"Plumbing of the International Financial System"

Since Russia has veto power at the UN, how have so many sanctions been imposed on them since the start of the Ukraine war? Surely, the Russians would have veto’ed it, right?

 

When Trump tore up the Iran nuclear deal treaty, we know none of the other parties to that deal – the EU, Russia, China – agreed. And yet, Iran was cut off from the international financial system. How could the US do that unilaterally?

 

I found the answer to this question – how the US can unilaterally impose sanctions on whoever displeases them – when I was reading De-dollarization.

 

That power, that capability is rooted in the fact that the US dollar serves as the “plumbing of the international financial system”. And since the dollar is owned by the US, they have the right to allow/disallow its usage by other countries – it’s their property, after all. And since international trade is overwhelmingly in US dollars, a country that can’t use the dollar can’t trade with anyone – it’s effectively under sanctions.

 

But that raises another question – how can the US prevent a country from using the dollar? If two countries want to trade in US dollars, how can the US stop them? Aha, inter-country trade doesn’t happen with suitcases of cash being exchanged! Instead, money is wired via banking systems. The US stops that by threatening the banks – if a bank facilitates any dollar movement to or from country X, then that bank will be fined, prosecuted, and prevented from operating in the US (or its allies). Since the US and its allies constitute the richest countries, no financial entity wants to incur their collective wrath and caves in.

 

This power has interesting side-effects. Bribes have to be paid for deals involving the government of a country. Like access to mines. Or a contract to build an airport. If, say, a Chinese company tries to bribe an official in an African country, the bribe is usually paid in dollars. Why? Because neither side has any use for the currency of the other. And a Swiss bank would accept only an international currency when the official tries to hide the money. But since the bribe was paid in US dollars, the US has jurisdiction –their currency, the dollar, was used in an illegal activity! And they can and have prosecuted individuals for such things.

 

But such prosecutions for corruption trigger anger in those prosecuted. Sometimes, as in bribing government officials, it’s the only way things can get done – so if a Chinese company bribed a Nigerian official, how is that America’s business? Or take the FIFA world cup bribing scandal – since the US is barely interested in football (soccer), and neither the giver nor the recipients of the bribes were Americans, how did America even have any jurisdiction? And yet, in both instances, the US prosecuted – because their currency was used for something illegal.

 

The increasingly unilateral use of this power by the US against whoever displeases them, is resulting in rising anger around the world. The authors point out that in the past, the target of such unilateral American actions, were smaller countries like Cuba, Venezuela and Iran. But increasingly, they have been targeting bigger, more powerful countries like Russia and even China to some extent. Has the US sowed the seeds of the backlash against the dollar? That’s a question the authors of the book explore in detail, but that’s a topic for another blog…