We are living through a golden age of financial sanctions, but golden ages come to an end. Because the US has such a big role in world finance, the United States government can use access to its financial system as a stick to force other countries to comply with US policy. This fact gives the US a unique ability to affect the behavior of foreign firms and even central banks, and it has played a key role in the development of effective sanctions against Iran that go beyond the limited restrictions that pass Russian and Chinese scrutiny on the Security Council.Via Meadia isn’t shy about using the instruments of national power but we have to realize there is a cost to this — the more we use sanctions on financial transactions, the more incentives we create for others to find new channels to conduct their business which will be harder for us to monitor and to block.And sure enough, the Financial Times reports that China and Iran – with a little help from the Russians – have put on their thinking caps and developed an alternative payment system that allows Iranian oil to flow to Beijing without a greenback passing between them. Iran is accepting payment for some of its oil in renminbi, but since the renminbi is not freely convertible like the dollar or the euro, a kind of barter system has sprung up that allows Iran to spend the currency on goods and services from Chinese companies.The system works even though domestic banks, like the Bank of China, have stopped dealing with Iran as a result of American pressure. Instead, Russian banks have stepped in as intermediaries that handle the renminbi and send it on to its final destination in Tehran. (Naturally, the Russians take large commissions for providing this service.)China is Iran’s largest oil market – 21 per cent of its crude oil exports are purchased by Beijing – which makes it a vital component in American efforts to constrict Tehran’s economy and force it to the negotiating table. And while this new payment system is balky and imposes additional transaction costs on both China and Iran, it also highlights the limitations the US faces as it tries to maintain pressure on Iran.In the medium to long term, we have to understand that China and Russia (along with a number of other powers) will look for ways to diminish America’s ability to use the global financial system to get its way. Financial sanctions are an important policy tool, and the case of Iran is grave enough to justify the inevitable costs of using them in this way, but the more we turn to them, the less useful they will ultimately become. Worse, some of the steps that other countries take to weaken this tool of American policy are likely to have side effects (such as making the global financial system harder to regulate and police) that we do not like.