Using American banks as a stick against Russia, Joe Biden has shown his willingness to militarize the American financial system against its enemies, pursuing tactics perfected during the Obama years and greatly accelerated under Donald Trump.
Biden’s decision this week to to prohibit U.S. financial institutions to purchase new Russian sovereign debt as punishment for an alleged campaign of cyber-hacking and other crimes offered the first significant insight into the president’s attitude toward sanctions. This has raised new concerns about their overuse.
“America’s financial institutions are being militarized,” a banking regulation lawyer told the Financial Times, referring to the use of sanctions as a tool of foreign policy. Experts argued this week that the US government is “contracting out US foreign policy” to US banks or deploying them as “forward basing” – military terminology for establishing a lasting armed presence beyond of the national territory.
Trump’s imposition of thousands of sanctions has made him the go-to foreign policy tool in his campaign against Iran, Syria, Venezuela, North Korea and China – and bipartisan pressure from Congress has also imposed sanctions on Russia. Officials in the Biden administration say they are developing a broader economic toolkit, will work more closely with their partners, and be more discriminatory in the use of sanctions.
Two people familiar with White House planning said Russian debt sanctions were not initially considered as part of the package to address US frustrations with Moscow, but that there are was pressured from senior officials to come up with a stronger response that would not be seen in one person’s words, such as “totally toothless”. Biden in particular pushed for a stronger response, both people said.
A National Security Council official said the administration was keen to take the time necessary to develop the correct response and questioned the accuracy of concerns about appearing “toothless.”
A senior administration official told the Financial Times that Biden’s team was examining the “effectiveness” of other punitive tools in addition to sanctions, such as tariffs, investment restrictions and tax controls. ‘export. He also envisioned positive incentives such as bilateral assistance, multilateral assistance and debt relief.
“There are a number of us in the White House who have thought deeply about economic policy,” the official said.
At stake, said Andrea Kendall-Taylor, who was appointed director of Biden’s NSC Russia before declining for personal reasons, is the dominance of the US dollar and America’s undisputed leadership in the global financial system, which relies on New York as an international dollar clearinghouse.
Those targeted by sanctions could seek to protect themselves by turning away from U.S. banks for non-dollar holdings, a trend which, if taken in en masse, could undermine the U.S. dollar as the main currency of the economy. Reserve.
“The risk is real, and I think it’s something the United States needs to be extremely aware of and discriminate against in the use of sanctions where possible,” she said.
“We see Russia and China really working together to reduce the centrality of the United States in the global economic system, and in the longer term, this risks diluting the effectiveness of our financial coercion tools,” he said. she declared.
Russian Foreign Minister Sergei Lavrov last month renewed his calls on Moscow and Beijing to reduce their reliance on the US dollar and Western payment systems during a visit to China.
China’s central bank this year expanded its digital currency pilot project to explore cross-border transactions. Booming crypto-currencies are another potential rival.
The senior administration official said Biden’s team had carefully calibrated actions against Russia according to a “principled approach”, defending their efforts to impose “precise” measures, target costs and avoid the dollar return.
“We wanted the package to be responsible for limiting the negative fallout on the United States and the global financial system,” the senior official said, adding that the dollar’s primacy was “extremely important to us”.
“It’s in our national interest because of the financial benefit it provides, it allows us to absorb shocks. . . and that gives us enormous geopolitical leverage, ”the official said.
Some members of Biden’s team who previously worried about the overuse of sanctions have become more comfortable with them, including Deputy National Security Advisor for the International Economy, Daleep Singh.
He told Congress in 2019 that he was “cautious” about actions against Russian debt as a US Treasury official in 2014 due to “unpredictable ripple effects,” but his point of view has since shifted, arguing that Russia was better able to absorb the blow and that investor exposure had decreased. .
Peter Harrell, Senior Director of International Economics and Competitiveness at Biden NSC, wrote in 2018, that the use of sanctions had “exploded” over the past decade and had become “a rare area of bipartisan consensus in Washington.”
The Biden administration has yet to follow through on two of its recommendations – periodically publish a cost-benefit analysis of the U.S. sanctions program or have U.S. presidents articulate, from the start, explicit principles guiding the use of sanctions.
But he seeks a multilateral approach – another Harrell recommendation – marking a key distinction from Trump-era unilateralism which, in 2018, pushed the European Union to expand a blockade status limiting the impact of Washington’s sanctions. on Iran.
The Biden administration has initiated joint targeted sanctions against Myanmar and Russia, although this week’s ruling on Russian debt was one-sided. The senior official said the package “had been carefully calibrated to increase the chances of partnering with allies”.
“We often had to act first, then we were able to bring our partners and allies with us over time, and again we hope to have the same kind of unity of purpose,” the official said. .
For now, banking experts say the risks to the dollar’s primacy remain remote and that U.S. sanctions remain effective, not least because non-U.S. Banks have a strong tendency to follow them due to market ties and risk of penalty. The Biden administration also excluded the secondary debt market and U.S. individuals from this week’s measures and included a liquidation period.
Rachel Ziemba, an expert on coercive economic policies, was among those who did not see the latest actions as a “significant risk” to the primacy of the US dollar, adding that pandemic lockdowns had seen people take more comfort in assets by dollars.
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