Economic warfare and the militarisation of international finance

On Thursday, the Financial Times published the first in a series of reports entitled “The Militarisation of Finance”, which is directly related to the aggression unleashed against Russia by the West, according to the newspaper’s own words (*). As you can see, international finance capital, unlike the whippersnappers, has no qualms about speaking to its readers without mincing words.

The imperialists’ economic plan against Russia, the paper claims, has been designed by Janet Yellen, who chaired the US Federal Reserve, and Mario Draghi, the former head of the European Central Bank. It is they who have seized much of Moscow’s $643 billion in foreign exchange reserves, which is a declaration of economic war against Russia.

The aim is to push the Russian currency “into a free fall”. This is a totally new kind of war: the militarisation of the US dollar and other Western currencies to punish their adversaries.

It has nothing to do with the Ukraine War because the plans have been discussed for two decades. The US is fed up with endless military aggression against third countries and economic warfare is intended to partly fill the vacuum. Economic sanctions have become the new national security policy, replacing diplomacy and war.

The militarisation of finance will have profound implications for the future of international politics and economics. Many of the basic assumptions of the post-Cold War era are being overturned. Globalisation was once sold as a way to avoid conflict. The web of dependency would bring former enemies ever closer together. Instead, it has become a new battleground.

The power of financial sanctions is due to the ubiquity of the US dollar. It is the most widely used currency for international transactions, often involving a US bank. US capital markets are the largest in the world and US Treasury bonds act as a safety net for the global financial system.

As a result, it is very difficult for financial institutions, central banks and even many companies to function if they are isolated from the US dollar and the US financial system. Add to this the euro, which is the second largest reserve currency of central banks, as well as the pound sterling, the yen and the Swiss franc, and the impact of these sanctions is even more frightening.

The US has sanctioned certain central banks before (North Korea, Iran and Venezuela), but they were largely isolated from the global market. The sanctions against Russia’s central bank represent a first: the use of the weapon against a major economy and the first time in a war involving a major nuclear power.

The plan carries great risks. Central bank sanctions could provoke a backlash against the dollar’s dominance in global finance. In the five weeks since the blockade was imposed, the Russian rouble has regained much of the ground it initially lost and Moscow says it will find ways around the sanctions.

The freezing of Russia’s reserves marks a historic change in the direction of international politics. “These economic sanctions are a new kind of economic government with the power to inflict damage that rivals military power,” Biden acknowledged in a speech in Warsaw in late March. They were “undermining Russia’s strength, its ability to rebuild its military and its ability to project its power”.

A global economic police
The new phase of economic warfare began on 11 September. After the terrorist attacks of 2001, the US invaded Afghanistan, moved into Iraq to overthrow Saddam Hussein and used killer drones on three different continents. But with far less fanfare, it has also developed mechanisms to act as a global economic police force.

A few weeks after the 9/11 attacks, Bush pledged to “starve terrorists of funding”. The controversial Patriot Act, on which the indefinite detentions were based, also gave the Treasury Department the power to exclude from the US financial system any financial institution involved in money laundering.

Coincidentally, the first country threatened by this law was Ukraine, which was warned by the Treasury in 2002 that its banks were at risk of being compromised by organised crime. Shortly afterwards, Ukraine passed a new law to prevent money laundering.

The US Treasury also negotiated access to Swift data on suspected terrorists, the Belgian-based messaging system that is the canon for international financial transactions, the first step in a web of control over money moving around the world.

The financial tools were then applied to Iran under the pretext of its nuclear programme. The US has tried to restrict Iran’s access to the international financial system. US Treasury officials visited European banks and quietly informed them of Iranian government accounts. European governments don’t like the US Treasury telling their banks how to operate, but they had to swallow. No one dares to mess with the US Treasury.

Obama imposed economic sanctions on Iran’s central bank, the latest step in a campaign to strangle its economy. The sanctions not only put pressure on Iran to negotiate the 2015 nuclear deal, but also paved the way to do the same with Russia.

Going after a country’s central bank is as far as you can go today in sanctioning its financial sector. Central banks not only print money and supervise the banking system, but also provide a vital economic buffer in a crisis, defending a currency or paying for essential imports.

Russia’s reserves increased after the annexation of Crimea in 2014 to insure against future US sanctions. China’s large holdings of US Treasury bonds were once seen as a potential source of geopolitical leverage.

Western sanctions against Russia’s central bank have undermined its ability to support the economy. Attacking a central bank is like having savings to use in an emergency and when the emergency comes, the bank does not allow withdrawals. The imperialists have probably neutralised about two thirds of Russia’s reserves.

Brussels’ lackeys sign blank
The European Union has been criticising the excessive influence of the US currency for the last five decades and is now eating its words. Brussels is working closely with the United States against Russia. “Never in the history of the European Union have we had such close contact with the Americans on security matters as we have now; it’s really unprecedented,” said a senior EU official.

Planning for the sanctions began in November last year. Biden asked Yellen to draw up plans for measures that could be taken to respond to an invasion. From then on, the US began coordinating with the EU, the UK and other vassal countries. From then until the 24 February invasion, Biden administration officials spent an average of 10-15 hours a week in video conferences with Brussels and member states to coordinate sanctions.

In Washington, sanctions policy has been led by Daleep Singh, a former New York Fed official who is now national security adviser for international economics at the White House, and Wally Adeyemo, a former BlackRock executive who was deputy secretary of the Treasury. In 2014 the two worked with the Obama administration as the US and Europe disagreed on how to respond to Russia’s annexation of Crimea.

The EU was desperate to avoid a more recent embarrassing precedent regarding sanctions against Belarus, which turned out to be much weaker as individual countries sought exemptions for their industries. This time the EU effort was coordinated directly from Ursula von der Leyen’s office through Bjoern Seibert, her chief of staff.

The other central figure is Canada’s finance minister, Chrystia Freeland, whom we have already introduced in another post. She was in close contact with Kiev’s hitmen. A few hours after Russian tanks began rolling into Ukraine, Freeland sent a written proposal to the US with a specific plan directed against the Russian central bank. Canadian Prime Minister Justin Trudeau reiterated the proposal at an emergency summit of G7 leaders.

Can the US still be trusted?

Until 24 February, the plan focused on isolating Russian banks from Swift. Then the imperialists brought the more aggressive options to the fore. In Europe, it was Draghi who pushed the idea of sanctioning central banks at the EU emergency summit the same night as the invasion. Italy, a major importer of Russian gas, had been hesitant in the past to impose sanctions. However, the Italian leader argued that Russia’s reserves could be used to cushion the blow of further sanctions.

They had to be able to cash in quickly. The last-minute talks caught the second-stringers, the likes of Pedro Sánchez, off guard and they rushed to do the same.

However, Western unity is apparent. The major Western powers have not defined what Russia would have to do for sanctions to be lifted, so the Financial Times asks a good question: is the aim to inflict short-term damage on Russia to inhibit the war effort or is it long-term containment?

Even when they work, sanctions take a long time to take effect. However, the economic damage is being felt unevenly, with Europe taking a much harder hit than the US.

So far, Europe has been reluctant to impose an oil and gas embargo, given the bloc’s heavy dependence on Russian energy imports.

The other key factor is whether the West can win the battle of the sanctions discourse, both in Russia and the rest of the world. For China, India, Brazil and other countries that could help Russia escape Western sanctions, a key question is posed about the role of the dollar in the global economy: can the US continue to be trusted?

The question completely turns Western media propaganda on its head. The problem is not Russia but the United States.

(*) https://www.ft.com/content/5b397d6b-bde4-4a8c-b9a4-080485d6c64a

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