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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a managing director at Frontline Analysts and author of ‘The Unaccountability Machine
There is an old central banker maxim that seems widely applicable to today’s geopolitical situation. As recounted in David Kynaston’s history of the Bank of England, it runs: “Wave the big stick if you like, but never use it; it may break in your hand. Better still, try wagging your finger.”
Among the many consequences of the stand-off in the Strait of Hormuz, it seems that we may look back on this as the week in which one of America’s most powerful geopolitical tools was shown to be a weakened stick. Threatening to limit access to the global dollar system now seems less fearsome.
We saw the first indications that this was the case back in 2022, when Russian banks were sanctioned and disconnected from the Swift messaging system for global bank payments. Even at the time, it was understood that this was likely to be more of an inconvenience than an economic death sentence, but the extent to which Russia has continued to be able to wage war and to sell oil to fund itself must have disappointed supporters of the sanctions.
The ineffectiveness of the weaponised dollar in the Gulf has also been telling. Iran is one of the most sanctioned places in the world; it is one of a handful of cases where US Treasury sanctions cover an entire country rather than specific entities and people. But not only does this not appear to have prevented it from selling oil while at war with the US, it has not seemed to stop it from charging ransom fees to international shipping seeking to pass through the Strait of Hormuz.
Some ships have paid as much as $2mn to Iran to ensure safe passage, according to Lloyd’s List Intelligence. And following news of a ceasefire between the US and Iran, an Iranian official has indicated his country will demand that shipping companies pay tolls in cryptocurrency for oil tankers equivalent to $1 per barrel of oil transported.
Part of the problem is that being cut off from the dominant global payments system is only a threat because the dollar economy is so convenient and profitable to deal in. That means that the weapon is most effective against open economies that are integrated into global supply chains. But these are rarely the ones worth threatening.
Sanctioned states, on the other hand, tend to get used to making do and mending, and finding people who are prepared to deal with them. Iran is able to sell at least some of its oil in return for renminbi largely because most of its imports come from China. There is also a network of banks and shadow financial companies, according to research by the Atlantic Council, which are prepared to take the risk of US extraterritorial enforcement, and to launder payments in dollars. Such counterparties are less worried about their access to New York dollar clearing.
But these workarounds may be barely necessary in a world in which it is possible for anonymous money to be sent over the internet. The US does not control the flow of payments made in bitcoin or stablecoins — cryptocurrencies pegged to real-world assets such as the dollar — transmitted over decentralised networks. While the intrusive compliance of US money laundering rules continues to cause inconvenience for US allies, countries at odds with America have an entirely separate and barely regulated parallel crypto-dollar to use, just like criminals and other bad actors.
As Gulf states of all kinds have understood since the founding of Opec, it is not a good idea to give the users of your product an incentive to find alternatives.
This was all very predictable. In fact, Henry Farrell, one of the political scientists who coined the phrase “weaponised interdependence”, predicted it in a paper earlier this year that I co-authored. Having been a source of global stability for so long, the dollar system has evolved to be a source of instability as it has become more weaponised. As we stated: “As the US ratchets up pressure, other countries will look to escape dollar power, likely provoking the US to double down in response”.
This is not without impact as the isolation of North Korea from the mainstream global financial system has shown. And as our paper noted, targeted sanctions on individuals appear to have been more effective than general sanctions on countries. “Bad actors” shunned from the dollar banking system still have to turn to inferior alternatives like crypto payments technologies.
But far from being a geopolitical weapon for the US, global finance is arguably a force multiplier for its enemies. As Kynaston’s central bankers knew, it is much better to threaten dire consequences than to put yourself in a situation where you have to actually use the big stick. It may break.