Summary

The US has built a formidable arsenal of economic weapons—sanctions, export controls, SWIFT exclusion—that operate through chokepoints in global finance and trade. The dollar's dominance (60% of reserves, 90% of forex) combined with control of financial infrastructure lets America wage economic warfare more effectively than military force. The Iran case demonstrates how targeted pressure on banks, oil, and the central bank brought a nation to the negotiating table, though overuse risks pushing adversaries toward alternative systems.

Key Takeaways

Notes

Introduction

• Economic warfare: sanctions, export controls, investment restrictions > military force
• The Twilight of Sovereignty (1992): finance, IT will obsolete national gov’t
• Geographic → economic chokepoints
  • Eg. currency, banks, chips
• ↑ stunning resurgence in power of states
• Need a balance (not too much or too little use)

1: Building the chokepoints

1: The old way

• Economic warfare requires
  1. Strong navy
  2. Broad Int’l coalition

2: Invisible infrastructure

• The invisible infrastructure that enables cross-border finance
• USD is 60% of reserve currency stores, owns largest stock, bond markets
• USD involved in 90% of ForEx transactions
• Globalization of finance, supply chain

3: Finance unchained

• Bretton Woods
• US share of global GDP: 40% → 25%

4: The deal in the desert

• OPEC embargo
• Petrol dollars

5: Our currency, your problem

• Deregulation
• Neoliberalism
• Global trade

6: Guerrillas in gray suits

• 9/11 → war on terror
• Office of Foreign Assets Control + IEPA
• TFI

7: An economic weapons test

• US Patriot Act
• North Korea bank freeze

2: Iran and the bomb

8: The technocrat

• Iran running out of money

9: Iran stares down a toothless tiger

• Froze $12B of assets to free hostages

10: Risky business

• Risk of nuclear proliferation
• Iran’s banks

11: Stuart Levey goes to war

• Bank sanctions enforcement

12: Extending a hand

• Levey highest ranking official to stay on Bush → Obama

13: With us or against us

• Secondary sanctions

14: Exodus

• Tightening sanctions, fines
• China, petrol dollars still at work

15: The last bastion

• Sanctions still not effective yet
• Oil exports were last bastion
• But decided to limit

16: 100-0

• Oil embargo
• Sanction on the central bank of Iran

17: Good cop, bad cop

• Sanctions must succeed in shaping psychology of banks, companies, govts
• Significantly reduce oil purchases
• China needed special convincing
• SWIFT forced to sanction Iran banks
• Oil shortage
• New idea: Iran can still sell oil, but $ in escrow

18: Landslide

• Inflation → bottom-up pressure for regime change
• Landslide election in favor of better Int’l relations to reduce sanctions

19: The freeze

• Diminishing marginal returns of additional sanctions
• Sanction relief discussions
• Unfrozen under $5B from escrow
• Frozen nuclear program + economy

20: The world avoided another war

• Loosening embargo’s at the right time allows US to maintain Iran’s dependence upon on it (rather than finding alt trade partners)
• 2+ weeks of deal negotiation for Iran nuclear deal

21: Black magic

• Sanctions had a negative connotation before 2006
• This was the first time sanctions really worked
• Globalism → US given economic choke points

3: Russia’s imperial land grab

22: The diplomat

• Russia invasion of Crimea

23: The fallen bear licks its wounds

• Ukraine was the crown jewel of the former Soviet Union
• Russia’s growing desire + ability to act
• US covert influence conspiracy
• US investment, Russia integration into world economy (2012ish)

24: Euromaidan

• Democratic, pro-European movement
• Ukraine → Russia crisis

25: Aim first, then shoot

• Russia seemed too big to sanction
• Had to get buy-in from Europe first given dependence on Russian oil
• Threatening sanctions, but none enacted

26: The contact group

• G7 sanction advisory group
• Memo writers: officials with lesser titles but more influence

27: The scalpel

• Adding financial rigor (eg. from Goldman Sachs)
• Need more precise instruments
• Sectoral sanctions = scalpel

28: The opening salvo

• Iran sanctions were unanimous, Russian sanctions hurt some US businesses

29: MH17

• Russia downs plane that kills 200+ Europeans, turns up pressure for sectoral sanctions

30: Escalation

• “Pay now or pay double later”
• Escalate capital markets sanctions > supplying arms to Ukraine

31: Economy in tatters

• Identified weaknesses as reliance on:
  1. US capital markets
  2. US tech for offshore drilling
• Russia’s China pivot
• Ruble loses 50% of its value

32: Back from the edge

• Sanctions pushed the Russian economy to the edge, then backed down

33: From Russia with bribes

• Russia looked for weak link countries to ignore sanctions (eg. Greece)
  • US flew in to remind us vs them

34: Dark thought

• Anxieties of a European veto of sanctions calmed
• Stalemate

35: Golden escalator

• Sanctions were effective, but serious damage to economies and risk of overuse
  • Undermines US leadership in the global economy
• Globalization fashioned into a weapon
• The more globalized an economy, the more vulnerable it’d be to economic warfare
• Though ultimately, sanctions on Russia failed to end war
• Uncertainty → incrementalism → ↑
• Election interference: “you fuck with us over the election and we’ll crash your economy”

4: China’s bid for tech mastery

36: The interpreter

• China recognized as an adversary, reorienting foreign policy as such
• Huawei 5G on par with US reserve currency as economic + political kill switch with global reach
• Belt & road initiative (BRI) quite controversial for US, but embraced by UK
• New choke point: finance → tech

37: Irresponsible stakeholder

• Huawei’s advantages:
  • Support from gov’t
  • Expertise from abroad
• ↑ China not playing by the rules, but not being punished for it
• 1990s China traumatic trifecta:
  • Tiananmen Square protests
  • Gulf War
  • Dissolution of the Soviet Union
• ↑ hide strength, bide time
• False assumption that globalization would lead to economic freedom → democracy
• Too gung-ho about adding to WTO without having it follow the rules

38: The awakening

• Xis goal to become “the reddest leader”
• Techno-authoritarianism
• BRI debt trap diplomacy
• Military civil fusion
• Made in China 2025 frontier tech
  • More $$ spent on chips than oil

39: Let 100 China policies bloom

• Trump worry over trade deficit: not understanding more US consumption
• China’s modernization complete

40: The clue: ZTE

• Tech dominance was clear key risk
• Huawei + ZTE state risk
• ZTE barred from all US purchases
• Trump national security < China trade deal
• Proof of large, sudden impact of tarrifs

41: The validation: Fujian Jianhua

• Tit for tat escalation
• FJ stealing trade secrets
• Financial sanctions → commercial sanctions

42: The first shot at Huawei

• Huawei exec arrest due to Iran sanctions violation
• China WTO + predatory economic tactics → hollowed out industries
  • Massive subsidies, stolen IP, etc.

43: A false start

• “The Middle East has oil, China has rare earths” DXP
• Huawei re-allowed to buy from US companies via license applications
• Huawei not thwarted - needed cooperation from more gov’ts

44: Backdoors and betrayal

• US firms contributed 39% of value in semi supply chain, China 6%
• Huawei hardware backdoor
• But, UK continued relationship

45: The second shot at Huawei

• US needed to offer a better alternative than Huawei
• Covid
• Huawei → US nuclear kill switch
• FDPR: Huawei banned from US

46: The dominoes fall

• Effective, $100Bs
• China pledging $1.5T to tech self-sufficiency
• Other countries followed shortly after
• 30% plummet

47: Iron curtain

• False belief in China WTO → democracy
• Reciprocity + candor
• ASML chokepoint
• Trump turned consensus on its head that China economic warfare would cause extreme harm
• China threats were more bark than bite
• Designed to be permanent, not temporary

5: Russia’s invasion of Ukraine

48: The practitioner

• Invasion → new options in play

49: The best-laid plans

• Trump imposed a record # of sanctions, but they were largely ineffective
• Biden re-assessment of sanctions policies

50: America is back

• Afghanistan disaster

51: Standing athwart history, yelling stop

• Russia invasion prep
• Advance warning, but still skepticism

52: Panic at the pump

• Immediate inflation concerns (oil)
• Europe echoed threats

53: An invasion is an invasion

• Promising to weaponize finance + tech
• Day zero sanctions
• Financial sanctions + export controls

54: The Scholz jolt

• Europe joined US in sanctions

55: Banks and tanks

• Invasion → day zero sanctions
• Russia oil, gas, coal exempted

56: Pandora’s box

• Freezing Russia central bank’s USD reserves
• ↑ risks future status as world’s reserve currency
• G7 counties sign-off
• ↑ unprecedented, “it was just theft”

57: Monetary policy at the point of a gun

• Afraid of being poor stewards of world financial system
• Financial contagion risk
• Russia ordered gas giants to convert reserves to Rubles, essentially having the act as reserve banks
• Estimated 10-15% GDP loss, wiping out 20 years of progress

58: A Potemkin currency

• Ukraine holding off blitzkrieg
• US, others start embargoing Russian oil

59: Supply & demand

• Dipping into oil reserves for shock prevention
• India purchasing Russian oil

60: The Rubik’s Cube

• Oil sanction / tariffs

61: What other option do we have?

• Price cap vs complete ban
• Incredible existential risk of ban
• EU committed to ↑
• US urging for price cap

62: The service providers’ cartel

• Price cap + secondary sanctions

63: An economic war of attrition

• Sanctions changed from trying to influence Russian behavior to damage their economy

64: A partitioned market

• Price cap threatens price setting dominance of OPEC+
• Price cap possibilities:
  • Marginal cost of production ($10-25)
  • Russia gov’t budget (<$70)
  • Current increased cost ($55-65)
  • Consultation with buyers (conservative)
• $30 vs $65-70 → $60
• 6mo later, profits down by 50%

6: The world economic rupture

65: Small yard and high fence

• Chips export to China blocked by US
• De-risking and diversifying, not decoupling
• 3 important tech families: biotech, clean energy, computing

66: The scramble for economic security

• BRICS

67: Breaking the choke points

• DM Libra crypto
• Crypto breaks US economic warfare
• USD reserve status is still strong
• Even China’s trade is only 30% in its own currency
• Other countries don’t like USD reserve dominance, but better than China
• US should launch a digital currency
• “China may well build deeper capital markets or even loosen capital controls, but it cannot match the fundamental advantages of the dollar unless it revamps its entire political system for the better or America’s is remade for the worse”
• ↑ careful of the Fed, legal system
• Petrol dollar system
• China is still 5+ years behind on chips
• Could break the global economy

68: Strategy and sacrifice

• Are the benefits of economic warfare worth the cost?
• Fixed a fatal flaw in globalization, preventing underminers of US-led world order from profiting while doing it
• G7 is the steering committee of economic warfare, BRICS is the counterweight
• To deter Russia, threats of sanctions must’ve been conspicuously stronger

Conclusion: impossible trinity

• Should create a permanent economic war council
  • A cross-disciplinary council of experts trained by curriculum and constantly working on sanction scenarios
• Sanctions could also be used for
  • Carbon-intensive mega projects
  • Dangerous applications of AI
• US must continuously improve economic arsenal
  • Eg. sovereign wealth fund, stockpiled resources, domestic investments
• “The age of economic warfare”
• The impossible trinity:
  • Economic interdependence
  • Economic security
  • Geopolitical competition
• Eventually chokepoints will diminish in importance and the age will end
• Unsure whether response to ↑ will be positive or negative
  • For instance, it’s a replacement for true warfare