Plan A

In the 1990s,​ high-quality counterfeit $100 bills began to appear around the world. The United States Secret Service, the agency responsible for investigating fraudulent currency, claimed that these ‘supernotes’ were printed in North Korea, though it wasn’t clear how the intaglio printer, cotton-linen paper and colour-shifting ink had ended up there. Even so, numerous clues pointed in that direction. In 1996, Yoshimi Tanaka, a former member of the Japanese Red Army Faction, was arrested in Cambodia for distributing supernotes in Thailand. Twenty-six years earlier, he had helped hijack Japan Airlines Flight 351, diverting it to North Korea, where he and his co-conspirators – including Moriaki Wakabayashi, bassist with the cult psychedelic rock band Les Rallizes Dénudés – defected; several of them lived for decades in a compound outside Pyongyang. In 2005, the leader of the Irish Workers’ Party, Seán Garland, who had long cultivated ties to the Korean Workers’ Party, was arrested for allegedly purchasing supernotes from North Korean nationals (he was never extradited and so never stood trial). Around the same time, smugglers in California were indicted on charges of importing millions of dollars’ worth of these notes, as well as more than a billion counterfeit Marlboro and Newport cigarettes and quantities of phony Viagra. The fake dollars had apparently been purchased from North Korean officials by a Macanese judoka called Jimmy Horng and a Taiwanese national called Wilson Liu, who laundered them in slot machines at Caesars Palace casino in Las Vegas.

Weeks after one of the smuggling rings was broken up – its leaders were lured by undercover FBI agents to a fake mafia wedding in New Jersey – the US Treasury tried out a new type of economic warfare against North Korea. It targeted Banco Delta Ásia, a relatively small bank in Macau that was accused of facilitating North Korea’s trade in counterfeit money, cigarettes and narcotics, which the regime was thought to rely on to pay for its ballistic missile and nuclear programmes. By labelling Banco Delta Ásia a money launderer, the US Treasury could prevent American banks from dealing with it. Also, any foreign bank that transacted with it would be cut off from the US financial system, blocking easy access to the US dollar and making it difficult to execute payments across national borders. Most banks in Asia ditched Banco Delta Ásia and the Macau government froze $25 million of North Korean holdings. Kim Jong-Il’s regime duly withdrew from nuclear talks and the following year North Korea tested its first nuclear device. Sanctions did little to prevent this; they may have had the opposite effect. But by exploiting foreign dependence on the dollar, the US government had shown that it too had a powerful new weapon.

Economic blockades are not new. The Peloponnesian War was triggered by one in the fifth century BCE; the Ottomans took Constantinople in 1453 after closing the Bosphorus. But targeted sanctions as a tool of peacetime foreign policy are a more recent innovation. In the aftermath of the First World War, liberal internationalists such as President Woodrow Wilson promoted them as a ‘peaceful, silent, deadly’ means of bending a rival’s will. Their first major test came with Italy’s invasion of Ethiopia in 1935. The failure of the League of Nations’ sanctions to prevent Mussolini’s occupation of Addis Ababa ruined the League’s reputation as an instrument of collective security. In 1941, Japan attempted to break free of a tightening US embargo by attacking Pearl Harbor. During the Cold War, embargoes became Washington’s favoured method of confronting communist countries while avoiding nuclear war; the embargoes implemented against North Korea in 1950 and Cuba in 1960 are still in force. From the 1970s, sanctions were used, frequently with the authorisation of the United Nations, to punish human rights violators and arms traffickers, to compel democratisation and to end apartheid in South Africa. They were generally more successful at impoverishing and weakening their targets than in forcing major changes to their behaviour or bringing about regime change. This was certainly true of the sanctions imposed on Iraq after the Gulf War of 1990-91, which did little to dislodge Saddam Hussein but caused a humanitarian crisis that sparked a global backlash (the first protests I joined were roadside anti-sanctions rallies in a New England town in the late 1990s). There was a growing sense in Washington that the success rate of sanctions did not justify their cost. In the case of Iraq, as it turned out, Plan B was invasion.

The disastrous wars in Iraq and Afghanistan made sanctions again seem a better alternative and their use rose dramatically. They have also grown more powerful, focusing on what Edward Fishman in his new study describes as one of the key ‘chokepoints’ in the world economy: control of the US dollar. Maritime trade has always had to negotiate geographic bottlenecks: the Suez Canal, for example, or the Malacca Strait or the Strait of Hormuz. Controlling these narrow passages, through which large volumes of trade pass, confers significant strategic advantages. Yet by the early 2000s, access to the dollar – used in around 90 per cent of foreign exchange transactions and accounting for roughly 70 per cent of foreign exchange reserves worldwide – seemed to offer even greater leverage.

As Fishman explains, US officials came to this view after 11 September 2001. The US Treasury lost most of its national security functions to the Department of Homeland Security, established late in 2002, but it had unexpectedly been given new powers by the Patriot Act, a law rushed through Congress weeks after 9/11 which dramatically increased the state’s capacities to carry out surveillance and policing, as well as expanding the definition of terrorism. The Act’s anti-laundering measures, originally aimed at terrorists’ bank accounts, were soon applied to unfriendly states as well.

After North Korea, the US’s next target was Iran, which had been under sanctions since the 1979 hostage crisis, though they had done little to curb the growth of the country’s oil industry or its regional ambitions. In 1996, near the end of Bill Clinton’s first term, Congress passed a law threatening the imposition of heavy penalties on foreign companies that did business in Iran, such as European oil producers like France’s Total, soon to be a major investor in the development of the South Pars gas field in the Persian Gulf. These ‘secondary sanctions’ meant that third parties transacting legally with Iranian entities now faced being penalised by the US. The sanctions extended the reach of the US state far beyond its legal jurisdiction, and sparked a huge backlash in Europe; the EU prohibited European firms from complying with them. Clinton backed down.

In 2005, under George W. Bush, US efforts to isolate Iran from the world economy were renewed after the election of Mahmoud Ahmadinejad, the conservative former mayor of Tehran, who alarmed Western observers with his messianic speeches and efforts to accelerate Iranian nuclear enrichment. In 2006, a Treasury lawyer called Stuart Levey, drawing on the personal connections of his boss, Henry Paulson (the former CEO of Goldman Sachs), met with the heads of the world’s largest banks to warn them to cut ties with Iran. This again proved very unpopular: ‘You fucking Americans,’ one senior executive at the British bank Standard Chartered apparently responded. ‘Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?’ But ultimately what mattered was the bottom line: for almost everyone, the risk of huge fines or of losing access to US banking services outweighed the benefits of trading with Iran. Nearly every major bank complied.

Despite all this, Iran continued to make huge profits on energy exports. After Barack Obama came to office in 2009, Congress agreed, in a rare bipartisan moment, that the US should enforce secondary sanctions. The mere threat led European companies such as Eni, Shell, Statoil and Total to quit Iran, ceding ground to Chinese rivals which ensured that the oil kept flowing. The fact that the global oil trade has long been invoiced almost exclusively in US dollars meant that no European companies were willing to risk being cut off from the US correspondent banking system, a crucial intermediary in facilitating international dollar transactions. But blocking Iranian oil exports was politically fraught. One likely consequence was soaring oil prices – some predicted they could rise to more than $200 a barrel. And prices were already high: after bottoming out in the wake of the financial crisis, they had been driven up by demand from China and other emerging market economies, and accelerated by the Libyan uprising and civil war early in 2011. Facing a re-election campaign in 2012, Obama opposed any further disruption to global oil supplies, even as members of the Treasury plotted how to blacklist the last Iranian financial institution with access to the US dollar: the central bank. Doing this would make it very difficult for Iranian exporters to be paid, but it also risked pushing energy prices so high that they would spark what one Treasury official called a ‘nuclear winter recession’. Despite opposition from the White House, two senators – Mark Kirk, a Republican, and Robert Menendez, a Democrat (currently serving a federal prison sentence on corruption charges) – demanded sanctions on Iran’s central bank, winning unanimous Senate approval. A few months later, Congress also authorised sanctioning Swift, the Brussels-based financial messaging platform used by nearly every bank in the world to communicate international money transfers, if it didn’t stop all business with Iranian entities. It did so, further imperilling the ability of Iranian banks to make international transactions. By early 2012, Iran had been all but cut off from the dollar.

The effects were immediate. During 2012, the Iranian rial collapsed as oil revenues plummeted by nearly 30 per cent. The prices of staple foodstuffs soared, in some cases doubling in one year. This economic crisis developed just before the presidential elections of June 2013, when Hassan Rouhani, running for the technocratic Moderation and Development Party, was elected on a promise to bargain Iran’s nuclear programme for sanctions relief. Iran’s presidents are not mere figureheads, though their freedom of action is constrained by the supreme leader, and only a limited number of candidates, approved by the Guardian Council, are allowed on the ballot. Even so, the choice of Rouhani was a departure. One of his first acts in office was to tap the well-connected diplomat Mohammad Javad Zarif – who studied for a PhD in international law and policy in the US – to lead talks on sanctions relief.

Fishman claims the hardships imposed on Iran by the stiffening of US sanctions caused a ‘psychological shift’ among Iranian elites which in turn brought about this diplomatic transformation. But he doesn’t do enough to explain exactly how the economic crisis shifted the balance of power among domestic factions or changed the strategic calculus of Ayatollah Khamenei and his inner circle. As is often the case with sanctions, it’s hard to know for sure whether they, or other factors such as the threat of military intervention, impelled the regime to change course. Still, this might be the most plausible example of the effectiveness of sanctions in forcing a major diplomatic turnaround: in 2015, the Joint Comprehensive Plan of Action – the ‘Iran deal’ – was signed, trading sanctions relief for checks on Iran’s progress to nuclear capability.

What happened next showed the flimsiness of US strategy. The first problem was that the promised sanctions relief was disappointing. While European firms, unlike their US counterparts, were technically allowed to return to Iran, many were too risk-averse to do so, scarred by the steep fines they had incurred when secondary sanctions were enforced. In 2014, for example, the French bank BNP Paribas had paid $8.9 billion to settle a case brought by the US government. It would take more than personal reassurances from the US secretary of state, John Kerry, to get them back. In addition, Levey, the former Treasury lawyer, played spoiler to these efforts. After leaving government, he worked on sanctions compliance as chief legal officer for HSBC, ensuring that the bank avoided another huge fine; in 2012, it had paid the US government more than $1.9 billion for violations. (Among the protagonists of Fishman’s book – several of whom left government to make money advising clients how to avoid the Treasury’s ire – Levey has had the most success parlaying his experience into riches: after leaving HSBC, he oversaw Facebook’s botched efforts to create a cryptocurrency before joining Oracle, where in 2025 he was paid more than $14 million.) At HSBC, Levey publicly opposed the return of foreign banks to Iran, claiming that, even if it was legal, it was both illogical and bad business for Washington to encourage European firms to do what remained illegal for American ones. The architect of arguably the best demonstration of the efficacy of sanctions undermined his own strategy by showing that making a deal to remove sanctions didn’t actually get you the relief you were hoping for.

Bank executives also knew that the prospect of a Trump presidency made returning to Iran a dangerous proposition. Sure enough, Trump killed the 2015 deal. In 2018, the US reimposed ‘maximum pressure’ sanctions on Iranian oil exporters and banks as well as secondary sanctions on European companies. Those that had had the temerity to go back to Iran left again. In their fury, Germany, France and Britain attempted to create an alternative, non-dollar-based transaction system, but it came to nothing: Instex, set up in 2019, was dismantled in 2023 after facilitating just a single transaction. The Iranian economy collapsed again. But this time the regime dug in, accelerating the enrichment of uranium and removing IAEA nuclear inspectors. Relations with the US deteriorated even further after the assassination in 2020 of Qasem Soleimani, commander of the Quds force, who had been second only to Khamenei in the Iranian state apparatus. Rouhani was sidelined before his term ended in 2021 and succeeded by the more conservative Ebrahim Raisi, who died in a helicopter crash in 2024. In 2025, the US bombed several of Iran’s enrichment sites, before embarking on a larger military campaign this year. The sanctions on Iran were, in the end, more of a prelude to war than an alternative to it.

The outbreak​ of the Russo-Ukrainian War in early 2014 provided another opportunity for the US to test sanctions. Russia was a more dangerous target, particularly for America’s allies in Europe, which were closely tied to the Russian economy and risked financial damage if Russian banks lost access to the dollar. Russian oil and gas made up a third of the EU’s energy imports; there was little enthusiasm for cutting off supplies. Although the US had less direct exposure to the Russian economy, there was major opposition to sanctions from businesses eager to profit from the development of drilling in the Russian Arctic and Far East. Weeks before Russia seized Crimea in February 2014, the Wall Street bank Morgan Stanley agreed to transfer most of its oil business to Rosneft, which it had a few years earlier helped take public and whose top financial ranks were filled with people who had worked at the bank, including its former CEO John Mack. Exxon also had billions at stake in the Russian Arctic and Far East, where in 2012 it had drilled the deepest well in history, at 12,376 metres. Exxon’s CEO, Rex Tillerson, who had become close to Putin, joined Wall Street in publicly lobbying against sanctions. In 2017, he became Trump’s first secretary of state.

The compromise reached in early 2014 was to target businessmen and officials close to Putin, in the hope that squeezing their profits would push them to discourage Putin from undertaking further aggression in Ukraine. But the strategy was unsuccessful: the head of Russian railways, Vladimir Yakunin, captured the reaction of Russia’s oligarchs when he said that he was flattered to be included on the sanctions list, since it was a sign of his service to the state. More punitive measures were brought in after the start of the Donbas separatist insurgency in April 2014 and the shooting down of Malaysia Airlines Flight 17 that July, focused on preventing Russian state banks like Sberbank and VTB from raising money and refinancing debt on Western capital markets – though without cutting them off entirely from the dollar – and blocking Russian oil companies from using Western technology for offshore, deepwater or shale production. They came at a perilous moment for the Russian economy. That summer, oil prices began a steep decline, driven by the expansion of shale operations in Texas and North Dakota. Between June to December 2014, the price of Brent crude oil (which sets the price for 80 per cent of the global petroleum trade) fell from $111 to $62. The speed and scale of the price-drop was second in recent years only to the collapse caused by the financial crisis in 2008. As export revenues crashed, the value of the ruble plummeted and domestic inflation spiked.

But Moscow developed an effective response. The governor of the Central Bank of the Russian Federation, Elvira Nabiullina, a savvy economist who was Putin’s economic adviser before being appointed to the bank in 2013, increased interest rates dramatically, causing a steep but short-lived contraction of the economy. Inflation dropped sharply and the economy rebounded. In addition to this orthodox monetary response, the state cushioned the twin blows of sanctions and the commodity price crash by forcing companies paid in other currencies to convert them into rubles; by moving reserve assets out of dollars into gold, renminbi and other currencies; and by subsidising domestic food production. To insulate the Russian economy further, a new payments system, the Mir card, was introduced as an alternative to Mastercard and Visa. The threat of being cut off from Swift was mitigated by the creation of a Russian financial messaging system.

Nabiullina was much praised by the Western technocratic elite and given invitations to Jackson Hole, Basel and the IMF. There, she was fêted for her efforts to defend liberal economic orthodoxy in Russia’s challenging environment as an emerging economy; Christine Lagarde, then managing director of the IMF, said she made ‘central banking sing’. Above all, though, Nabiullina had prepared Russia to weather the Western response to its invasion of Ukraine in 2022. Days after the war began, the US and its European allies froze around $300 billion of reserve assets held abroad by the Russian central bank to prevent them from being used to defend the ruble as sanctions bit. The rainy day fund that the Russian state had been accumulating for years was gone. This was the Iran playbook, but on a much larger scale; one former Russian central banker described the attack as a ‘financial nuclear bomb’. There were predictions that the Russian economy was on the verge of collapse, but Nabiullina parried, raising interest rates to 20 per cent and implementing capital controls. Despite the seizure of the currency reserves, the wartime spike in oil prices ensured that the government was bringing in huge amounts of foreign currency. Rosneft and Gazprom earned more than a billion dollars daily. Russian growth rebounded to 4.3 per cent in 2024 (in Britain, growth was just over 1 per cent).

Concerns about post-pandemic inflation in the US were the chief constraint on far-reaching measures against foreign energy producers. A middle ground was reached at the end of 2022, when US officials convinced their G7 counterparts to implement a price cap on Russia’s oil sales, which would reduce the country’s export earnings without depleting global supplies too much. Insurers and brokers were required to prove they only dealt with Russian oil sold below the set price of $60 per barrel – low enough to hurt Moscow but not so low that it would cause sales to stop, thereby pushing prices to destabilising heights.

The price cap has had mixed results. Moscow’s oil revenues have taken a hit, but it hasn’t been enough to alter Putin’s policies. It has also been relatively easy to evade. Russia has acquired a ‘shadow fleet’ of tankers of uncertain ownership, insured in countries outside the G7, which are used to ferry oil to major consumers like China, India and Turkey. These ships avoid detection by broadcasting a false location or turning off tracking devices, transferring their cargo at sea to other ships, and concealing their identities through false flags, forged documents and shell companies. The US has threatened the Indian government with secondary sanctions in the form of massive tariffs, but it remains unclear whether a recent agreement to halt imports from Russia will stick. Meanwhile, independent ‘teapot’ refineries in China, most of them in Shandong province, buy up huge quantities of Russian and Iranian oil, benefiting from the discounted price of sanctioned goods and unworried by the US response since, unlike China’s major state-owned oil companies, they operate outside the dollar system. They have saved China billions on energy imports.

Some​ Western observers take heart from the prospect that, even if sanctions have not been decisive for the outcome of the war, they may be accelerating Russia’s long-term economic decline. This turns on how and when the war ends and what its aftermath brings. Trump himself has emphasised the ‘tremendous opportunity’ offered by Russia’s economic rehabilitation, and businesses are watching to see whether profits can already be made. One Texas investor, Gentry Beach, a college friend of Donald Trump Jr, is attempting to exploit a sanctions loophole to work with the Russian company Novatek on developing gas facilities in Alaska’s North Slope. Meanwhile, America’s other wars are helping Russia: the spike in oil prices caused by the US-Israeli attack on Iran has significantly increased the value of Russian energy exports. In March, the US Treasury waived some sanctions on Russian oil shipments in a desperate attempt to bring prices back down.

That this happened without Russia having to make any concessions, mere months after facing punitive new sanctions, is just one example of the chaos of the second Trump administration’s approach to economic warfare. Tariffs, the centrepiece of his economic agenda, were raised and lowered and often raised again with little explanation of their purpose. Were they supposed to bring back manufacturing? Increase tax revenue? Or just give the president leverage to bargain with everyone, including countries the US did almost no trade with, like the tiny Micronesian island of Nauru, hit with a 30 per cent tariff? In February, the US Supreme Court removed the easiest legal pathway for the arbitrary use of tariffs (though the legal case continues), and the average tariff remains high. What appeared early in the administration to be an intensification of economic warfare against China – tariffs were raised to 145 per cent, effectively ending trade between the two countries – has given way to the most dovish approach in years. Part of the explanation is that China has its own cards to play. In response to last April’s tariffs, Beijing announced export controls on its cache of rare earths, minerals used in many high-end technologies. This threatened the production of many US products – including F-35 fighter jets and long-range Tomahawk missiles, both of which rely on magnets made of samarium, a metal found almost exclusively in China. In October, a licensing system was introduced that requires government approval before any product can be made anywhere using a rare earth processed in China. This helped China win several concessions, including on tariffs. In December, China was told it would be allowed to import advanced AI chips, such as Nvidia’s H200, which previously it had been barred from doing.

Beijing was using the same weapons the US had used on it – and with better results. The first Trump administration declared war on the Chinese company Huawei, anxious that allowing Chinese 5G technology to be embedded in Western economic and military infrastructure might give Beijing leverage. The US browbeat its allies into banishing Huawei and declared that no one could sell anything built with US components to Huawei without Washington’s permission. The strategy appeared to bear fruit when Boris Johnson agreed in 2020 to remove Huawei 5G technology from Britain. Predictions of the company’s demise followed. But it has recovered in spectacular fashion, investing billions in AI chips, smart cars and other advanced technology. The second Trump administration recently used the same legal designation of ‘supply chain risk’ against the US AI company Anthropic after it refused to allow the unrestricted military use of its technology, demonstrating Trump’s willingness to wield the tools of economic warfare against perceived domestic enemies.

It is possible that these economic weapons are losing their power to inspire fear abroad. The US-Israeli war on Iran began without any obvious preparation for Iran’s likely response and its economic consequences. The Iranian blockade of the Strait of Hormuz has resulted in an oil supply shock and caused chaos in the markets for shipping and petroleum products. Asian states have been particularly badly affected, but the crisis has also led to something the Trump administration would once have considered political suicide: rising petrol prices at home. A few weeks into the war, the Treasury announced waivers of sanctions on Iranian oil shipments in an effort to bring down prices. Iran had finally gained some relief from sanctions, temporarily at least. After a ceasefire was declared in early April, Iranian officials unsurprisingly announced that they would keep control of traffic in the strait. Being cut off from the dollar had lost its bite. And seizing an old-fashioned maritime chokepoint had caused a financial hegemon to blink. The US government hadn’t realised that other states could play its game too.

24 April