Friday, April 1, 2016

Alastair Crooke — 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.
Actually, sanctions are a blessing in disguise. The less non-Western countries have to do with the West financially and economically, the better off they will be. They need to develop parallels instead. After all, they are the ones who have the natural resources that the West needs. The West should be coming to them rather than the other way around.
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).
Consortium News
The ‘Hybrid War’ of Economic Sanctions
Alastair Crooke

See also

Eurasia Review
China-Iran: Common Grounds For Cooperation – Analysis
Taipan Bharadwaj
China has warned the US that it will protect its sovereignty in the disputed waters of the South China Sea and rejects attempts to use international laws and freedom of navigation as a pretext to undermine its national security interests.

In a meeting with US President Barack Obama at the fourth Nuclear Security Summit in Washington DC, his Chinese counterpart Xi Jinping said that while he believes in the peaceful resolution of conflicts through direct talks, China will take steps to protect its national interests and sovereignty.
“China will firmly safeguard the sovereignty and related rights in the South China Sea,” Xi said in a meeting, according to Xinhua news.
While acknowledging that Beijing “respects and safeguards the freedom of navigation and overflight other countries are entitled to under international law,” Xi stressed that China will “not accept any freedom of navigation as an excuse to undermine China's sovereignty and national security interests.”
Xi warns Obama against threatening China’s sovereignty & national interests


Matt Franko said...

"But in a deeper way, it’s a product of the dominance of the U.S. economy. "

Its not the US economy it is the USD... the second rate foreign nations all zealously seek the USDs... Trump (effectively) wants to pull the plug on all of these USD zombies...

MRW said...

Matt, so if you "pull the plug on all of these USD zombies,” what happens? What’s the consequence of that over time?

If other countries don’t want, or can’t, save in USD, what happens to (1) the US reserve currency status, and (2) US financial hegemony? Do we become Switzerland or Canada?

Matt Franko said...


Dont have it yet but I think this (MNE) is the blog to to read be best informed about the fallout from those potential developments ... as far as forex/equities/bonds/fiscal etc...

I'm not putting a lot of thought into it until its closer to actually happening... He might not make it... HRC or a GOP convention draftee would probably mean status quo ie more of the same as currently which i think we have a pretty good handle on the current situation...

Bernie or Trump would probably shake things up... but in different ways...

I think we should just stand by for now and see how it plays out .... we have time...

Meantime I keep going back to this excerpt from Augustus' epitaph:

"In the temples of all the cities of the province of Asia, as victor, I replaced the ornaments which he with whom I fought the war had possessed privately after he despoiled the temples. Silver statues of me-on foot, on horseback, and standing in a chariot-were erected in about eighty cities, which I myself removed, and from the money I placed goldn offerings in the temple of Apollo under my name and of those who paid the honor of the statues to me. "

Trump is (effectively) proposing to "remove the statues" (as a figure of speech) being built by all the USD zombies out there..

But there would differences in motivations between why Trump would do this ("get even!") vs why Augustus did it ("stop disgracing yourselves!") so it might not turn out the same...

(FD I am thinking more about a Trump fallout than a Bernie fallout as I am a GOPer)

but again we just have to see how events play out and keep on top of it...

MRW said...

I guess my question is more along the lines of Why bother? I’m assuming global usage of USD would be the least of Trump’s problems as Prez, and, in fact, would hasten the mature creation of the alternative financial architecture that Crooke cites. How does that benefit us? Of course, it would mean that we (the US) would have to start selling our goods in the newly-prized currency in order to obtain them (since we can’t make rubles or yuan on our printing presses).

MRW said...

On the other hand, it would drastically reduce our propensity for conducting war and maintaining bases in other countries since it would now be a real cost to us payable in something other than fiat USD.

Tom Hickey said...

The way the Great Game works post WWII to the present is that the ROW desires to save in USD more than other currencies, making the USD the dominant reserve currency. This is for two chief reasons.

First, the US has the largest and most resilient economy and secondly, it is the world's sole superpower militarily, with a policy of global hegemony and denying competitors. Both the economic might of the US and its military might rest on the military-industrial-financial-governmental complex that rules the country with an iron first.

Military might grows out of military spending, and the US has the means in the USD to spend more on the military than the ROW combined. As long as this holds, the USD will dominate and competitors will not be allowed.

China knows this and has a strategy to counter it. The US is now confronted with a Chinese-Russian and potentially Iranian strategic alliance and is face with the prospect with having to fight a two front war in Eurasia that it cannot win. But the US is determined to try.

Expect a Thyucides trap.

Bob said...

Why does there have to be a reserve currency? You can go to the FOREX anytime you want to exchange X for Y. And if you have a lot of savings, there are other ways to squirrel your wealth away, such as buying real estate.

Tom Hickey said...

Why does there have to be a reserve currency?

Liquidity AND safety.

Matt Franko said...

MRW that is about right... this is what he (at least) is saying in his campaign stump speeches...

Collapse the CAD, get compensation for overseas bases or close them, redirect Defense spending into R&D/production/training of advanced systems and less on operational deployments...

FD I am voting for him in the Primary and then the General if he is there...

John said...


You can add to that list the devil's pact in which the client Gulf states only accept payment for oil and gas in dollars. So unless you have no wish to buy oil and gas, you have to obtain dollars. I should imagine that this is a far more important reason than having somewhere safe and liquid. Surely, you only want somewhere safe and liquid because you have dollars. And the reason you have them is because you are in a position of having to acquire them!

Things may have been different from 1945 to the early seventies, so that acquiring dollars for US goods and services was necessary to rebuild war torn countries. But the deal to price energy only in dollars says something about how Washington perceived then and still perceives now the threat to the dollar as reserve currency. I don't think there really is a risk to the dollar as the reserve currency. Possibly a hundred years from now, if then, by which time there will presumably a multipolar world, making a reserve currency obsolete. A reserve currency helps certain powerful sectors, and they happen to be the most powerful sectors (energy, military and finance) and they make policy. A reserve currency is not some neutral or accidental economic and financial phenomenon. Like most things in economics, it should be looked through the prism of power and vested interests. As Neil so illuminatingly puts it, although perhaps for a different reason, there's no such thing as economics - just politics. And this is international geopolitical economy. As long as the dollar is the reserve currency, Washington is in a stronger position than it otherwise would be. Without the reserve currency, Washington would have to face up to the fact of its decline from preeminent colossus to merely one of a handful of international superpowers. The oil-dollar nexus keeps Washington from facing that day.

Tom Hickey said...

One could always just exchange whatever currency one wished to save for USD to complete a transaction involving oil or whatever else the seller preferred. This would be handles by ones bank.

The question is why one would hold a reserve currency? The answer is that reserve currencies are the preferred vehicle in which to save. And the reason is that that they are both highly liquid and also safe assets. So lots of people desire to hold either USD or US treasuries, which are just as liquid as USD but carry some interest rate risk.

If currencies were equally liquid and safe stable exchange rates, then there would be no need or use for reserve currencies. That's not the world we live in now.

Bob said...

The Canadian dollar offers safety and liquidity.

John said...

Tom: "One could always just exchange whatever currency one wished to save for USD to complete a transaction involving oil or whatever else the seller preferred. This would be handles by ones bank."

Explain please! I can't make out the point you're making. Isn't there a fundamental difference from paying, say, in rupees rather than exchanging rupees for dollars and then making the payment for oil? Otherwise what were Kissinger and company trying to achieve in linking Middle East energy to dollars? Were they fundamentally mistaken in thinking the currency in which a commodity was priced is important, and that is is in fact unimportant, even irrelevant?

This payment issue isn't the most important reason for Washington's Middle East policies, although it always seemed to me important. Following decades long identical explanations by State and DoD, the most recent was given by Zbigniew Brzezinski when he explained that US control of Middle East energy "gives it indirect but politically critical leverage on the European and Asian economies that are also dependent on energy exports from the region." Whoever controls the oil dictatorships has "critical leverage" on other economic powers.

The pricing in dollars and the "recycling of petrodollars" is a bonus, but they aren't the reason for Washington's Middle East policy.

Matt Franko said...

John if you understand MMT then you have more knowledge in the tip of your pinky finger than Kissinger and Brezinski have in their entire bodies ... COMBINED....

Tom Hickey said...

Were they fundamentally mistaken in thinking the currency in which a commodity was priced is important, and that is is in fact unimportant, even irrelevant?

Yes and no. Pricing oil in USD creates demand for USD to complete transactions. But it doesn't necessarily increase saving in USD. Those needing dollars can obtain through exchange on demand since the USD is highly liquid and relatively stable.

This might increase the tendency to save in dollars but it is not necessary to hold USD in advance of the transactions involving USD. Again, banks act as intermediaries. When entities purchase oil, their bank debits their account in the unit of account and provides the USD to the seller either from its fx reserve fund or gets USD on the market.

The idea that pricing oil in something else than USD will end "dollar hegemony" is wrong. The idea is that the US will not be able to place its bond issues that fund deficit spending if that occurs. That is not the case. It would reduce demand for USD in transactions but not as highly liquid safe assets. Demand for the later drives the USD as the dominant reserve currency. That will continue as long as the US is dominant economic and militarily, which is what the Wolfowitz Doctrine is about maintaining and the military-industrial-financial-governmental complex keeps in place.

A lot of people think that the US can be cut down to size by attacking the dollar but that is based on faulty analysis of how the system works.

Tom Hickey said...

To put in another way, the causality is reversed.

The US is not the richest and most powerful country because it has the global reserve currency as some erroneously imagine.

Rather, the US has the global reserve currency because it is the richest and most powerful country.

As long as the US is the richest and most powerful country the USD and US tsys will be the safe haven owing to the many advantages this affords over holding other currencies or government securities denominated in other currencies.

Tom Hickey said...

The Canadian dollar offers safety and liquidity.

Also have to look at volatility as an aspect of safety.

US/CAD chart

John said...


Thanks to people like you, I'm very slowly getting there, and time is limited! What's that great line by Keynes about escaping from old ideas? I still have my dark nights of the soul, but they're few and far between now.

One may not agree with what Brzezinski and people like him have to say, but you have to appreciate what it is they're trying to convey. Since 1945 people like Brzezinski have engineered a geopolitical situation in which Washington gives its client Arab despotisms orders on the supply and price of oil because it will give "critical leverage" on other economies. That is the policy. That has nothing to do with MMT. It is a geopolitical decision. What Brzezinski is reiterating is a policy that goes back to the mid-forties, so it's not as if he's living in the Twilight Zone. Brzezinski is a very smart cookie, I have to be honest enough to give him that, notwithstanding his jihad in Afghanistan. Kissinger is too full of himself to realise he's not as smart as he thinks he is.

Nonetheless, the minor question still stands. If you need dollars to pay for energy, does that not put Washington and the powerful interests that control it (I try not to say US) in a stronger financial, economic and strategic position than if energy were priced in euros, pounds or nothing in particular at all? The major question of why US policy is what is has been explained by Brzezinski, echoing exactly George Kennan, probably the most astute strategic planner the US has ever had.

John said...


You've answered my question. There's the unfortunate time delay while posting that I didn't read your above post.

I think you're right and it clears things up. But as I said, it is a minor issue. The major issue was explained by Zbig and goes all the way back to 1945.

Bob said...

Also have to look at volatility as an aspect of safety.

Is that chart scary or reassuring?
And whose volatility?

USD vs. Bangladeshi Taka: