merely an economic variable. It is also a political one. If nations begin believing that access to dollar finance depends not only on commercial reliability but also on geopolitical alignment, some will naturally seek insurance policies.

[00:05:47]Insurance in international finance often means diversification.

[00:05:51]Central banks diversify reserve holdings. Energy exporters diversify payment currencies. Importers negotiate local currency settlements. Regional financial institutions create independent payment mechanisms.

[00:06:05]Bilateral trade agreements increasingly experiment with currencies other than the dollar. None of these changes individually overturn the existing system. Collectively, however, they slowly reduce its exclusivity. Iran became something of an unintended laboratory for this process. Years of isolation forced Iranian policymakers and businesses to develop commercial relationships that did not rely exclusively on traditional Western institutions. Trade with Asian partners expanded. Regional connectivity became increasingly important. Local currency transactions gained practical significance where they previously seemed unnecessary.

[00:06:45]Financial creativity evolved from preference into necessity.

[00:06:50]History repeatedly shows that necessity often produces innovation more effectively than comfort. Consider how countries develop technology during wartime or how industries become more efficient during crisis. Constraints frequently encourage experimentation.

[00:07:08]Some experiments fail, others permanently reshape markets. Sanctions paradoxically created incentives for financial experimentation that might otherwise have taken decades to emerge.

[00:07:21]This matters because global monetary systems rarely change overnight. They evolve gradually through countless individual decisions. One importer invoices differently. One exporter accepts another currency. One central bank adjusts reserve allocations. One regional organization establishes a new settlement mechanism. Each decision appears insignificant in isolation.

[00:07:44]Together, they alter the architecture of global finance. Critics sometimes argue that discussions about ddollarization are exaggerated because the dollar still dominates international trade, reserve holdings, and crossber finance. There is considerable truth in that observation.

[00:08:03]The dollar remains extraordinarily influential. Replacing it entirely would require enormous structural changes that no single country can accomplish quickly. But framing the debate as an all or nothing contest misses the deeper transformation.

[00:08:19]The real issue is not whether the dollar disappears. The real issue is whether it gradually loses the monopolyike position it once enjoyed. There is an important distinction between dominance and exclusivity. A currency can remain the world's largest reserve currency while steadily facing greater competition than before. That subtle shift may appear insignificant in the short term. Yet over decades, it can reshape investment flows, borrowing costs, diplomatic leverage, and geopolitical influence.

[00:08:52]Iran's role in the story is therefore symbolic as much as practical. Its economy alone is not large enough to redefine global finance. What matters is the precedent. Each sanctioned episode demonstrates to other governments that alternative financial channels are worth developing before they become absolutely necessary. This is where unintended consequences become especially powerful.

[00:09:16]When policymakers design sanctions, their immediate objective is to maximize pressure on a specific target. They understandably focus on today's crisis.

[00:09:26]Yet, international systems respond over much longer time horizons. Decisions that appear highly effective in the short run sometimes produce adaptations that reduce their effectiveness later.

[00:09:38]Think of antibiotics in medicine.

[00:09:40]Initially, they destroy harmful bacteria with remarkable efficiency, but excessive or repeated use eventually encourages resistant strains to evolve.

[00:09:50]The medicine remains useful, but its effectiveness gradually declines because the environment adapts. Financial sanctions may face a comparable dynamic.

[00:10:01]The more frequently countries witness access to the dollar system being restricted, the greater the incentive becomes to invest in alternatives. Those alternatives may initially appear inefficient, expensive, or incomplete.

[00:10:15]Yet, as more participants join them, their efficiency improves, their costs decline, and their attractiveness grows.

[00:10:23]That does not mean sanctions stop working overnight. It means they may become progressively less decisive than policymakers once assumed. Perhaps the greatest irony is that America's financial strength became so overwhelming that many believed it could be exercised indefinitely without fundamentally changing the behavior of the international system.

[00:10:44]Yet overwhelming strength often changes the incentives of everyone else. For years, countries accepted the dollar- centered order because it provided enormous benefits. Increasingly, however, some governments are asking a different question. Not whether they should abandon that system entirely, but whether relying on only one system is strategically wise. That question, once raised, is remarkably difficult to silence. The conversation becomes even more interesting when we shift our attention from Iran itself to the wider international environment. Every major transformation in history has spread not because one country became powerful overnight, but because many countries independently reached the same conclusion at roughly the same time. The industrial revolution was not driven by a single invention. The internet did not become global because one company adopted it. Likewise, changes in the international monetary system are not determined by one nation deciding to trade without the dollar. They emerge when dozens of governments, corporations, and financial institutions slowly begin making similar calculations. Iran's experience has contributed to that calculation. For countries that have watched sanctions expand over the past two decades, the lesson has not necessarily been that the United States is weak. Quite the opposite. The lesson has been that American financial power is so extensive that relying exclusively upon it carries strategic risks. Ironically, that realization encourages diversification.

[00:12:20]It is not always an act of hostility toward Washington. Often is simply an exercise in risk management. This helps explain why conversations about local currency trade, alternative payment systems, and reserve diversification have become increasingly common across parts of Asia, the Middle East, Africa, and Latin America. Nations with vastly different political systems and economic priorities have begun exploring similar policies for different reasons. Some seek protection from sanctions. Others want lower transaction costs. Others hope to reduce exchange rate volatility.

[00:12:58]Still, others simply want greater strategic autonomy. Iran happens to stand at the intersection of many of these developments. Its growing economic engagement with China illustrates this shift. China purchases energy, invests in infrastructure, and promotes broader financial cooperation across Eurasia.

[00:13:17]While many transactions still involve the dollar somewhere in the global financial chain, both countries have strong incentives to increase settlements using alternative currencies wherever practical. Similar patterns have emerged in Iran's trade with regional partners where local currencies or non dollar arrangements can reduce exposure to financial restrictions. At the same time, organizations such as bricks have fueled broader discussions about reforming the international financial architecture. These discussions should not be exaggerated into predictions of an immediate replacement for the dollar. Building a trusted international currency requires deep capital markets, transparent institutions, legal certainty, liquidity, and confidence developed over decades. Those are formidable advantages that cannot simply be replicated by political declarations.

[00:14:10]Yet, it would be equally mistaken to dismiss these developments altogether.

[00:14:14]History rarely moves through sudden revolutions. More often, it advances through gradual accumulation. Small adjustments that appear insignificant today can over 20 or 30 years. Produce systems that look remarkably different from those that existed before. Energy markets offer an excellent example. For decades, global oil transactions overwhelmingly relied upon dollar pricing. This reinforced demand for the American currency because countries needed dollars to purchase energy. But if even a modest percentage of international energy trade begins settling in other currencies, the implications extend beyond individual transactions.

[00:14:55]Financial institutions adapt. Currency markets deepen. Central banks hold more diverse reserves. Companies become comfortable operating within multiple financial ecosystems rather than one.

[00:15:08]The key word here is not replacement. It is diversification.

[00:15:14]Diversification reduces dependence.

[00:15:17]Reduce dependence limits leverage. And reduced leverage changes geopolitical calculations.

[00:15:24]That is why the consequences of sanctions extend far beyond the immediate economic damage inflicted upon the targeted country. There is another dimension that deserves attention.

[00:15:37]Innovation in financial technology is changing the landscape faster than many policymakers anticipated. Digital payment systems, faster crossborder settlement mechanisms, and experiments with central bank digital currencies are expanding the range of options available for international commerce. These technologies are still evolving and face significant technical and regulatory challenges. Nevertheless, they illustrate an important trend. Global finance is becoming more flexible than it was 20 years ago. When flexibility increases, monopoly power naturally declines. This does not mean the dollar ceases to matter. It means participants gain additional choices. Markets generally reward choice. From an American perspective, this presents a strategic dilemma. Financial sanctions have often provided an attractive alternative to military intervention.

[00:16:35]They allow governments to apply pressure without deploying troops. In many cases, they have influenced negotiations, restricted access to sensitive technologies, and imposed real economic costs. Policymakers therefore have understandable reasons to view sanctions as an effective instrument. The question, however, is not whether sanctions can work. The question is whether repeated reliance upon them gradually encourages the rest of the world to build systems that reduce their future effectiveness. Those two statements can both be true simultaneously.

[00:17:15]Sanctions may succeed in imposing immediate costs while also accelerating long-term adaptation.

[00:17:21]That paradox lies at the heart of today's geopolitical transformation.

[00:17:26]Iran demonstrates this paradox with unusual clarity. Despite decades of sanctions, its economy has certainly experienced inflation, investment challenges, currency volatility, and slower growth than it might otherwise have achieved. Yet, the country did not disappear from global commerce. Instead, it redirected much of its economic activity, strengthened regional partnerships, adjusted domestic production, and sought financial channels outside traditional western networks. Whether one views those adaptations as fully successful or only partially effective is less important than recognizing that adaptation occurred at all. Once alternatives exist, they rarely disappear. Other countries observe them, refine them, and sometimes improve upon them. This creates what economists call path dependence. Once businesses learn how to trade through multiple currencies, once banks establish new correspondent relationships and once governments develop alternative payment infrastructure, returning exclusively to the previous model becomes less likely. In that sense, sanctions may have unintentionally accelerated experimentation across the international system. The broader lesson extends beyond Iran.

[00:18:46]Whenever a dominant power uses its strongest advantage repeatedly, other actors naturally devote greater resources toward reducing dependence upon that advantage. Military superiority encourages asymmetric warfare. Technological superiority encourages domestic innovation elsewhere. Financial superiority encourages financial diversification.

[00:19:11]This is not unique to the United States.

[00:19:13]It is a recurring pattern throughout history.

[00:19:16]Great powers often assume their greatest strengths guarantee permanent influence.

[00:19:22]Yet those very strengths frequently motivate competitors to innovate in ways that eventually narrow the gap. Perhaps the most important point is psychological rather than economic.

[00:19:33]International monetary systems ultimately depend upon confidence.

[00:19:38]Confidence that contracts will be honored. Confidence that reserves remain accessible. Confidence that payment systems remain open. Confidence that today's financial rules will still apply tomorrow. Once confidence begins sharing space with uncertainty, diversification becomes increasingly rational. That does not mean confidence in the dollar has collapsed. Far from it. American financial markets remain among the deepest and most liquid in the world. US Treasury securities continue to play a central role in global finance. The dollar retains advantages built over generations, but the existence of strengths should not obscure emerging trends. The international system today is more multipolar economically than it was 30 years ago. Trade flows increasingly connect Asia, the Middle East, Africa, and Latin America.

[00:20:32]Regional financial institutions possess greater influence. Technological innovation lowers barriers to creating new payment networks. Central banks hold a broader mix of reserve assets than in previous decades. These developments collectively suggest that the future may not belong to a single dominant financial architecture but to several overlapping ones. If that proves correct, then Iran's experience will be remembered not because it defeated sanctions economically, but because it illustrated how prolonged financial pressure can accelerate structural adaptation.

[00:21:11]History often rewards those who recognize unintended consequences before they become obvious. The original objective of sanctions was to isolate Iran from the global financial system.

[00:21:24]Yet one unintended consequence may have been encouraging conversations around the world about building a financial system in which isolation becomes progressively more difficult to impose.

[00:21:37]Whether that transformation unfolds quickly or slowly remains uncertain.

[00:21:42]Whether the dollar continues as the world's leading reserve currency for decades is a separate question entirely.

[00:21:49]Leadership can endure while its margin gradually narrows. dominance can persist while competition steadily increases.

[00:21:57]That is why the story is ultimately larger than either America or Iran. It is a story about incentives. It is a story about adaptation. It is a story about how international systems evolve when pressure forces innovation. And perhaps the greatest irony of all is this. The most powerful economic weapon ever created may have inspired the search for a world in which that weapon is no longer quite as powerful as it once was. That possibility does not guarantee the decline of the US dollar, nor does it ensure the rise of any single alternative.

[00:22:32]But it reminds us that history rarely moves in straight lines. Every action produces reactions. Every strategy creates counter strategies. And every attempt to preserve an existing order inevitably shapes the forces that seek to transform it. The future of global finance will not be determined by one sanction, one agreement, or one country alone. It will be determined by millions of economic decisions made across decades. And if there is one lesson to take away from Iran's experience, it is that resilience sometimes grows strongest under pressure. And that the consequences of economic power are often far more complex than those who wield it first imagined.