Using American banks as a baton against Russia, Joe Biden showed a willingness to arm the American financial system with weapons, continuing tactics honed during the Obama years and dramatically intensified under Donald Trump.
Biden’s decision this week to to forbid U.S. financial institutions since the purchase of new sovereign Russian debt as penalties for the alleged cyber hacking campaign and other violations have provided the first significant insight into the president’s stance on sanctions. This has raised new concerns about their overuse.
“U.S. financial institutions are at gunpoint,” a banking regulator’s lawyer told the Financial Times, citing the use of sanctions as foreign policy tools. Experts this week claimed that the U.S. government “entrusts U.S. foreign policy” to U.S. banks or deploys them as “pre-based” – military terminology for establishing a permanent armed presence off domestic turf.
Trump’s imposition of thousands of sanctions has made them a transitional foreign policy tool in his campaign against Iran, Syria, Venezuela, North Korea and China – and congressional bilateral pressure has also forced sanctions on Russia. Biden administration officials say they are developing a broader economic handbook, working closely with partners and being more discriminated against in the use of sanctions.
Two people familiar with White House planning said sanctions against Russia’s debt were not initially envisaged as part of a package to address US frustrations with Moscow, but that pressure was put on senior government officials to give a stronger response that will not be seen, one person said. , as “completely toothless”. Baiden was particularly committed to a stronger response, both said.
A National Security Council official said the administration wanted to take the time needed to develop the correct response and disputed the accuracy of the concern about looking toothless.
A senior administration official told the Financial Times that Biden’s team looked at the “efficiency” of other punitive tools besides sanctions, such as tariffs, investment restrictions and export controls. Positive incentives such as bilateral assistance, multilateral assistance and debt relief were also considered.
“There are a number of us in the White House who have thought deeply about economic governance,” the official said.
The role, said Andrea Kendall-Taylor, who was named Biden’s director of the NSC for Russia for personal reasons before being rejected, is the dominance of the US dollar and unchanged leadership in the global financial system, which relies on New York as an international clearing house for dollars.
Those targeting sanctions could protect themselves by turning away from U.S. banks toward non-dollar holdings, a trend that, if taken en masse, could undermine the U.S. dollar as its primary reserve currency.
“The risk is real and I think it’s something the United States should be extremely aware of and discriminatory in applying sanctions whenever possible,” she said.
“We see that Russia and China are really working together to reduce the central role of the United States in the global economic system, at the risk of reducing the effectiveness of our financial coercion tools in the long run,” she said.
Last month, Russian Foreign Minister Sergei Lavrov renewed calls for Moscow and Beijing to reduce their dependence on the US dollar and Western payment systems during a visit to China.
The Central Bank of China has expanded its digital currency pilot this year to investigate cross-border transactions. It will grow cryptocurrencies are another potential rival.
A senior administration official said Biden’s team had carefully calibrated actions against Russia in line with a “principle-based approach”, defending its effort to impose “precisely”. targeted costs and avoid a return in dollars.
“We wanted the package to be responsible for limiting the negative spillover to the United States and the global financial system,” the senior official said, adding that the primacy of the dollar was “extremely important to us.”
“It is in our national interest because of the advantage in the cost of financing that it provides, it allows us to absorb shocks. . . and it gives us a huge geopolitical leverage, “the official said.
Some on Biden’s team who had previously worried about the excessive use of sanctions have become more comfortable with them, including Deputy National Security Adviser for International Economy Daleep Singh.
He told Congress he was “cautious” about actions against Russia’s debt as a U.S. Treasury official in 2014 because of “unpredictable spillover effects,” but has since evolved his opinion, arguing that Russia was able to absorb the hit, and investor exposure has decreased.
Peter Harrell, Senior Director for International Economics and Competitiveness at Biden’s NSC, wrote In 2018, the use of sanctions “exploded” over the past decade and became a “rare area of bipartisan consensus in Washington”.
The Biden administration has yet to accept two of its recommendations – to periodically publish a cost-benefit analysis of the US sanctions program, or for US presidents to articulate explicit principles governing the use of sanctions early on.
But a multilateral approach is being sought – another Harrell recommendation – marking a key difference from the Trump-era unilateralism that launched the European Union in 2018 to extend a blockade statute that limits the impact of Washington’s sanctions on Iran.
The Biden administration has taken joint targeted sanctions against Myanmar and Russia, although this week’s move against Russia’s debt was one-sided. A senior official said the package had been “carefully calibrated to increase the chance of partnering with allies”.
“Often we had to act first, and then over time we successfully connected our partners and allies 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 far-reaching and that U.S. sanctions remain in place, not least because non-U.S. banks follow them largely because of market ties and criminal risks. The Biden administration also excluded the secondary debt market and U.S. individuals from this week’s measures and included a abolition period.
Rachel Ziemba, an expert on coercive economic policies, was among those who do not see the latest actions as a “significant risk” to the primacy of the U.S. dollar, adding that pandemic lock falls have seen people further comforting dollar assets.