The ‘Hybrid War’ of Economic Sanctions

U.S. politicians love the “silver bullet” of economic sanctions to punish foreign adversaries, but the weapon’s overuse is driving China and Russia to develop countermeasures, as British diplomat Alastair Crooke explains.

By Alastair Crooke

Iran’s Supreme Leader Ali Khamenei told a large group of people in the holy city of Mashhad on Sunday that “The Americans did not act on what they promised in the [Iranian] nuclear accord [the JCPOA]; they did not do what they should have done. According to Foreign Minister [Javad Zarif], they brought something on paper but prevented materialization of the objectives of the Islamic Republic of Iran through many diversionary ways.”

This statement during the Supreme Leader’s key Nowruz (New Year) address should be understood as a flashing amber light: it was no rhetorical flourish. And it was not a simple dig at America (as some may suppose). It was perhaps more of a gentle warning to the Iranian government to “take care” of the possible political consequences.

Iran's Supreme Leader Ali Khamenei speaks to a crowd. (Iranian government photo)

Iran’s Supreme Leader Ali Khamenei speaks to a crowd. (Iranian government photo)

What is happening is significant: for whatever motive, the U.S. Treasury is busy emptying much of the JCPOA sanctions relief of any real substance (and their motive is something which deserves careful attention). The Supreme Leader also noted that Iran is experiencing difficulties in repatriating its formerly frozen, external funds.

U.S. Treasury officials, since “implementation” day, have been doing the rounds, warning European banks that the U.S. sanctions on Iran remain in place, and that European banks should not think, even for a second, of tapping the dollar or euro bond markets in order to finance trade with Iran, or to become involved with financing infrastructure projects in Iran.

Banks well understand the message: touch Iranian commerce and you will be whacked with a billion dollar fine – against which there is no appeal, no clear legal framework – and no argument countenanced.  The banks (understandably) are shying off. Not a single bank or financial lending institution turned up when Iranian President Hassan Rouhani visited Paris to hold meetings with the local business élite.

The influential Keyhan Iranian newspaper wrote on March 14 on this matter that: “Speaking at the UN General Assembly session in September, Rouhani stated: ‘Today a new phase of relations has started in Iran’s relations with the world.’ He also stated in a live radio and television discussion with the people on 23 Tir: ‘The step-by-step implementation of this document could slowly remove the bricks of the wall of mistrust.’”

Keyhan continues: “These remarks were made at a time when the Western side, headed by America, does not have any intention to remove or even shorten the wall of mistrust between itself and Iran. … Moreover, they are delaying the implementation of their JCPOA commitments. Lifting the sanctions has remained merely as a promise on a piece of paper, so much so that it has roused the protest of Iranian politicians.

“The American side is promoting conditions in such a way that today even European banks and companies do not dare to establish financial relations with Iran – since all of them fear America’s reaction in the form of sanctions [imposed on those same banks]. Actually, the reason for the delay in the commencement of the European banks’ financial cooperation with the Iranian banks and the failure to facilitate banking and economic transactions, is because many of the American sanctions are still in place, and Iranian banks’ financial transactions are [still] facing restrictions. Moreover, given their continuing fear of the biting legislations and penalties for violations of the Americans’ old sanctions, European financial institutions are concerned about violating the American sanctions that continue to be in force …

“It is pointless to expect the US administration to cooperate with Iran given the comments of the US officials, including [National Security Advisor] Susan Rice, since the Americans’ comments and behaviour reveal their non-compliance with their obligations and speak of the absence of the US administration’s political will to implement even its minimum obligations.”

Here Keyhan is specifically referring to Susan Rice’s observation to Jeffrey Goldberg in the Atlantic that, “The Iran deal was never primarily about trying to open a new era of relations between the US and Iran. The aim was very simply to make a dangerous country less dangerous. No one had any expectation that Iran would be a more benign actor.”

Keyhan continues: “Any action on the international scene calls for suitable and appropriate reaction. Therefore, we cannot expect a government like the US administration that seizes every single opportunity to restrict our county, to lift the sanctions. Rice’s recent comments are only a small part of the increasing anti-Iranian rhetoric of the American officials in recent months. These remarks should actually be regarded as a sign … that the dream of the JCPOA is nothing but wishful thinking and far from reality.” (Emphasis added).

The Supreme Leader’s nudge therefore was intended for the ears of the government: Do not build too much politically on this accord: beware its foundations may turn out to be built on sand.

‘Silver Bullet’ Worries

Recently U.S. Treasury Secretary Jacob Lew gave a talk at Carnegie, on the Evolution of Sanctions and Lessons for the Future, on which David Ignatius commented: “Economic sanctions have become the ‘silver bullet’ of American foreign policy over the past decade, because they’re cheaper and more effective in compelling adversaries than traditional military power. But Jack Lew warns of a ‘risk of overuse’ that could neuter the sanctions weapon and harm America. His caution against overuse comes as some Republican members of Congress are fighting to maintain U.S. sanctions on the Iranian nuclear program despite last year’s deal limiting that Iranian threat.”

White House chief of staff Jack Lew

U.S. Treasury Secretary Jack Lew

So what is going on here? If Lew is warning against sanction overreach, why is it that it is precisely his department that is the one that is so assiduously undermining sanctions relief for Iran – “particularly since Lew’s larger point is that sanctions won’t work if countries don’t get the reward they were promised — in the removal of sanctions — once they accede to U.S. Demands”, in the paraphrase by Ignatius himself?

One reason for this apparent contradiction implicit in Lew’s remarks probably is China: Recall that when China’s stock markets were in freefall and hemorrhaging foreign exchange, as it sought to support the Yuan – China blamed the U.S. Fed (U.S. Reserve Bank) for its problems – and promptly was derided for making such an “outlandish” accusation.

Actually, what the Fed was then doing was stating its intent to raise interest rates (for the best of motives naturally!) – just as those, such as Goldman Sachs, have been advising. U.S. Corporate and bank profits are sliding badly, and in “times of financial depletion,” as the old adage goes, “bringing capital home becomes the priority” – and a strong dollar does exactly that.

But the Peoples’ Bank of China (PBOC) did a bit more than just whine about the Fed actions, it reacted:  It allowed the Yuan to weaken, which induced turmoil across a global financial world (already concerned about China’s economic slowing); then raised the Yuan value to squeeze out speculation, betting on further falls in the Yuan; then let it weaken again as the Fed comments started to slide in favor of interest rate hikes, and a strong dollar – until finally, as Zero Hedge has noted:

Zerohedge: And since Janet delivered, PBOC has strengthened the Yuan Fix by the most since 2005!!

Zerohedge: And since Janet delivered, PBOC has strengthened the Yuan Fix by the most since 2005!!

“It appeared the messaging from The People’s Bank Of China to The Fed was heard loud and understood. Having exercised its will to weaken the Yuan (implying turmoil is possible), Janet Yellen (Fed Chair) delivered the dovish goods [i.e. indicated that global conditions trumped the advice of the likes of Goldman Sachs to strengthen the dollar], and so China ‘allowed’ the Yuan to rally back. In a double-whammy for everyone involved, the biggest 3-day strengthening of the Yuan fix since 2005 also pushed the Yuan forwards, back to their richest relative to spot since Aug 2014 – once again showing their might against the dastardly speculative shorts.”

In short, the Ignatius’s “silver bullet” of foreign policy (the U.S. Treasury Wars against any potential competitor to U.S. political or financial hegemony) is facing a growing “hybrid” financial war, just as NATO has been complaining that it is having to adjust to “hybrid” conventional war – from the likes of Russia.

So, as the U.S. tries to expand its reach, for example by claiming legal jurisdiction over the Bank of China, and by blacklisting one of China’s largest telecom companies, thus forbidding any U.S. company from doing business with China’s ZTE, China is pushing back. It has just demonstrated convincingly that U.S. Treasury “silver bullets” can fall short.

Zerohedge: Crushing shorts as Yuan forwards collapse back to their ‘richest’ relative to spot since Aug 2014

Zerohedge: Crushing shorts as Yuan forwards collapse back to their ‘richest’ relative to spot since Aug 2014

This, we think, may have been Lew’s point — one directed, possibly, at Congress, which has become truly passionate about its new-found “neutron bomb” (as a former Treasury official described its geo-financial warfare).

In respect to Russia, this is important: Russia and America seem to be edging towards some sort of “grand bargain” over Syria (and possibly Ukraine too), which is likely to involve the Europeans lifting, in mid-2016, their sanctions imposed on Russia. But again, the U.S. is likely nonetheless to maintain its own sanctions (or even add to them, as some in the U.S. Congress are arguing).

Source of three graphs: Zerohedge

Source of three graphs: Zerohedge

So, if Russia, like Iran and China become disenchanted with promises of U.S. sanctions relaxation – then, as the Keyhan author noted, a suitable and appropriate (i.e. adverse) reaction, will ensue.

Boomerang Effect

What the Fed and Lew seem to have assimilated is that the U.S. and European economies are now so vulnerable and volatile that China and Russia can, as it were, whack-back at America – especially where China and Russia co-ordinate strategically. Yellen specifically signaled “weakening world growth” and “less confidence in the renormalization process” as reasons for the Fed backtrack.

Ironically, David Ignatius in his article gives the game away: Lew is not going soft, saying that the US needs to use its tools more prudently; far from it. His point is different, and Ignatius exposes it inadvertently:

“U.S. power flows from our unmatched military might, yes. But in a deeper way, it’s a product of the dominance of the U.S. economy. Anything that expands the reach of U.S. markets — such as the Trans-Pacific Partnership in trade, for example — adds to the arsenal of U.S. power. Conversely, U.S. power is limited by measures that drive business away from America, or allow other nations to build a rival financial architecture that’s less encumbered by a smorgasbord of sanctions.”

This latter point precisely is what is frightening Lew and Ignatius. The tables are turning: in fact, the U.S. and Europe may be becoming more vulnerable to retaliation (e.g. Europe, with Russia’s retaliatory sanctions on European agricultural products) than China and Russia are, to unilateral Treasury or Fed warfare.

This is the new hybrid war (and not the hot air issuing from NATO). Lew and Ignatius know that a parallel “architecture” is under construction, and that Congress’ addiction to new sanctions is just speeding it into place.

So, why then is the U.S. Treasury so zealous in undermining the effectiveness of JCPOA’s agreed lifting of sanctions? Well, probably because Iran has less leverage over the global financial system than either China or Russia. But also perhaps, because “Iran sanctions” are (erroneously) viewed by U.S. leaders as the Treasury’s “jewel in its crown” of geo-financial success.

What may be missing from this hubristic interpretation, however, is the understanding that Iran’s experience will not be lost on the others, nor on the SCO when it convenes its next meetings on how to combat Western “color revolution” operations (with Iran likely joining that organization as a member, rather than an observer, this summer).

Alastair Crooke is a British diplomat who was a senior figure in British intelligence and in European Union diplomacy. He is the founder and director of the Conflicts Forum, which advocates for engagement between political Islam and the West. [This article previously appeared at the Conflicts Forum’s Web site and is republished with permission. Copyright Conflicts Forum ­- not to be reprinted, reproduced or re-circulated without prior permission. Please contact CF with any queries.]

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10 comments for “The ‘Hybrid War’ of Economic Sanctions

  1. Tom Welsh
    April 1, 2016 at 12:23 pm

    Having inadvertently and most foolishly driven China and Russia into each other’s arms, the US government has learned… exactly nothing. It proceeds to do its best to drive Iran into closer partnership with China and Russia! Those nations are already close to India, and even Pakistan is showing willingness to participate in a new pan-Asian community. If the Americans keep it up, they could find themselves facing not only a united military and naval defence of the Asian continent, but a united economic and financial front as well.

  2. Joe L.
    April 1, 2016 at 2:20 pm

    The world is watching and know how the US uses sanctions to dominate and “dictate” to the world through its’ large control of many of the world’s financial institutions. I think that if the world is given a choice to get from under the US’ boot then it will take it. I think the world has much reason to dislike the US, simply pick a continent from South America to Africa to Asia where the US have ravaged in war or coups even against democracies meanwhile using institutions like the IMF to take control of countries resources through privatization which still leaves the people poor. Sanctions have been used far, far, far too often and as this article points out it is only driving countries together to create things like the BRICS Development Bank which will make its first loan this month, I believe, as well as the AIIB, SCO, and the creation of a SWIFT alternative along with alternatives to US credit being UnionPay etc. The US’ need to control the world is the very thing that I think will break it, that is also why I am against the TPP because I see it as a means of the US trying to maintain control over the world, US hegemony. I frankly don’t want to live in a world that is dictated by the US or any power including China or Russia or Britain or France or any other power. No more Empire, that should go the way of the dinosaurs…

  3. rosemerry
    April 1, 2016 at 4:20 pm

    I had not realised that the USA was following this path, and stopping other countries who are wanting to benefit from Iran’s availability to trade fairly. How devious, vicious and unfair is this “exceptional” partner, forcing its allies to submit to its continuing sanctions while pretending to have made a decent deal.

  4. Realist
    April 1, 2016 at 4:52 pm

    “Banks well understand the message: touch Iranian commerce and you will be whacked with a billion dollar fine – against which there is no appeal, no clear legal framework – and no argument countenanced.”

    This is not a “fine” per se when there is no legal jurisdiction. It is just stealing, economic thuggery, plain and simple. And all this still derives from the Iranian people’s removal from power of the puppet Shah whom America supported as a pawn of Big Oil after overthrowing the legitimately-elected Iranian prime minister Mosaddegh in 1953? The American state never gives up its sense of entitlement to world rule, no matter how many suffer, or how long, as a consequence. How long till Cuba wises up to Obama’s false promises? How long till the American people realise that this government is our common enemy as well?

  5. Zachary Smith
    April 2, 2016 at 1:15 am

    Now that other countries are learning about the “hybrid” warfare methods, their utility may be waning. I’m guessing that Brazil was caught by surprise.

    Frankly, I don’t understand most of the stuff that’s going on. As a generic basic ignoramus, I’m transfixed by first one, then another glib author with a smooth line. At this very moment I hold the view that the US of A doesn’t have the leverage it once did. Here is a headline dated yesterday:

    “U.S. blinks and allows Iran backdoor access to SWIFT following their move to sell oil in Euros”

    Why did the US do that? I’m not sure, but it doesn’t look like ‘we’ acted from a strong position.

    http://thedailycoin.org/u-s-blinks-and-allows-iran-backdoor-access-to-swift-following-their-move-to-sell-oil-in-euros/2016/04/01/

    Here is another one:

    “Why are Russia and China Buying Gold, Tons of it?”

    Last year I remarked to a relative that the price of physical gold now has a “floor” – a price at which China and Russia are going to buy every single gram offered for sale. If their economies aren’t rock solid, they’re taking pains to make sure their currencies are. I’m assuming that’s why deals totally bypassing the dollar are happening between Russia and China. Both the Renminbi and Ruble are gradually becoming as “good as gold”.

    hXXp://journal-neo.org/2016/03/30/why-are-russia-and-china-buying-gold-tons-of-it/

    A little more frightening is that both nations are gradually getting out of Dollar Securities. When the US government has shown itself to be utterly ruthless and thoroughly dishonest in its dealings with ‘rogue’ nations, the dollar is an obvious thing to get rid of. China in particular is dragging the process out so as not to attract attention, but it’s happening. What are we going to do when nobody wants to finance the US Debt and Imperial Wars anymore? Get a whole lot poorer would be my first guess.

    Lots of crazy things happening, and I worry that the Empire’s Masters Of The Universe are getting desperate. Yet another reason to dread Hillary’s coronation. IMO she’ll be every bit the tool of Big Banking and Big War Industry as Obama has been.

  6. Peter Loeb
    April 2, 2016 at 6:33 am

    “I TOLD YOU SO…”

    In many comments in these spaces I noted during the negotiations
    about the so-called” Iran deal” that I seriously doubted there would
    be any deal at all. I have yet to hear an announcement of the
    sanctions of Iran which are to be lifted. This , as I have often
    suggested, should be at the White House with backers of the
    “deal” behind the President ehrn he signed this “historic”
    diplomatic agreement etc. etc.

    No such announcement has been made. Instead consistent
    complaints have been heard about Iran’s failures. Usually such
    complaints focus only on military aspects.

    There is no consensus for lifting sanctions on Iran in
    the US today. Rather the contrary. Again and again the US
    will put forward legislation and statements which in effect
    excuse it from meeting any obligations re: its
    agreement to lift sanctions on Iran.

    Commentators were accurate. Yes, there was
    an agreement. The “agreement” by the US was never
    ever “in good faith” and was never seriously intended
    to be implemented.

    Recently, Iran has gravitated more and more toward
    support of Russia and its coalition in the ISIS
    coalition. Iran has been invited by Russia to
    consider full membership in he Shanghai Cooperative
    Organization (SCO).

    It is being left with no choice.

    I am no expert in diplomacy but simply wonder whether
    the UN should be formally notified that continued
    adherance to the Iran agreement by Iran cannot be implemented
    until and unless the US (and West) fulfill their
    obligations (lifting of sanctions). Should this be in the
    form of a UJN supervisory unit to report on what
    western sanctions have been lifted at this time?

    —Peter Loeb, Boston, MA, USA

  7. ltr
    April 2, 2016 at 8:08 pm

    A revelation, terrific essay.

  8. Michael Evans
    April 3, 2016 at 2:33 pm

    “The Iran deal was never primarily about trying to open a new era of relations between the US and Iran. The aim was very simply to make a dangerous country less dangerous. No one had any expectation that Iran would be a more benign actor.”

    I just loved this piece, “make a dangerous country less dangerous” OK, so when is something going to be done about THE most dangerous country EVER? And I don’t mean Russia.

  9. Brian
    April 3, 2016 at 11:08 pm

    If financial warfare is the future, America is going to lose, and lose badly.

  10. Carl Jones
    April 5, 2016 at 1:38 am

    This is the end game for the US. There is a new model and its only going to get stronger. The US is also bankrupt. Trump is willing to say real US unemployment is about 20%. Well, its worse than that, its probably around 23/24%. Its the same in Britain where the government uses weather warfare to flood and thus pump insurance money into the sinking economy. The US also uses this gambit. Russia, China, India, Iran and many others, even those outside the BRICS are just biding their time. They know the US and UK are punch drunk boxers wobbling on their feet.

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