Targeting North Korea and Iran

According to Fishman, it all started with North Korea, a rogue state that wanted nukes. Bureaucrats at the Treasury realized they could target the banks that connected North Korea to the international financial system. All banks need dollars, since they’re the world’s reserve currency, and the United States controls access to dollars. If the Treasury decides that a bank can no longer access dollars, it’s effectively done for.

So once the United States started to target banks linked to North Korea, no one wanted to do business with it. Korea was pretty easy to isolate as it was a relatively small economy — not so with Iran. US sanctions against Iran in the 1990s were therefore relatively ineffective. The United States prevented its own companies (mainly oil companies) from doing business in the country, but foreign competitors stepped in and took the business instead. The United States then tried to levy “secondary sanctions” against these companies, but it caused an outcry in Europe and had to be abandoned.

Having learned from North Korea, in the 2000s the Treasury decided to target Iran’s links with the international financial system in an attempt to undermine its nuclear program. Instead of sanctioning banks that did business with Iran directly, US officials met with the heads of the world’s major banks and warned them that doing business with Iran was dangerous and could jeopardize their access to US financial markets. The banks complied. The United States also managed to convince the major oil companies to exit Iran, using a mix of carrot and stick.

The only holdout was China, which started to buy more oil from Iran. In a situation that has become very familiar, Iran’s sanctioned economy became almost entirely dependent on oil exports. Given that the world economy is addicted to oil, as long as oil prices remained high, Iran would always be able to access the foreign currency it needed to continue its nuclear program.

The United States considered sanctioning the Iranian central bank, cutting off its access to dollars, which would have made it impossible for other countries to buy Iranian oil. But this was considered an act of all-out war. There were also major concerns that cutting the world economy off from Iranian oil cold turkey would cause prices to spike, generating inflation and tanking economic growth.

So US officials came up with a fudge: they would impose sanctions on the central bank, but give Iran’s customers time to wean themselves off Iranian oil. It just so happens that, at the time it was sanctioning Iran, US fracking output had expanded dramatically, and the United States was able to replace a lot of the oil supply lost through blocking Iranian oil exports.

The final blow came when the United States managed to convince China and India to get on board. The United States proposed a deal whereby Iranian petrodollars would be kept in banks in importing countries — so when China bought oil from Iran, the dollars used to buy the oil would be kept in a Chinese bank and could only be used to purchase approved Chinese goods imports. The deal worked for countries like China because it would boost exports, and it worked for the United States because it meant Iran couldn’t use the money to expand its nuclear program.

Unable to access dollars, the Iranian economy tanked. There were mass protests, a new leader was elected, and accessing these offshore petrodollars became a central part of the new round of negotiations between the United States and  . These negotiations ended in success for the United States when Iran agreed to roll back its nuclear program.

The United States had shown that its control over the dollar was like controlling the Suez Canal: it allowed the world’s foremost imperial power to cut off other countries’ ability to trade with each other, creating a “chokepoint” that gave it immense leverage.

Sanctioning Russia

Next came Russia, which annexed Crimea in 2014. The United States couldn’t use its full economic war chest because Russia was simply too linked with the global economy. If Russia’s banks went down, they would take many European banks with them, potentially triggering another global financial crisis. And Europe was far too addicted to Russian natural gas to go cold turkey. What’s more, plenty of US oil companies, including the politically powerful ExxonMobil, were working with Russia. Rex Tillerson, former CEO of Exxon and Donald Trump’s appointment for secretary of state in 2017, had agreed to a massive deal to develop Russian oilfields and was a personal ally of Vladimir Putin.

In the end, these links turned out to be Putin’s weakness. Fossil fuels are the foundation of his war machine — in fact, today, they’re the basis of the entire Russian economy. Russian oil companies need access to international capital to be able to develop new projects and drill for oil in hard-to-reach places, which means deals with Western banks and technologically advanced Western fossil fuel companies. Other sectors of the Russian economy had also been borrowing in dollars, and the financial system was dependent upon raising money from international investors.

Rather than cutting off the Russian economy’s access to dollars, which could create a financial crisis, the United States designed sanctions that would prevent Russian institutions from accessing new dollars, limiting their ability to grow and therefore the growth of the Russian economy. As Fishman puts it, “The US would use Russia’s reliance on US capital markets as a chokepoint.” The European Union was initially hesitant, but when Russia blew a passenger airline out of the sky, the EU got on board with its own basket of sanctions mirroring those imposed by the United States.

These sanctions had the intended effect. Inflation skyrocketed, the ruble tanked, and the Russian economy collapsed, helped along by the fall in oil prices that took place at the same time. The central bank stepped in to try to contain the damage, mainly by hiking interest rates to extremely high levels. The United States had won once again — but at what cost?

Imperial Hubris

Fishman’s account is fascinating in that he is clearly on board with the goals of US foreign policy, but he’s also aware that the methods used to advance these goals have been self-defeating. The exhaustive use of sanctions in recent years has amounted to a weaponization of the United States’ role at the center of the world’s financial system.

After their success in using sanctions against North Korea, Iran, and Russia, US leaders were struck by hubris. They believed that they wielded immense, unchallengeable power, and the only thing they needed to consider when deploying this power was the potential blowback economic sanctions might have on the US economy and the economies of its allies. This became very clear when the United States took the unparalleled step of freezing the funds of the Afghan central bank when the Taliban returned to power in 2021.

But as the United States has gone further and further, its enemies — and neutral states wary of its imperial overreach — have found ways to adapt. This strategy has been particularly clear with Russia, which used the period between 2014 and the renewed invasion of Ukraine to insulate its economy from US sanctions, build up foreign exchange reserves, and — perhaps most importantly — develop trade links with states like China outside the United States’ orbit. Trade between the two countries has grown so much that the dollar is no longer used to intermediate — China now buys a great deal of Russian oil using renminbi.

Back in the 1990s, Bill Clinton’s Treasury secretary worried about overusing sanctions as a tool of US foreign policy. Fishman quotes him as saying such a strategy could “undermine the role of the dollar as the reserve currency.” This is exactly what is happening. Central bank holdings of US dollars have fallen over the last several decades — Trump’s trade war has simply exacerbated a long-standing movement away from the dollar.

Sanctions and Deglobalization

All in all, US sanctions policies have accelerated a longer-term trend of “deglobalization.” As Fishman puts it, “governments around the world are trying to unwind aspects of globalisation that leave them susceptible to external pressure.” The United States has overplayed its hand, encouraging allies and rivals alike to seek ways to insulate themselves from its power.

Fishman goes on to make a series of recommendations as to how the United States can wield its sanctions power more effectively. But that ship has already sailed. Trump’s new round of economic war — which is about undermining China’s challenge to US technological supremacy — has put the nail in the coffin of US-led globalization. No matter what happens next, America’s trading partners will be extremely wary of leaving themselves exposed to the United States’ power over the world’s chokepoints in the future.

Chokepoints also makes clear that a country with access to substantial fossil fuel revenues is insulated from most forms of domestic and international pressure. Most of the world’s worst tyrants are dependent upon fossil fuel revenues to prop up their brittle regimes. Without much need to levy income taxes, they’re much less accountable to their domestic populations. And thanks to the world’s addiction to oil, they know they’ll always be able to access foreign currency that can be used to access advanced military hardware — whether to fight wars against foreign nations or against their own populations.

Western leaders should take note: wean yourselves off fossil fuels, or countries like Russia and Saudi Arabia will always be able to hold you to ransom. Tony Blair might not be a fan of the “net-zero agenda” advocated by lefty snowflakes, but his country’s addiction to fossil fuels makes it weak and powerless in the face of hostile foreign nations. Ironically, left-wing pushes for decarbonization are among the few things that might actually strengthen the hand of Western governments.