There is a striking asymmetry in the global economy. In terms of trade and GDP the world has three poles: the United States, the EU and China. But in the international financial system a single state has overwhelming power. The vast majority of transnational payments are routed through US banks. US treasury bonds are the de facto reserve asset around the world. The Fed is the global supplier of liquidity in times of crisis. National economies respond on a hair trigger to US monetary policy. Giant American and European financial institutions, based for the most part in the US, control a large share of international corporate activity. New York is in effect the organisational headquarters of global capitalism, a permanent Bisenzone fair. Almost all transactions between nations are priced and settled in just a handful of currencies, of which the dollar makes up by far the biggest share. Colombian pesos are as much use in Karachi as Pakistani rupees are in Bogotá, but dollars count in both. Even large economies like those of India, Brazil and South Korea conduct around 85 per cent of their trade in dollars.
In Trade Wars Are Class Wars (2020), Matthew Klein and Michael Pettis showed that the US functions as the world’s importer of last resort – absorbing the trade surpluses of Europe and China – and that the American working class pays the price. But they didn’t discuss the power that accrues to the US through its financial dominance. Economic sanctions were treated in a single line: ‘The dollar’s role in the global payments system has given the Treasury immense power to impose financial sanctions on targets anywhere in the world.’ The fact is that Washington controls access to the international financial system. Much as a naval blockade denies access to the seas, US sanctions are based on monopoly power over a global commons: the world’s reserve currency and medium of exchange. Sanctions are also a weapon. As a component of US strategy they are often seen as an alternative to military violence, promising, in the words of a recent Washington Post editorial, ‘the achievement of foreign policy goals without the use of armed force’. In reality, sanctions usually accompany military action (Libya in 2011, Syria from 2012) or are a prelude to it (Haiti in 1994, Bosnia in 1993, Kosovo in 1999, Afghanistan in 2001, Iraq in 2003).
Sanctions have long been the ‘instrument of first resort’ of US foreign policy. During Obama’s second presidential term 2350 new sanctions were declared. Over Trump’s term there were 3800. The current system of American financial weaponry developed alongside the rapidly growing security state during the war on terror. The Treasury, eager to keep rank with the national security apparatus, looked for ways to contribute. Ideologically, sanctions complemented the ‘rogue state’ discourse of the 1990s. Under cover of UN consensus, they were applied to devastating effect in Iraq, where pretensions of peaceful coercion resulted in hundreds of thousands of civilian deaths. When Iraq invaded Kuwait, sanctions were built around an embargo on Iraqi oil, but after 9/11 new methods were deployed. A combination of presidential decrees and provisions under the Patriot Act compelled banks to provide financial intelligence to the US Treasury. Swift, the main global network for inter-bank payments, agreed in secret to hand over transaction data to the government. Section 311 of the Patriot Act gave the Treasury the power to sever the link between the US financial system and entire national jurisdictions. Since international banks are almost all reliant on America’s financial infrastructure, this was a significant innovation. Ostracising countries from the banking system became the capital punishment of the financial world.
What did this look like in practice? Iran had been subjected to an asset freeze after the revolution in 1979. The US imposed traditional trade sanctions during the Iran-Iraq war, and blocked all trade with Iran in 1995. The following year, an embargo effectively killed the country’s liquid natural gas industry. But it wasn’t until the Treasury’s new weapons were turned on Tehran that it became clear how potent they could be. In 2006, the US began isolating Iranian banks from the international monetary system. In 2011, the Obama administration launched a ‘sanctions onslaught’. Iran’s oil exports, ports, petrochemicals industry and central bank were all targeted; Iranian banks were cut off from Swift. It was a complete financial stranglehold. US allies – the UK, France, Germany, Japan, South Korea, Australia and Canada, together with the Gulf monarchies – were enlisted to lend a veneer of multilateralism. Only some of these sanctions were lifted after the Iran nuclear deal came into effect in 2015, and these were reimposed when the Trump administration withdrew from the deal in 2018. This time, America’s allies objected strongly: Europeans briefly tried to institute an alternative payments system, INSTEX, to get round the sanctions, and an effort was made to block them through the UN. But dissent in the Security Council was quashed with breezy truculence by Mike Pompeo: opposing the US position, he said, was ‘just nuts’.
In 1979, Iran’s GDP per capita was slightly higher than Turkey’s. It now stands at less than 25 per cent, despite a succession of government breakdowns and economic crises in Ankara. The trajectory of the Iranian economy has more closely resembled that of Iraq, which suffered from a decade of brutal traditional sanctions followed by outright conquest and civil war. In Iran’s case it’s difficult to disentangle the causes, since revolutionary politics had their own effects. But the Obama-era financial punishment of 2011-12 was responsible for an immediate drop in Iranian GDP, wiping out a third of economic activity. In The Art of Sanctions: A View from the Field (2017), the former director of Iranian affairs at the National Security Council, Richard Nephew, described the sanctions as based on ‘objectives for the imposition of pain’, accompanied by instructions for ‘the conditions necessary for the removal of pain’. It’s the torturer’s schema, taken straight from the war on terror handbook. (Until December, Nephew was Biden’s deputy special envoy to Iran.)
The term ‘economic sanctions’ fails to capture the nature of these measures: they are a full financial blockade, stopping the flows that allow an economy to function. When the EU imposes ‘sanctions’ on employees of the Russian military contractor Wagner Group, or considers imposing them on the Bosnian Serb leader Milorad Dodik, these are forms of diplomatic pressure. The UK’s restrictions on Belarusian state companies are economic sanctions, but they are effectively an industrial penalty – quite unlike the financial weaponry wielded by the US. (The UK was unlikely to do a lot of business with the Minsk Wheel Tractor Plant in any case.) Blocking access to London’s financial networks is a major inconvenience but is hardly comparable to severing access to the international financial system itself. The EU claims it runs a ‘fully autonomous sanctions regime’ in the service of ‘safeguarding EU values’. But for the most part its sanctions, and those of the UK, are applied in conjunction with US power. The structure of international finance means that even the largest banks can’t afford to provoke American ire.
Iran is far from the only case. One of the first subjects for Section 311 was Myanmar. In November 2003, two Burmese banks, described as ‘financial institutions of primary money laundering concern’, were targeted for isolation. Within weeks, the Burmese government had shut down the banks and introduced regulations that conformed to American desires. But as Nicholas Mulder shows in The Economic Weapon, a much longer history lies behind the invention of modern sanctions. When war broke out in 1914, the British Empire had been the dominant naval power for almost a century. London’s capital markets financed 60 per cent of global trade: like New York today, it was at the centre of the infrastructure of industrial capitalism. France joined Britain in imposing blockades against German heavy industry, which relied on imports from as far away as the Malabar Coast. Thanks to Dutch and Swiss neutrality, a full maritime blockade of European ports was impractical. Instead, Britain imposed a system of naval stop and search in the North Sea. Beginning in 1916, all ships refuelling at British coaling stations were subject to cargo inspections to check for contraband destined for Central Europe.
This was a material blockade, but it soon became a monetary one too. The British government confiscated financial assets held in London and forced banks to sign guarantees to prevent them dealing with the Central Powers. Until 1916, financial flows were routed to Germany and Austro-Hungary through Dutch, Swiss and Scandinavian banks. Now the British exercised its power over neutral countries by threatening to exclude their banks from the London-Paris financial system. At first the effect was limited, but the threats became more potent after the US joined the effort in 1917. A Dutch bank was blacklisted for working with German clients. Credit Lyonnaise had its transactions interdicted.
Estimates of the deaths caused as a result of the blockade of Central Europe range between 300,000 and 400,000. (Ludendorff said that without food supplies from Romania the situation would have been much worse.) Of course the balance of forces meant that the war was a losing proposition for the Central Powers in any case: the outcome can’t be attributed to either the trade embargo or the financial blockade. But as Mulder shows, such measures were decisive in the Eastern Mediterranean, where large parts of the Ottoman Empire were dependent on imported grain. Unlike in Northern Europe, Britain and France were able to impose a total naval blockade. The Levant experienced a brutal famine during which up to 500,000 people died. In Mount Lebanon, only one in two survived. Here was the economic weapon in full force.
The leaders of the major powers were impressed and sought to build sanctions into the design of the League of Nations. Before the war, ‘arbitrationists’ – mostly jurists in France – had searched for ways to enforce international law without committing to military action. In the starvation methods of the Anglo-French blockade they believed they had found one. Woodrow Wilson thought economic ‘suffocation’ would be impossible to resist. The French minister of commerce, Étienne Clémentel, commended the notion of subduing ‘unruly’ peoples by manipulating the supply of raw materials. The Versailles powers spoke about law and order, but were eager to make the wartime blockade a permanent form of imperial discipline. League of Nations officials had no illusions about the effect on civilians. As the head of the economics section put it, recalcitrant nations could reliably be brought into line through ‘the starvation of the general population’.
The US decision not to join the League of Nations impeded the full realisation of this dream. Even so, Britain and France had a few successful moments in their attempt at rule by sanctions. In 1921, the threat of a League-endorsed British naval blockade prevented a war between Yugoslavia and Albania. In 1925, Greek border incursions into Bulgaria were seen off by a combination of the threat of League sanctions and the prospect of Royal Navy manoeuvres off Piraeus. But these were minor episodes, and Mulder perhaps exaggerates the extent to which they represented a change in the way the great powers exercised control. In Ireland and Afghanistan, Britain was still suppressing independence movements with military force. France and Italy both occupied neighbouring territory in Europe. Anglo-American ships bombarded Nanjing. Mulder wants to argue that the autarkic turn taken by Japan, Italy and Germany in the 1930s was partly a reaction to the threat of material blockades. But if he is right then it was an overreaction, since the threat was largely empty. The only time League sanctions were actually applied was following the Italian invasion of Ethiopia – and they were largely ineffective because the US refused to enforce an oil embargo. No serious effort was made to use economic weapons against Germany in 1936, Japan in 1937, or Germany in 1938.
In the absence of US support, the failure of rule by sanctions as attempted by the British and French empires was hardly surprising. Industrialisation had altered the composition of the global economy and with it the balance of power. Only America had the financial might to constrain other nations by economic means. This was first demonstrated in 1941. Before joining the war, the US froze assets belonging to countries under German control and imposed an oil embargo on Spain to manoeuvre it away from the Axis. In July 1941 the US and Britain cut off Japan’s oil supply, leading to the suicidal attack on Pearl Harbor. The postwar settlement was enforced by US air power rather than by economic coercion, but sanctions had proved their usefulness. When the UN Security Council was set up, sanctions were incorporated into its design as the penalty of first recourse for rebellious nations.
The UN gave sanctions the appearance of multilateral legitimacy. But in practice the economic weapon was a dollar weapon. During the Cold War, the presence of the Soviet Union and China on the Security Council inhibited the US from deploying its weapon under UN auspices – that didn’t come until the 1990s. But the US could impose its own trade embargos, with the Soviet Union and China each targeted at one point or another. The biggest American sanctions programme, however, was reserved for Cuba – a target that receives curiously little attention in the historiography of sanctions, as if the American embargo were a natural feature requiring no explanation. Cuba necessarily plays no part in Mulder’s account, which ends with 1945. But el bloqueo – starting with the arms embargo of the 1950s, becoming near total in 1962 and maintained ever since – is the oldest and harshest sanctions programme in the world. It is embedded in US law, making it ‘unique among country-based sanctions’, as the Treasury proudly puts it. Its costs to Cuba over time are difficult to tally but they certainly run into hundreds of billions of dollars in today’s money.
Judged as an attempt to bring down the political structures of the Cuban revolution, economic sanctions obviously failed. Much the same could be said about Iran. And the efficacy of sanctions as a tool of coercion has often been criticised within the US establishment. In 1997, Robert Pape, a political scientist much admired by policymakers, published the influential paper ‘Why Economic Sanctions Do Not Work’. Pape argued that even the most severe economic measures would inevitably run up against nationalist resolve, and that no matter how strict the blockade, a country’s well-connected elite would still be able to procure the luxuries to which they were accustomed. The people most affected would be the poor – and alleviating the suffering of poor people is rarely a government’s highest priority.
Even countries subjected to the harshest US sanctions have found ways of adapting. Despite decades of economic assault, Iran has managed to raise life expectancy to the level of a standard industrialised economy through a commitment to public health that is exceptional by regional standards. Life expectancy in Cuba, thanks to its famed health service, is the same or higher than in the US. But to criticise sanctions on the basis of what they achieve is to ignore the logic behind the infliction of pain, as former US officials describe it. Torture is more often about punishment than coercion. Pape maintained that sanctions could have a further use, to ‘disarm criticism of the use of force later’. In other words, American military action would be more palatable if it were presented as a last resort after sanctions ‘failed’. Principled criticism based not on the usefulness of sanctions but on the suffering inflicted on civilians has been quite rare. In 2017, the Trump administration passed the Countering America’s Adversaries Through Sanctions Act with just five dissenting votes in the House and the Senate.
National trade restrictions may be unwise, even cruel, but a government’s ban on its own trade with another country is a legitimate part of statecraft. American embargos are of a different order, since the US is in effect asserting that it is illegal for anyone, anywhere, to deal with countries or entities it has placed under sanctions. Large international banks including Lloyds TSB, Credit Suisse, Standard Chartered, HSBC, RBS, BNP Paribas, Commerzbank and ING have all paid fines for violating American sanctions, as have Bank of Brazil, Bank of Tokyo Mitsubishi and Bank of China. The fines sometimes run into the hundreds of millions of dollars. Outside the US, these ‘secondary sanctions’ are quite reasonably interpreted as extraterritorial expansion, with no justification beyond America’s brute power. Secondary sanctions are a ‘weapon out of control’, as Tom Ruys and Cedric Ryngaert have argued in The British Yearbook of International Law. But although European leaders often express their outrage at being subjected to US whims, they never show signs of actual resistance. It is taken as a given that the US will infringe the rights of all other states.
China and Russia are not so inhibited: both vehemently condemn the ‘long-arm jurisdiction’ of the American legal system. As critics in China put it, US financial sanctions are the equivalent of papal excommunication. Such thinking is surprisingly novel: Russia once went along with the strangulation of Iran and in 2006 Chinese banks complied with the US attempt to finish off North Korea’s economy. The turning point came in 2014, when the Obama administration imposed sanctions on Russia after the annexation of Crimea. While not full isolation on the Iran model, in combination with low oil prices these measures contributed to a Russian recession. China saw the situation as Russia did: a line had been crossed. It was one thing for the US to punish peripheral states such as Iran or Cuba for their disobedience, and quite another to try it with a major nuclear power.
Late last year, as Russian military forces began to mass from Rostov to Pinsk, the US threatened to extend its sanctions to a full blockade of the Russian economy. When Putin recognised the independence of the Donbas separatist regions on 21 February, Biden responded by sanctioning the Russian state investment company VEB and the state-backed Promsvyazbank. The following day, he announced that the US had ‘worked with’ Germany to cancel the Nord Stream 2 pipeline, which had been due to deliver enough Russian natural gas to supply 26 million European homes. The moment Russian troops crossed the border into Ukraine, the US brought out the heavy financial weaponry. On 24 February, the major Russian banks – Sberbank, VTB and Gazprombank – had their access to the international financial infrastructure revoked. This was an attack on Russia’s whole financial system, not to mention the majority of its citizens. Sberbank’s European subsidiaries collapsed overnight. The US followed up by banning all transactions with the Russian Central Bank and freezing its assets. By 27 February, Russian banks were being cut off from Swift.
Since 2014 Russia has taken steps to make its economy relatively sanctions-resistant. Spending on imported goods and services was deliberately suppressed, and Russia’s foreign currency reserves were nearly doubled, to $640 billion. It’s hard to know exactly where these assets are held, but as much as 65 per cent are thought to be with financial institutions based in the US, UK, EU, Japan and Switzerland. The remaining 35 per cent are held in gold or on Chinese territory. These reserves may be vulnerable to the edicts of the US Office of Foreign Assets Control, and some pressure has been brought to bear by Chinese state banks, which have refused to finance purchases of Russian oil for fear of US secondary sanctions.
Yet despite these harsh measures, Russian energy exports were initially exempted from US sanctions. Biden declared that the programme had been ‘specifically designed’ to allow Europe to keep paying for the Russian oil and gas on which it depends: American officials told international banks that they wouldn’t be penalised for processing energy transactions. The energy ties between Russia and Europe are such a central feature of world politics that it seemed unlikely that even a war could interrupt them. European imports of Russian hydrocarbons have barely shifted since 2014. On 8 March, Biden went further, issuing an executive order prohibiting the purchase of Russian oil, coal and gas. This move is unlikely to hurt the American economy. Europe, deeply divided and still considering its options, is in a far more difficult position.
The Kremlin has acknowledged that these are ‘heavy sanctions’. On 28 February, the rouble lost nearly a third of its value and the central bank was forced to double interest rates. US officials began to worry not that the sanctions weren’t working but that they were working too well: could putting Russia under this much pressure provoke further military escalation? No one knows how damaging sanctions might be to a state of Russia’s size and importance. The Russian government has taken action to shore up the currency by forcing exporters to buy roubles with the proceeds of foreign sales. Some of the defensive measures put in place over the last eight years are as yet untested. Russia’s own alternative payments system, Mir, has allowed domestic transactions to continue unimpeded even though Mastercard and Visa have suspended Russian operations. But despite the name – it means ‘world’ – Mir is of little use outside Russia and Armenia. The Russian transfer network SPFS is unlikely to be an adequate replacement for Swift. It’s clear that US sanctions against China wouldn’t cause the degree of economic damage seen in a smaller country, such as Iran. But what of Russia?
The biggest victims of financial blockades will always be the ordinary citizens of the sanctioned state. Whether or not America’s financial weaponry is capable of inflicting mass suffering on Russia, it continues to do so in smaller countries. In 2017, as part of an attempt to force Nicolás Maduro from office, the US imposed a financial blockade on Venezuela, with sanctions that were referred to as ‘smart’ and ‘targeted’. The Washington-based Centre for Economic Policy Research has since reported that they were in fact responsible more than forty thousand deaths: they ‘reduced the public’s caloric intake, increased disease and mortality (for both adults and infants) and displaced millions’. The echoes of wartime starvation were unmistakable – but the EU and the UK supported the policy anyway. The Caesar Syria Civilian Protection Act sanctions, which came into effect in 2020, were just as indiscriminate. The World Food Programme found that the number of Syrians without enough to eat doubled. Aid groups reported that the sanctions were restricting the supply of humanitarian aid. None of this has altered the policies of the Syrian regime.
This kind of power remains an American prerogative. US analysts have begun to speak of China’s increasing use of sanctions – which have involved trade restrictions and tit-for-tat travel bans on American and European officials – as though they were comparable to those imposed by the US. But the renminbi accounts for only 2 per cent of international transactions. Bans on wine or basketball coverage are not an economic threat. This hasn’t stopped some American courtiers claiming that China and even Russia are the real masters of the discipline, just as they do with space militarisation and proxy warfare.
Last year the Biden administration conducted a review of US sanctions programmes. Janet Yellen, the secretary to the Treasury, suggested only one improvement: that exceptions should be made for humanitarian assistance – ‘where possible and appropriate’. Biden has persisted with Trump’s sanctions on Syria and Venezuela. Saudi Arabia’s blockade of Yemen in 2017, in concert with a proxy war backed by the US and UK, contributed to miserable conditions for the majority of the Yemeni population. The Biden administration is now considering reimposing sanctions on the Houthis. After its withdrawal from Afghanistan last year, the US froze $9.5 billion in Afghan state assets under old anti-Taliban sanctions. Afghanistan’s financial institutions can now barely function and the country is facing a general famine. The US has ignored appeals from the UN and the World Food Programme to unfreeze assets. And yet despite Biden’s faithful adherence to Trump-era policy, he has been criticised by the American right for doing nothing to prevent the ‘brazen defiance’ of Chinese firms purchasing Iranian oil.
The financial blockade originated as a tool of imperial control, and this is what it remains, even when used in response to a clear act of aggression. Russia’s invasion of Ukraine has shown that sanctions not only have widespread support, but are now considered an inevitable, even natural, force in world politics. The current arrangement of the global economy is not inevitable, however. At some point the US may no longer be in a position to exploit its financial centrality as it does now. For large parts of the world that moment will be cause for celebration.
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