When the COVID-19 pandemic spiked in Iran in March 2020, calls for lifting financial restrictions to allow the import of much needed medical supplies fell on deaf ears in President Donald Trump’s administration. The White House had no intention of putting the brakes on an increasingly forceful tool of twenty-first century US foreign policy—financial warfare. Today, close to a dozen US government agencies, led by the Treasury Department’s Office of Foreign Asset Control (OFAC), enforce a wide spectrum of sanctions against more than 6,000 individuals, corporations and governments worldwide.

Countries in the Middle East constitute the majority facing such sanctions. Former US President Barack Obama expanded the sanctions imposed by his predecessors on Syria, Iran and Lebanon, reinstated sanctions in Libya and introduced new ones in Somalia and Yemen.[1] In turn, Trump aggressively enforced and unilaterally expanded the sanctions Obama put in place.

The pretexts for these punitive measures, which inflict lethal harm on the peoples of the region, are not new. The rationale boils down to classic tropes like fighting terrorism, defending human rights, ending corruption, curtailing the drug trade or money laundering as well as precipitating regime change. The design and implementation of sanctions, however, has evolved over time. Financialization, which led to the increased use of financial instruments in mediating world economic exchange, coupled with the privileged position that US finance enjoys within money markets, has enabled Washington to deliver maximum impact at minimum cost. In the absence of another large scale military confrontation akin to the 2003 Iraq invasion, the long-term failure or success of sanctions—particularly against Iran and its allies—will largely determine the fate of US empire in the region and beyond.

Financialization, which led to the increased use of financial instruments in mediating world economic exchange, coupled with the privileged position that US finance enjoys within money markets, has enabled Washington to deliver maximum impact at minimum cost.

Currently, the efficacy of sanctions relies on a host of factors tied to the structure of the world financial order, the political economy of the Middle East and the design and implementation of the sanctions themselves. A key factor is the persistence of the dollar as a world currency despite the declining economic power of the United States. Dollar dominance is itself partly tied to another persistent feature of the political economy of the Middle East, dependence on the energy sector. Heavy reliance on the production of oil that is priced and traded in dollars (petrodollars) makes Middle Eastern states particularly vulnerable to US financial sanctions because it undermines their ability to access financial markets well beyond those operating in or tied to US financial centers. Restricting a country’s access to alternate financial markets is usually accomplished through secondary sanctions that penalize non-US entities for doing any business with target entities, even when those entities operate outside US jurisdiction, effectively cutting them off from most of the global economy. Such extensive sanctions require a dose of multilateralism for effective implementation, something Obama was more conscious of than Trump.

Amid increased global financial integration, sanctioned states and non-state entities will need to chip away at multinational complicity with US sanctions, create or enforce their own partnerships for trading with allies, move away from heavy dependence on oil revenues and support rival currencies to the US dollar.


Post-Cold War Global Financial Integration


The collapse of the Soviet Union left US global power unchecked. States that challenged US hegemony like Iran and Iraq in the Middle East, or Cuba and Venezuela in Latin America, were subjected to harsh trade or investment embargoes that left hundreds of thousands dead and many more deeply impoverished. Following the fiasco of the 2003 invasion of Iraq, and the 2011 Arab uprisings, the United States expanded the umbrella of financial sanctions—as an alternative to large scale military action—against state and non-state actors.

This new wave of sanctions is of two types, both reliant on the increased financialization of the world economy. The first type targets all transactions and assets related to specially designated persons (SDPs), which can be individuals, corporations, charities, governments or their associates. These sanctions are intended to shut out SDPs from the liquid financial resources that fund their activities. The second type imposes sanctions on financial transactions tied to strategic commodities, like charcoal exports from Somalia, oil from Libya and Syria, and oil, minerals and gold from Iran. In the case of the latter, it also involves financial sanctions on imports of primary commodities (like steel, concrete or other inputs) necessary for technological and industrial development, like ship building or processing petrochemicals. These sanctions seek to starve the enemy’s main industrial sector in order to deprive them of hard currency, namely US dollars, required to finance imports and expand foreign investment.

Multilateral collaboration has been key to the effectiveness of US sanctions.
Multilateral collaboration has been key to the effectiveness of US sanctions. Cooperating with longtime US allies like Canada, Japan and Britain—whose list of sanctioned countries overlaps with, and in fact outnumbers the US list—widens the net of sanctions. Saudi Arabia’s longtime commitment to sell oil in dollars, and to secretly purchase US government bonds, augmented the leading position of the US dollar in foreign exchange markets and recycled spent dollars back into US coffers. Attempts by US adversaries like China or Russia to price and trade oil in gold or currencies like the Euro and the Chinese Yuan have (unsurprisingly) been met by vehement opposition from Washington. More recently, Washington has enlisted satellite states in the Gulf like Saudi Arabia, Qatar and even Oman and Kuwait to sanction Hezbollah. Meanwhile, Gulf capital, including $2 trillion of sovereign wealth funds, favors investment in North America and Europe.


State vs Non-State Actors


Complicity in enforcing sanctions has equally included private non-state actors. In Lebanon, private banks have flouted Lebanon’s famous banking secrecy laws to accommodate US demands for denying Hezbollah’s associates access to the banking system. Prompted by the Central Bank, the private banks also enforced FATCA, the US law instated in 2010 under Obama that obliges foreign financial institutions to report on foreign assets held by their US account holders, many of whom are dual US-Lebanese citizens. The United States has also pursued, and in some cases prosecuted, wealthy Lebanese businessmen in Latin America and West Africa, or banks like Jammal Trust bank, for their alleged dealings with Hezbollah. Washington has taken advantage of the COVID-19 pandemic and the financial crisis crippling Lebanon to deny the Lebanese people financial assistance and medical aid under the pretext of fighting Hezbollah.

These forms of collective punishment have undermined the newfound wealth of some Lebanese expatriates, reduced their remittances back home and as a result further destabilized the Lebanese economy.

There is little evidence that sanctions and banking restrictions have dried up Hezbollah’s finances.
But there is little evidence that sanctions and banking restrictions have dried up Hezbollah’s finances. If anything, it inadvertently shielded Hezbollah’s assets from being held up in banks, as is the case with depositors during the current collapse of Lebanon’s banking system. Other non-state actors have not only managed to outmaneuver US sanctions, they have made a handsome profit. Lebanese banks offering high interest rates have become a destination for some Yemeni deposits, albeit now frozen due to the Lebanese banking crisis. Somali charcoal reportedly makes its way to Iranian ports where it is repackaged and sold (via Dubai) across the Arab world, in the process generating tax income for the El-Shabab militant group.

By contrast, it is harder for state entities like Iran to avoid formal channels of trade and finance, for example when Obama, backed by Congress, strengthened secondary sanctions against Tehran. These sanctions prohibited foreign financial institutions from conducting business with Iranian institutions, including its central bank. On a parallel track, Washington pursued an aggressive litigation campaign with heavy fines against non-Iranian financial institutions accused of violating sanctions including Standard Chartered, Royal Bank of Scotland and BNP Paribas, with the latter paying a whopping $9 billion in settlement. This created a chilling effect. The tipping point occurred when Obama, partly prodded by the neoconservative and pro-Israeli lobby group United Against a Nuclear Iran, as well as the US Senate Banking Committee, bullied the Belgian-based SWIFT, which is an interbank financial messaging service, into expelling Iranian financial institutions from its network. When SWIFT complied in 2012, Iran’s oil exports reportedly dropped by more than 50 percent. The resulting foreign currency shortages led to further inflation. Mounting financial pressure pushed Iran to reach the much-touted Joint Comprehensive Plan of Action (JCPOA) nuclear deal in 2015 with the five permanent members of the UN Security Council plus Germany and the European Union.

When Trump withdrew his support for the JCPOA and reintroduced secondary sanctions in 2018, SWIFT—which houses one of its three data centers in the United States—was quick to oblige in the “interest of the stability and integrity of the wider global financial system.”[2] Another financial slump hit Iran and contributed to the spread of protests against fuel taxes. Trump also introduced more stringent measures on the export of medical and food supplies, which have made it increasingly difficult for Iran to contain and manage the spread of the coronavirus.

European Union countries were not on board this time around, but their dissent has yet to bear fruit. Their creation of an alternative payments system, INSTEX, in 2019 has failed so far to resuscitate high-volume trade between Europe and Iran. Many EU companies and banks remain hesitant to engage in any transaction with Iran—regardless of the system used to process it—for fear of violating US strictures and being subjected to retaliation in other markets. European complacency in the face of Trump’s intransigence has reinforced the ultimate deference of European diplomacy to Washington, as well as the centrality of dollar dominance and US financial markets in the perpetuation of financial sanctions. Resisting US financial warfare in the future must take account of these two factors.


Future Financial Wars


Despite the decline in US economic power, both in terms of its relative Gross Domestic Product (GDP) and as a share of world trade, dollar dominance remains largely unchallenged. According to the Bank of International Settlements, an estimated 88 percent of all 2019 foreign exchange transactions worldwide were cleared in dollars. Despite China’s status as the second largest economy, the Yuan ranks a distant eighth with a meagre share of 4.3 percent. The dollar also constitutes close to 60 percent of all global currency reserves, which are central bank assets used to prop up each country’s own currency.

The disconnect between US economic power and dollar dominance is not an aberration. Trust in currencies as units of international accounting and stores of monetary value outlast the strength of their corresponding national economies. The pound sterling remained the world’s leading currency more than a quarter century after the United States overtook Britain as the leading economy. It took several shocks, including two devastating world wars and a series of anti-colonial uprisings, for the balance to tip.

Nevertheless, some cracks in dollar dominance are starting to show. In recent years, central banks have begun diversifying away from the dollar.

Some cracks in dollar dominance are starting to show. In recent years, central banks have begun diversifying away from the dollar.
The International Monetary Fund (IMF) has also incorporated the Chinese Yuan into the special drawing rights (SDRs), which is an emerging international currency of sorts composed of a basket of other currencies. These are still baby steps in monetary historical time. Catastrophic shocks to the system are needed for a major shift away from the dollar, culminating in the currency’s collapse, or what financial analyst Jerry Rickards refers to as a Dollar Apocalypse.

A prolonged recession in the wake of COVID-19, coupled with massive government bailouts through quantitative easing, may hasten a shock of this sort in the future. Restructuring in the oil industry, subsequent price fluctuations in oil markets and bolder attempts to sell oil in other denominations will also impact the status of the dollar in foreign exchange markets in general and the dollar’s share of foreign reserves in Middle Eastern central banks. Whatever the pace of dollar decline, it will be accompanied by a period of global currency wars and instability.

Rickards outlines four potential outcomes of these wars: The first is multiple reserve currencies, whereby the dollar becomes just one of many reserve currencies held by central banks and traded globally. The second is the transformation of SDRs into a global currency, displacing the dollar. In this case, the IMF, backed by the G20, becomes the super financial power managing the global monetary order. The third is a return to a gold exchange standard. The fourth is chaos.[3]


Pushing Back Against Sanctions


Middle East state and non-state actors facing sanctions are not in a position to directly influence these currency wars compared to economic and political heavyweights like China or Russia. But affected actors can take advantage of the contradictions and rivalries. In the short run, the key is to undermine multilateral cooperation to enforce sanctions, including secondary ones. Fracturing cooperation should be easier under the tenure of Trump, who handily alienates his European and Asian counterparts. In the long run, the key is to de-dollarize, even if gradually and partially. For state actors, which are the most impacted by financial sanctions, this includes negotiating better terms of trade with rival currency blocs and creating alternative blocs with regional partners or Global South allies, accelerating the shift away from total dependency on oil and increasing the ratio of gold and other reserve currencies in their foreign currency baskets.

Iran has made a head start—its latest move was to supply oil to Venezuela in defiance of US threats. Arab countries are the least prepared. Their peoples are facing ongoing authoritarian clampdowns, civil wars, inter-state rivalries, foreign military intervention and accelerated expansion of Zionist settler colonialism. Restoring domestic legitimacy while protecting national sovereignty—however hard that may seem today—is the only way countries can partake in the complicated management of inter-state financial coordination required to fight US financial aggression. Weaning off the dollar economy is easier said than done. But financial warfare is a drawn-out battle and there are no quick and magical solutions to combat it. Those most able to insure themselves against future shocks and act collectively to neutralize them are the most likely to withstand and possibly overcome them.


[Hicham Safieddine is an assistant professor in the History of the Modern Middle East at King’s College, University of London.]





[1] Details of all US financial sanctions discussed in this article are based on information provided through the official website of the US Treasury Department’s Office of Foreign Assets Control, see https://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/consolidated.aspx

[2] Reuters, “SWIFT says Suspending Some Iranian Banks’ Access to Messaging System,” November 5, 2018.

[3] James Rickards, Currency Wars: The Making of the Next global Crisis (London: Penguin Books, 2012).

How to cite this article:

Hicham Safieddine "Consequences of US Financial Warfare in the Middle East," Middle East Report 294 (Spring 2020).

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