From the London Review of Books, April 24:
In the 1990s,
high-quality counterfeit $100 bills began to appear around the world.
The United States Secret Service, the agency responsible for
investigating fraudulent currency, claimed that these ‘supernotes’ were
printed in North Korea, though it wasn’t clear how the intaglio printer,
cotton-linen paper and colour-shifting ink had ended up there. Even so,
numerous clues pointed in that direction. In 1996, Yoshimi Tanaka, a
former member of the Japanese Red Army Faction, was arrested in Cambodia
for distributing supernotes in Thailand. Twenty-six years earlier, he
had helped hijack Japan Airlines Flight 351, diverting it to North
Korea, where he and his co-conspirators – including Moriaki Wakabayashi,
bassist with the cult psychedelic rock band Les Rallizes Dénudés –
defected; several of them lived for decades in a compound outside
Pyongyang. In 2005, the leader of the Irish Workers’ Party, Seán
Garland, who had long cultivated ties to the Korean Workers’ Party, was
arrested for allegedly purchasing supernotes from North Korean nationals
(he was never extradited and so never stood trial). Around the same
time, smugglers in California were indicted on charges of importing
millions of dollars’ worth of these notes, as well as more than a
billion counterfeit Marlboro and Newport cigarettes and quantities of
phony Viagra. The fake dollars had apparently been purchased from North
Korean officials by a Macanese judoka called Jimmy Horng and a Taiwanese
national called Wilson Liu, who laundered them in slot machines at
Caesars Palace casino in Las Vegas.
Weeks after one of the smuggling rings was broken up – its leaders were lured by undercover FBI agents to a fake mafia wedding in New Jersey – the US
Treasury tried out a new type of economic warfare against North Korea.
It targeted Banco Delta Ásia, a relatively small bank in Macau that was
accused of facilitating North Korea’s trade in counterfeit money,
cigarettes and narcotics, which the regime was thought to rely on to pay
for its ballistic missile and nuclear programmes. By labelling Banco
Delta Ásia a money launderer, the US Treasury
could prevent American banks from dealing with it. Also, any foreign
bank that transacted with it would be cut off from the US financial system, blocking easy access to the US
dollar and making it difficult to execute payments across national
borders. Most banks in Asia ditched Banco Delta Ásia and the Macau
government froze $25 million of North Korean holdings. Kim Jong-Il’s
regime duly withdrew from nuclear talks and the following year North
Korea tested its first nuclear device. Sanctions did little to prevent
this; they may have had the opposite effect. But by exploiting foreign
dependence on the dollar, the US government had shown that it too had a powerful new weapon.
[Climateer here: that's a rather robust pair of opening paragraphs]
Economic blockades are not new. The Peloponnesian War was triggered by one in the fifth century BCE;
the Ottomans took Constantinople in 1453 after closing the Bosphorus.
But targeted sanctions as a tool of peacetime foreign policy are a more
recent innovation. In the aftermath of the First World War, liberal
internationalists such as President Woodrow Wilson promoted them as a
‘peaceful, silent, deadly’ means of bending a rival’s will. Their first
major test came with Italy’s invasion of Ethiopia in 1935. The failure
of the League of Nations’ sanctions to prevent Mussolini’s occupation of
Addis Ababa ruined the League’s reputation as an instrument of
collective security. In 1941, Japan attempted to break free of a
tightening US embargo by attacking Pearl
Harbor. During the Cold War, embargoes became Washington’s favoured
method of confronting communist countries while avoiding nuclear war;
the embargoes implemented against North Korea in 1950 and Cuba in 1960
are still in force. From the 1970s, sanctions were used, frequently with
the authorisation of the United Nations, to punish human rights
violators and arms traffickers, to compel democratisation and to end
apartheid in South Africa. They were generally more successful at
impoverishing and weakening their targets than in forcing major changes
to their behaviour or bringing about regime change. This was certainly
true of the sanctions imposed on Iraq after the Gulf War of 1990-91,
which did little to dislodge Saddam Hussein but caused a humanitarian
crisis that sparked a global backlash (the first protests I joined were
roadside anti-sanctions rallies in a New England town in the late
1990s). There was a growing sense in Washington that the success rate of
sanctions did not justify their cost. In the case of Iraq, as it turned
out, Plan B was invasion.
The
disastrous wars in Iraq and Afghanistan made sanctions again seem a
better alternative and their use rose dramatically. They have also grown
more powerful, focusing on what Edward Fishman in his new study
describes as one of the key ‘chokepoints’ in the world economy: control
of the US dollar. Maritime trade has always
had to negotiate geographic bottlenecks: the Suez Canal, for example, or
the Malacca Strait or the Strait of Hormuz. Controlling these narrow
passages, through which large volumes of trade pass, confers significant
strategic advantages. Yet by the early 2000s, access to the dollar –
used in around 90 per cent of foreign exchange transactions and
accounting for roughly 70 per cent of foreign exchange reserves
worldwide – seemed to offer even greater leverage.
As Fishman explains, US officials came to this view after 11 September 2001. The US
Treasury lost most of its national security functions to the Department
of Homeland Security, established late in 2002, but it had unexpectedly
been given new powers by the Patriot Act, a law rushed through Congress
weeks after 9/11 which dramatically increased the state’s capacities to
carry out surveillance and policing, as well as expanding the
definition of terrorism. The Act’s anti-laundering measures, originally
aimed at terrorists’ bank accounts, were soon applied to unfriendly
states as well.
After North Korea, the US’s
next target was Iran, which had been under sanctions since the 1979
hostage crisis, though they had done little to curb the growth of the
country’s oil industry or its regional ambitions. In 1996, near the end
of Bill Clinton’s first term, Congress passed a law threatening the
imposition of heavy penalties on foreign companies that did business in
Iran, such as European oil producers like France’s Total, soon to be a
major investor in the development of the South Pars gas field in the
Persian Gulf. These ‘secondary sanctions’ meant that third parties
transacting legally with Iranian entities now faced being penalised by
the US. The sanctions extended the reach of the US state far beyond its legal jurisdiction, and sparked a huge backlash in Europe; the EU prohibited European firms from complying with them. Clinton backed down.
In 2005, under George W. Bush, US
efforts to isolate Iran from the world economy were renewed after the
election of Mahmoud Ahmadinejad, the conservative former mayor of
Tehran, who alarmed Western observers with his messianic speeches and
efforts to accelerate Iranian nuclear enrichment. In 2006, a Treasury
lawyer called Stuart Levey, drawing on the personal connections of his
boss, Henry Paulson (the former CEO of Goldman
Sachs), met with the heads of the world’s largest banks to warn them to
cut ties with Iran. This again proved very unpopular: ‘You fucking
Americans,’ one senior executive at the British bank Standard Chartered
apparently responded. ‘Who are you to tell us, the rest of the world,
that we’re not going to deal with Iranians?’ But ultimately what
mattered was the bottom line: for almost everyone, the risk of huge
fines or of losing access to US banking services outweighed the benefits of trading with Iran. Nearly every major bank complied.
Despite all this, Iran continued to make huge profits on energy
exports. After Barack Obama came to office in 2009, Congress agreed, in a
rare bipartisan moment, that the US should
enforce secondary sanctions. The mere threat led European companies such
as Eni, Shell, Statoil and Total to quit Iran, ceding ground to Chinese
rivals which ensured that the oil kept flowing. The fact that the
global oil trade has long been invoiced almost exclusively in US dollars meant that no European companies were willing to risk being cut off from the US
correspondent banking system, a crucial intermediary in facilitating
international dollar transactions. But blocking Iranian oil exports was
politically fraught. One likely consequence was soaring oil prices –
some predicted they could rise to more than $200 a barrel. And prices
were already high: after bottoming out in the wake of the financial
crisis, they had been driven up by demand from China and other emerging
market economies, and accelerated by the Libyan uprising and civil war
early in 2011. Facing a re-election campaign in 2012, Obama opposed any
further disruption to global oil supplies, even as members of the
Treasury plotted how to blacklist the last Iranian financial institution
with access to the US dollar: the central
bank. Doing this would make it very difficult for Iranian exporters to
be paid, but it also risked pushing energy prices so high that they
would spark what one Treasury official called a ‘nuclear winter
recession’. Despite opposition from the White House, two senators – Mark
Kirk, a Republican, and Robert Menendez, a Democrat (currently serving a
federal prison sentence on corruption charges) – demanded sanctions on
Iran’s central bank, winning unanimous Senate approval. A few months
later, Congress also authorised sanctioning Swift, the Brussels-based
financial messaging platform used by nearly every bank in the world to
communicate international money transfers, if it didn’t stop all
business with Iranian entities. It did so, further imperilling the
ability of Iranian banks to make international transactions. By early
2012, Iran had been all but cut off from the dollar.
The effects were immediate. During 2012, the Iranian rial collapsed as
oil revenues plummeted by nearly 30 per cent. The prices of staple
foodstuffs soared, in some cases doubling in one year. This economic
crisis developed just before the presidential elections of June 2013,
when Hassan Rouhani, running for the technocratic Moderation and
Development Party, was elected on a promise to bargain Iran’s nuclear
programme for sanctions relief. Iran’s presidents are not mere
figureheads, though their freedom of action is constrained by the
supreme leader, and only a limited number of candidates, approved by the
Guardian Council, are allowed on the ballot. Even so, the choice of
Rouhani was a departure. One of his first acts in office was to tap the
well-connected diplomat Mohammad Javad Zarif – who studied for a PhD in
international law and policy in the US – to lead talks on sanctions relief....
....MUCH MORE
From the Author's LRB mini-bio:
Jamie Martin teaches history at Harvard and is the author of The Meddlers: Sovereignty, Empire and the Birth of Global Economic Governance. He is writing a book about the economic consequences of the First World War.
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