The 2022 Russian invasion of Ukraine was met by military resistance and by another response, an economic one, led by the US government. Russia’s foreign assets were frozen, and most banks refused to process Russian transactions. This was open economic warfare, of a scale unprecedented in recent times for an economy the size of Russia’s.
Companies pursue profits, of course, and in times past would continue their operations despite wars. Famously, US companies like Ford and General Motors maintained operations in Nazi Germany. Since then, the world economy has been internationalised, and there is much greater mutual dependency, for example with products made from components in different countries. In most cases, trade continues between countries even when their governments clash.
To understand what made the economic measures used against Russia possible, the go-to guide is Henry Farrell and Abraham Newman’s book Underground Empire: How America Weaponized the World Economy. It is a penetrating study of how the US government, due to historical accidents, gradually discovered ways to exploit others’ economic dependencies, and used them in an increasingly unrestrained manner.
The story begins with electronic communication. Although the Internet is designed to be resilient to disruption, the algorithms for routeing messages favour speed, which means most of them go through a few nodes, most of which are physically in the US. This includes banking communications. The US government can exert leverage on foreign banks by threatening them with exclusion from communications. This includes Eurodollars, which are dependent on the same communication systems.
For example, the US government pressured SWIFT, a bank-clearing system, to serve its demands.
“SWIFT had been transformed from a politically independent organization, which was supposed to help protect banks from government regulation, into an all-seeing servant of the U.S. state, whose knowledge mapped out the hidden world of international financial transactions.” (pp. 65–66)
A US agency, OFAC (Office of Foreign Assets Control), can bend foreign banks to its will by blocking them from operating in the US and from working with US-regulated banks (e.g., Citibank) to make dollar-denominated transactions. Other banks avoid anything to do with a “designated” (targeted) foreign bank for fear they would also be targeted and lose access to trades in US dollars.
Another part of the story is surveillance of electronic communication by the National Security Agency, which expanded from anti-terrorism to economic surveillance, of both enemy and ally states, and of companies like Microsoft and Google. Some of this was revealed by whistleblower Edward Snowden. No one is protected from snooping and demands for access to information: “… not just foreign terrorists but American multinationals found that they fell outside the zone of protection.” (p. 153)
The authors argue that the weaponising of economic measures was not planned but rather used in an ever-widening fashion. They go through a series of case studies. The measures taken against the Iranian economy are eye-opening. They include isolating Iran from global banking and preventing it receiving payment for exports. I was amazed to read that Brian Hook of the US State Department pressured the captain of an oil tanker carrying Iranian oil, offering him a multi-million-dollar personal payoff (a bribe) for steering the ship to where it could be impounded, furthermore threatening sanctions against him personally if he refused.
Brian Hook
After Iran, there was the response to the Russian invasion of Ukraine. Then there are the economic measures designed to hobble the Chinese economy, for example preventing the import of the most advanced chips produced in Taiwan.
Underground Empire is an engaging, informative and well-referenced account. The authors write from a US perspective but are critical of weaponising the economy, in part because if such measures are overused, they encourage countermeasures and may eventually undermine US dollar dominance. As the US government has exercised its financial power, other governments and businesses have had more incentive to develop alternatives, including their own centralised networks.
“The United States had made itself too powerful to be trusted — it couldn’t credibly promise that it wouldn’t break its word to business under a different administration or a different interpretation of the rules.” (p. 76)
Henry Farrell
In an intriguing twist, Farrell and Newman are part of their own story. In 2019, they wrote an article about “weaponised interdependence,” with the intention of warning the US government against using its leverage on global finance coercively. Instead, their ideas were used by the Trump administration as a guide to flexing its power.
Abraham Newman
Corporations squeezed
It’s not often that we can think of multinational corporations as victims. As Farrell and Newman explain, businesses built up networks to serve their interests, but then the US government used these networks for its own purposes, putting businesses in awkward situations. They tell about Microsoft’s cloud computing business and how the US government made things difficult for the corporation.
“Yet even if the cloud seemed to exist nowhere and everywhere at once, U.S. companies like Microsoft were bound by U.S. law. American authorities demanded data on foreigners, threatening harsh penalties for American companies that did not comply, while ordering them to keep their compliance secret. These authorities also believed themselves entitled to seize industrial quantities of data from these companies overseas, without warrant and without informing the businesses, let alone the users, of what was happening. That made life nearly impossible for Microsoft and its competitors. How could foreign governments and foreign businesses trust Microsoft to keep their data private in the future?” (pp. 153-154)
And it’s not just the US government. Governments in China and the European Union have joined in. In this high-level economic warfare, businesses have been caught in the crossfire. Business leaders used to think nationalisation was the biggest danger. “Now, they are coming to understand that powerful, wealthy countries present the greatest risks.” (p. 147) Businesses might like to remain neutral, to make profits in all markets, but when the pressures become too great, they feel forced to choose sides.
The biggest story is not Iran or Russia but China, now the prime target of US government economic warfare because it is the strongest challenger to US economic dominance.
But by waging economic warfare, the US government risks strengthening its competitor.
“One of China’s great weaknesses in building its own empire was that other countries, businesses, and ordinary people couldn’t trust it: it took advantage of them whenever it suited. … If countries and businesses believed that the United States would deploy its power ruthlessly against them, then they might see little difference between it and its adversary.” (p. 190)
Underground Empire has a great deal of fascinating detail, and offers a deeper understanding of many world events than any number of media stories. On the other hand, Farrell and Newman examine economic warfare only at the level of governments and large corporations. They do not mention workers, trade unions or citizen campaigners. Do they have any influence?
Nothing new?
Weaponising the economy is nothing new. In the 1980s, the International Monetary Fund imposed “structural adjustment programs” on Third World countries around the world, which continue to siphon wealth from the poor to serve the rich in First World countries. Long before this, the British empire exploited its colonies through trade policies, so that, according to Shashi Tharoor in Inglorious Empire: What the British Did to India, colonial rule led to a drastic decline in wealth in India, while benefiting British manufacturers.
Gene Sharp in part two of his classic 1973 book The Politics of Nonviolent Action lists 198 methods of nonviolent action, in three main categories: (1) protest and persuasion; (2) noncooperation, including many types of strikes and boycotts; and (3) nonviolent intervention, for example fasts, sit-ins and alternative institutions. In the category of noncooperation are “actions to suspend economic relations”, which include actions by consumers, workers, owners, financial institutions and governments. Most relevant here are actions by governments, including embargoes by international sellers and buyers.
Sharp’s method #89 is severance of funds and credit. He writes,
“Economic pressures can also be exerted by cutting off the opponent’s sources of money, such as salaries, appropriations, loans and investments. This may be done by individuals, firms, or governments. In certain American colonies [in the 1700s], the assemblies withheld appropriations for the salaries of governors and judges as a means of keeping them from acting too much out of line with the assemblies’ political wishes.” (p. 239)
Sharp presented nonviolent campaigns as challenges to dictatorship, war, genocide and social oppression — not as tools by powerful groups to serve their own interests. Nevertheless, he included examples of how methods of nonviolent action have been used for other ends. The method of severance of funds and credit was used by whites in the US against blacks who pushed against segregation.
Gene Sharp
Method #93 is blacklisting of traders.
“During wartime or during a policy of embargo, one government may seek to block indirect transfer of embargoed good through firms or individuals in a neutral country by prohibiting trade with them as well as with the enemy country itself. … These were standard United States practices during World War II.” (pp. 244-245)
They seem to have become standard more recently, though war has not been declared.
Method #96 is international trade embargo, which
“is a combination of the international seller’s embargo and the international buyer’s embargo. It involves a total prohibition of trade with the opponent country, or a near-total ban, exempting perhaps medicines and the like.” (p. 246)
One of Sharp’s examples is the 1962 embargo of Cuba by the US government.
In economic warfare, there is an underlying violent foundation: property, including money and the economic system generally, relies on the power of the state for protection. If banks simply cleared out deposits and said, “tough luck,” what could depositors do? They rely on governments to protect their investments, to provide compensation or impose penalties on renegade banks and any others who violate the rules of the economic game.
But what happens when powerful governments are the rule-breakers, when they seize assets without compensation, impose tariffs in violation of trade agreements, and threaten banks from trading with the “opponent,” outside of wartime? When rule-makers become blatant rule-breakers, this undermines the legitimacy of the entire system, and can provoke resistance. This is what Farrell and Newman warn about and describe.
Sharp writes that “International embargoes of all three types have not produced many notable successes.” (p. 248) Whether US-government-initiated embargoes will succeed or be counterproductive remains to be seen.
So what’s new about the methods described by Farrell and Newman? In recent decades, multinational corporations have built up international networks unprecedented in scope and influence, networks encompassing trade, banking and technology, serving their own interests. What’s new is that the US government has found ways to exploit these corporate networks for its own ends, sometimes at the expense of the corporations, in ways not previously possible. Underground Empire is essential reading for understanding this new facet of political economy.
Brian Martin
bmartin@uow.edu.au
Thanks to Susan Engel and Abe Newman for valuable comments.