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The Art of Monetary War

More than any armed conflict, the current international monetary system has laid bare the folly of the romantic liberal portrait of globalization. The sanctions against Russia are the clearest manifestation yet of a distinct undercurrent of financial globalization that has become more pronounced in recent in years: geopolitical coercion through the central banking system. Over the past decade there have been a number of instances in which this form of financial compulsion—what one might call monetary warfare—has been used to devastating effect.

Sanctions and the new phase of economic combat

Bank of Russia
Bank of Russia. Photograph via Flickr.

The scale of the Western response to Russia’s invasion of Ukraine has been as surprising as the invasion itself. In the span of a few days, a highly integrated capitalist economy was wrenched out of the networks of financial globalization with unprecedented speed and comprehensiveness. Two and a half weeks after Russia launched its horrific war, the country is isolated, its economic linkages with the outside world growing more attenuated by the day.

The initial focus of Western sanctions—on the assets and financial transactions of key Russian businessmen and companies—didn’t come as a particular surprise. Some of the same targets had already been sanctioned in the wake of Russia’s first incursion into Ukraine in 2014. As the political pressure to punish Russia mounted, the US, UK, and EU announced the ejection of Russian banks from SWIFT, the global interbank messaging system. By prohibiting correspondent banking relationships with banks in New York, the West ultimately pushed Russia out of the global dollar-based clearing and settlement system.

Exclusion from the global payment system was a major step up in the escalation. But Western leaders were still on familiar territory. Iranian banks were excluded from SWIFT in 2012, and correspondent banking relationships were severed in 2019. And crucially, the US and EU had made sure to exempt all transactions related to energy: Russian gas and oil could continue to flow. It’s the subsequent measures, put in place in the Sunday after the invasion, that have constituted the real geoeconomic break: the freezing of Russian’s foreign reserve assets held abroad, and the outright ban on transactions with the Russian central bank. In emerging markets, foreign reserve assets are used by central banks to prevent runs on their currencies by committing to prop up their value in so-called open market operations. When markets opened on Monday after the invasion, the West had deprived Russia of the half of the $630 billion “war chest” of foreign exchange earnings that its central bank held at institutions abroad. The ruble has since fallen to record lows against the dollar. An exodus of Western firms commenced and has yet to cease. Finally, last Tuesday, the US announced an import ban on Russian oil.

The short-term consequences for Russian civilians are clear: a dramatic decline in purchasing power, massively higher unemployment, shortages of key goods such as food, medicine, cars, and household appliances. And then what? As the Deputy Director of the CIA David Cohen, architect of the sanctions against Iran and Russia (as undersecretary of the treasury for terrorism and financial intelligence) noted in 2019, if the goal is regime change, the logic of coercive sanctions does not hold up. Indeed, the experiment with severe sanctions and trade measures enacted against Iran has not led to any lasting behavioral change, let alone to changes in government. Cornell historian Nicholas Mulder’s recent history of sanctions, The Economic Weapon, makes the case on a grander scale. Mulder shows that sanctions tend to have little to do with deterrence or compellence: in their totality they constitute a form of siege, of attritional warfare against one’s enemy, particularly its civilian population. In the case of Iran, the humanitarian consequences of prolonged US sanctions have been degrading. Economic growth has languished, incomes have stagnated, and food prices have risen. As a result, food insecurity and malnutrition—especially among children and women—have risen, rendering a large part of the population more prone to chronic disease. An estimate by the Centre for Economic and Policy Research suggests that the reimposition of sanctions by the Trump Administration alone has resulted in up to forty thousand excess deaths in 2017 and 2018.

More startling than even the speed or the unity of the Western response, however, was that they were imposed while the war was in full swing, and not ex ante as is usually the case. This is why they are inseparable from the incompetent butchery on the ground. It should not come as a too big a shock that Putin’s escalatory response was to increase the alertness level of Russia’s nuclear arsenal. The central bank freezes have irked him more than the announcement of European weapon deliveries to Ukraine.

The financial war is a genuine war—and its stakes are immense. Over the course of a week, targeted financial sanctions escalated into measures that, if not lifted in the near future, are almost certain to condemn Russia’s quasi-autarkic economy to sharp and lasting stagnation. No matter their intent or longevity, these sanctions will change the country forever.


In The Great Transformation, Karl Polanyi attributed the relative peace in Europe in the century preceding the first world war to the implacable workings of “haute finance,” which muted geopolitical rivalries by aligning national interests with its “peace interest.” Peace and trade, he wrote, had become linked by way of monetary integration. Perhaps it was this belief that informed some of the complacencies that preceded the invasion.

Since the late 20th century, globalization has been celebrated in even more emphatic terms. Commentators both inane (Tom Friedman and his Golden Arches theory) and sophisticated (Paul Krugman) have long proffered an argument that economic integration would diminish the conditions for interstate hostilities. In reality it is hard to view the past decades of financial globalization as anything other than a prelude to the current conflict.

More than any armed conflict, the current international monetary system has laid bare the folly of this romantic liberal portrait of globalization. The sanctions against Russia are the clearest manifestation yet of a distinct undercurrent of financial globalization that has become more pronounced in recent in years: geopolitical coercion through the central banking system. Over the past decade there have been a number of instances in which this form of financial compulsion—what one might call monetary warfare—has been used to devastating effect.

Of course this method of coercion is not new. But the extreme step of the central bank freeze suggests that we are in a new phase of monetary combat. Not even Nazi Germany was fully exiled from the international monetary system. Relations between the Bank of England and the Reichsbank persisted well into the 1940s, while the Bank of International Settlements allowed the German central bank access to its clearing and settlement facilities throughout the entirety of the war. One infamous case in 1939 involved the clearing of looted Czecho-Slovakian central bank gold via the BIS in cooperation with the Bank of England.

The nature of central bank reserves is quasi-sacrosanct, but already in 2015 we could see the contours of the new monetary warfare. During the latter part of the European debt crisis, the socialist government of an insolvent Greece faced up against the troika of institutions representing the country’s creditors: the IMF, the Eurogroup (the council of European finance ministers), and the European Central Bank (ECB). At the peak of the crisis, the ECB paused the “emergency liquidity assistance” (ELA) to Greece’s central bank, in turn forcing their banks to shut down and limit cash withdrawals. This move, described by Greece’s finance minister Yanis Varoufakis as financial terrorism, was a cynical attempt to sway voters ahead of an all-important referendum on a memorandum presented by the creditors.

While the ECB’s power is limited to its monetary jurisdiction, the reach of the US Federal Reserve is global. This is due to the existence of vast offshore pools of dollar liabilities. In moments of crisis, when investors across the globe seek the safety of the world’s key currency and create a shortage of dollar-denominated assets, central banks rely on dollar reserves to backstop their financial system. In the absence of large “fortress” balance sheets, this makes them dependent on so-called dollar swap lines from the Fed. These swap lines are a form of good will—and good will can be withheld. During the convulsions brought about by the Covid-19 crisis, many countries clamored for dollar liquidity to prevent their financial system collapsing. But the only beneficiaries of these arrangements were allies of the United States.

The most blatant example of this type of coercion occurred just months before the Russian invasion. After the remaining US forces withdrew from Afghanistan, the Taliban swooped in to fill the vacuum and took control of the country’s institutions—including the central bank, which held an estimated $7 billion in reserves in the United States. The Biden Administration promptly froze and confiscated the reserves, and, in a cynical move, distributed half to the families of victims of the September 11 attacks. Afghanistan, the poorest country in Asia, now finds itself in a devastating famine that could results in millions of deaths.


Champions of globalization have always argued that integration into the global trading and financial system is a victory in and of itself. But what these examples suggest is that the West’s ability to coerce states has only increased as a function of their integration. This dynamic was legible to Vladimir Putin when, as Russia became a central node the global economy, it became more vulnerable—and he took steps to mitigate its vulnerability. The rapid growth of China and other developing economies generated the demand that supercharged Russia’s export sector in the two decades after Putin first became president in 1999: oil, gas, aluminum, nickel, palladium, wheat, and corn. As in all developing economies, the state made sure to accumulate a portion of the foreign exchange earnings of Russian firms in the public coffers. This occurred alongside an austere balancing of the budget. The country’s political and technocratic elite learned a cruel lesson after the 1998 financial crisis, when the ruble collapsed, and Russia defaulted on its debt. These are the origins of what would eventually become the war chest and the fortress balance sheet.

The evolution of global finance in this period may have also accelerated this process of accumulation. In his compelling new book Price Wars, Rupert Russell argues that the emergence of the over-the-counter derivatives market and the creation of commodity index funds sent commodity markets into overdrive, with prices largely detaching themselves from the dynamics of supply and demand. The transformation of oil and gas into volatile asset classes benefitted Russia greatly. Its propensity for violent conflict increased as a function of windfall gains from high oil prices, which were channeled into both the reserve buffer and defense. The invasion of Georgia in 2008 and Ukraine in 2014 were preceded by extended rallies in the price of oil. So was this latest conflict.

Further underwriting Putin’s ambitions was the worsening trend of both European and American hydrocarbon dependence. Germany and Italy in particular depend on Russian gas for domestic heating and their manufacturing industries. Though it is the world’s largest oil and gas producer, the United States imports heavy Russian crude required for its offshore refineries. Even if a deal with Iran can be found, there is no obvious substitute for this type of oil, because crude oil from the Gulf states is lighter. This dependence is compounded by the key role that gas prices play for political favorability ratings, adding pressure to the Democrats’ already poor prospects in the upcoming midterm elections. Biden’s surprising announcement on Tuesday that the US and UK would cease Russian oil imports comes at a potentially high political and economic cost. For Europe, the cost is likely too high to accept.

But as globalization underwrote Putin’s militarism and his increasingly hostile posture toward Russia’s neighbors, it simultaneously rendered the country’s economy fatally reliant: on the net demand from other countries such as Germany and China; on imports of crucial goods such as machinery, transportation equipment, pharmaceutical and electronics, mostly from Europe; on access to the global dollar system to finance and conduct trade. This is one way to construe the deceptively simple insight of Henry Farrell and Abraham L. Newman’s theory of weaponized interdependence: the logic of financial globalization that generated Russia’s trade surplus and gave Putin room to maneuver also provided the economic and financial weaponry that was turned against him.

This vulnerability is reflected in Putin’s strategic economic logic. In the period since 2014, the Russian central bank has successfully sought to de-dollarize a substantial portion of its reserves, and outstanding dollar liabilities throughout the economy have been reduced. These moves were informed by Western dominance of the global payment infrastructure via SWIFT and the dollar interbank system. In a very meaningful way Russia had prepared for the current conflict. But it was also guided by a belief in the sanctity of foreign reserves held at the world’s central banks. If such a sanctity ever existed, it has been obliterated overnight.


What will be the international impact of the Russian crisis? The status of key currencies like the dollar is an open question. One argument submits that if the reserves held at foreign central banks cannot be considered “money” in any meaningful sense (if, at the touch of a button, they cannot be used as a means of exchange or store of value), the “moneyness” of the dollar itself might be jeopardized. The dollar is a pillar of financial globalization as we know it: that trade is largely invoiced in dollars, and the global wholesale money market—in which dollar liabilities are generated offshore—relies on a steady flow of dollar assets. This is precisely what makes its demise unlikely. The financial system is not based on the short-term whim of investors, but on robust and long-term institutional realities: an open capital account, highly liberalized and integrated financial markets, and deep, liquid markets in benchmark assets like US treasuries. China still imposes capital controls, while Europe, despite recent steps in the right direction, doesn’t yet have a proper euro safe asset. And though the global financial plumbing seems to be weathering the crisis quite well so far, the removal of Russian petrodollars might in fact lead to the opposite outcome: a shortage of dollar assets in a time in which risk-averse investors are already rushing into them, further entrenching the greenback’s status.

The threat of financial war—and the perceived need for geopolitical alignment with the West as the precondition to avoid financial exile—might indeed render other currencies more attractive relative to the dollar, but it is hard to see how anything is going to change on a systemic level. Nothing so far indicates that the war has undermined the dollar, and with it the ability of the US to turn into a basket case the economy of any state that dissents from whatever is left of the elusive “rules-based international order.”

Politically, however, the long-term consequences are harder to discern. An unravelling of the existing economic and financial interdependencies is unlikely. These are not the last days of globalization—even if, in the medium term, it seems to have plateaued. But doux commerce—the notion that money talks, walks, and wants peace—is well and truly buried.

Nowhere is the failure of the rosy vision of globalization’s civilizing force more in evidence than in Europe—particularly in Germany.  While the exact implications of the war are still unclear for most countries, Germany’s very peculiar place in the global economy, and the degree to which its institutions and politics reflect that peculiarity, merit attention. Nowhere has the notion that the forces of economic integration would turn countries like Russia into “responsible stakeholders” in the global system had more purchase on policy. Thus, the premise of German security and defense policy over the past three decades was that aid and diplomacy were sufficient to meet its obligations, both as a member of a multilateral security alliance like NATO, and as the de facto leader of a European Union keen to establish itself as a geopolitical authority. A so-called culture of restraint, informed by Germany’s calamitous past, evolved into outright neglect. During the long tenure of Angela Merkel, Germany never made good on its pledge to invest at least 2 percent of its GDP into its moribund army. The speech by Chancellor Olaf Scholz on the Sunday after the invasion, calling for a one-time 100 billion euro off-balance-sheet defense fund, and a renewed commitment to the 2 percent target, therefore startled observers, many of whom believed the country’s elite could not be budged from its decades-old policy consensus. On the face of it this is a dramatic break in German politics.

But Germany’s shirking of its defense duties was always part of the larger failure to lift the levels of public and private net investment throughout the Germany economy, during a period when German borrowing costs were at a historical low. The main culprit was the much-maligned fiscal policy consensus, which was committed to the questionable view that sound public finances require strict fiscal rules that balance the budget and choke off demand when it becomes “excessive.” This commitment was in fact written into law, both at the German level (in the form of what’s called the debt brake) and at the European level (the Stability and Growth Pact). Much needed productive investment languished, in Germany and throughout Europe. Invariably, the expansion of Germany’s renewable sector fell short—and its dependence on Russian gas only increased, as investment into key infrastructures like heat pumps never took off at the appropriate scale. This continued dependence on the free flow of Russian hydrocarbons explains the seeming absence of any clear geopolitical calculation evident in the central bank sanctions: the inability to avoid exemptions for energy transactions motivates a stronger response elsewhere.

Any talk about the European block’s strategic autonomy rings hollow without a commitment to changing the fiscal rules that have prevented major investment into energy and defense. On Tuesday, it was reported that a proposal to create large joint fund for this purpose by issuing joint euro-denominated debt may be presented after the EU’s leaders hold an informal summit in Versailles on March 10. This would come only a year after the $2 trillion emergency package, also backed by joint liabilities, that was agreed upon as a response to the pandemic. If created, the new fund could have potentially extraordinary consequences, even for the status of the euro relative to the dollar. But one remembers only too well the many EU summits in years past that resulted in absolutely nothing. Jean Monnet, one of Europe’s “founding fathers,” famously remarked that “Europe will be forged in crises and will be the sum of the solutions adopted for those crises.” After a decade and a half of crisis and de novo institution building in the euro area, it is not clear what kind of Europe is being forged—and whether it can face the challenge it is currently presented with.


All crises reveal the structure of the systems through which they propagate. So too has the financial war thrown into sharp relief the shortcomings of the European project, a project heavily premised on a positive vision of globalization. It is now more likely that German and EU security, energy, and fiscal policy will chart a different course. But the underlying political and institutional headwinds have not ceased—nor should, therefore, the effort to build coalitions and an intellectual consensus to overcome those obstacles. It is still an open question to what extent European politics will change.

In the larger scheme of things, it is not clear why we should care if it does or not. Both the minutiae of European fiscal policy and the possible rejigging of the global financial plumbing seem of secondary importance compared to the severe global impacts of the financial sanctions on the real economy. Surging commodity prices will hit developing countries hardest, and widespread inflation might prompt an even harsher cycle of global monetary policy tightening that might induce widespread recession and unemployment.

Perhaps the most acute consequence is the shortage of agricultural products. Ukraine and Russia supply a third of the world’s wheat and are major exporters of barley, corn, and sunflower oil. The two countries account for 85 percent of Egypt’s, 45 percent of Yemen’s and 50 percent of Lebanon’s wheat imports—all countries that are already reeling from food shortages, social unrest, and recent currency devaluations that have reduced the purchasing power of ordinary citizens and increased the share of their income they pay for food. The impending food crisis is not just due to the war itself. Despite the fact that the sanctions exempt agricultural products, they have rendered doing business with Russian firms anathema. Among the many companies extracting themselves from the Russian economy are the international shipping giants, who are already refusing to send shipping containers, further disrupting the flow of wheat and other goods to Africa and the Middle East. This is one of the ways the monetary war is leading to a drastic sharpening of the political-economic-environmental polycrisis that reared its numerous heads in the wake of the pandemic.

But for now, those who will bear the brunt are ordinary Ukrainians and Russians. Ukrainians face protracted and brutal violence and possible Russian subjugation, while Russia’s strenuously gained advantage as a privileged raw materials exporter looks to have been wrecked on the shoals of Putin’s nationalist-irredentist ambitions. And unlike it did in the period after the 1998 crisis, Chinese demand will not be able to cushion the effects the crisis indefinitely. As the ruble continues to find new cliffs to fall off, citizens will suffer, while their now openly despotic leader remains firmly in place. To echo something Putin himself once admitted about communism: Russia has been led into a blind alley—far away from the mainstream of globalization.


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