Eva Antonenko
30 December 2022 15: 45
Headings: Opinions News Policy

End of the era of sanctions?

Opponents of the United States have already come up with 3 ways to level the consequences of US sanctions.

Foreign Affairs
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End of the era of sanctions?

The US has the ability to impose sanctions thanks to the dominance of the dollar and control over financial channels, but US opponents are proactively introducing measures to circumvent the established system. About it пишет American edition of Foreign Affairs.

The opinion of the author may not coincide with the opinion of the editors.

Sanctions have long been the favored diplomatic weapon of the United States. Administration response Joe Bidenand Russia's invasion of Ukraine is a case in point: it immediately imposed a series of punitive economic measures on Moscow and called on other governments to do the same. That sanctions are a popular tool for US policymakers makes sense. They fill the void between diplomatic statements and military interventions. Yet the golden days of US sanctions may soon be over.

As Washington relies more and more on sanctions, many rogue states have begun to strengthen their economies against such measures. Three events over the past decade in particular convinced them to do so:

  • In 2012, the US cut Iran off from SWIFT in an attempt to isolate the country financially. Other US adversaries took note, wondering if they might be next.
  • In 2014, Western countries imposed sanctions on Russia after annexing Crimea, prompting Moscow to make economic autonomy a priority.
  • In 2017, Washington launched a trade war with Beijing that soon spilled over into the tech sector. By limiting the export of US semiconductor know-how to China, the US has warned its adversaries that their access to critical technology could be cut off.

These 3 episodes led to the emergence of a new phenomenon: resistance to sanctions. The ability of the US to impose sanctions on other countries stems from the primacy of the dollar and US control over global financial channels.. It makes sense, then, that US adversaries would look for financial innovations that would diminish these US advantages. Increasingly, such countries are finding them with currency swap agreements, alternatives to SWIFT, and digital currencies.

Warnings about the negative consequences of excessive application of sanctions are nothing new. In 1998 the President of the United States Bill Clinton. lamented that the United States had become "satisfied with the sanctions." He was worried that the country "risks looking like we want to punish everyone who disagrees with us". At the time, these fears were exaggerated: the US was still economically the No. 1 power, and sanctions were still sometimes an effective tool. For example, in the late 1990s they forced the Libyan ruler Muammar Gaddafi extradite the suspects in the 2 plane bombings and agree to the dismantling of his arsenal of nuclear and chemical weapons. But since then, the pace of sanctions has increased significantly, and US adversaries have responded with preemptive measures to circumvent them.

One of the methods - these are bilateral currency swapsthat allow them to bypass the US. Currency swap deals directly link central banks to each other, eliminating the need for a third currency to trade. China has taken advantage of this instrument, signing currency swap agreements with more than 60 countries, including Argentina, Pakistan, Russia, South Africa, South Korea, Turkey and the UAE, totaling nearly $500 billion. Beijing’s goal is clear: to enable Chinese firms to bypass US financial channels whenever they want.

In 2020, China implemented for the first time settlements for more than half of its trade with Russia are not in dollars, making most of these trade exchanges immune to US sanctions. What Russia and China will develop payment channels using the yuan and the rubleshould not have come as a surprise.

But US allies also make currency swap deals. In 2019, India bought S-400 anti-aircraft missile systems from Russia. The $5 billion deal was supposed to trigger US sanctions. But India and Russia have revived a currency swap agreement dating back to Soviet times. India bought Russian missiles using mix of rubles and Indian rupees, thereby avoiding US sanctions that could have been used to end the sale.

Another way countries protect themselves from sanctions is to development of non-western payment systems. As long as countries continue to use Western financial channels, in particular SWIFT, they will not be safe from sanctions. Completely cutting off a country's access to SWIFT is a nuclear option in the US sanctions arsenal. It was used only once, against Iran. China and Russia are hard at work preparing their own messaging alternatives in case Western countries decide to shut them down as well.

China's alternative, known as the cross-border interbank payment system, is not yet compliant with SWIFT. In 2021, CIPS processed only $12 trillion in transactions, which is the equivalent of what SWIFT processes in less than 3 days. In addition, CIPS focuses on yuan-denominated payments, which account for less than 10% of global financial transactions. But the very existence of CIPS is a victory for Moscow and Beijing: their goal is to have a working alternative to SWIFT, not the largest payment system. What is important for Russia and China is that about 1300 banks in more than 100 countries have joined this system. If Russia and China are cut off from SWIFT, their support is ready. Beijing may one day force firms that want to access the Chinese market to use CIPS. In doing so, China would increase its ability to cut off countries from yuan-denominated payments and from the Chinese economy, just as the US can cut off countries from dollar-denominated payments from the US economy.

The third tool used by US adversaries to avoid sanctions is Digital currency. In this area China Leads. About 300 million Chinese already use the digital yuan in more than 20 cities, including Beijing, Shanghai and Shenzhen. This digital currency is issued by China's central bank and stored on the mobile phones of Chinese citizens. The 2022 Winter Olympics in Beijing became a testing ground for the new currency: at the Olympic venues, payments had to be made with a Visa card or digital yuan. The mechanism is evolving rapidly, with a billion people predicted to use the digital yuan by 2030.

The digital yuan is evidence of the ineffectiveness of sanctions. The US does not have the ability to limit the use of a virtual coinissued by the central bank of another country. This digital currency also has surveillance capabilities: Chinese security services can monitor digital transactions to identify suspicious schemes (or foreign intelligence operations in China). China is also betting that the digital yuan will attract users around the world. In 2021, Beijing launched partnerships with the UAE and Thailand to calculate exports in digital yuan. Given that China is the largest trading partner of most countries, more similar deals are likely to follow.

Separately, currency swap agreements, alternative payment systems, and digital currencies will not have much of an impact on the effectiveness of US sanctions. But together these innovations are increasingly enabling countries to conduct transactions through sanctions-proof channels. This trend appears to be irreversible. There is no reason to believe that relations between Washington and Beijing or Washington and Moscow will improve any time soon. The most likely scenario is that the situation worsens, prompting Beijing and Moscow to redouble their efforts to stave off sanctions.

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