Have Financial Sanctions Lost Their Bite Due to Emerging Alternative Financial Practices in Global Trade?

Abstract

The U.S. dollar is often considered the decisive chokepoint in international financial and related sanctions. Why? Because sanction or embargo violations require enabling financial payments – assumed to be in most cases U.S. dollars – and therefore must pass through U.S.-controlled dollar clearing systems. Inevitably, these payments will be visible to U.S. enforcement authorities and therefore subject to intervention and seizures. Consequently, any transfers of restricted commodities, weapons of mass destruction (WMD) technologies, conventional weapons, other military goods, or other sanctioned activity have long been believed to be discoverable by their U.S. dollar payments.

The reality, however, tells a different story. For decades, Chinese and Russian arms have flowed steadily to embargoed destinations such as Sudan, Central African Republic, Mali, Yemen, and others. China, Russia, and their proxies have also served as secretive transshipment points for technologies, commodities, and manufactured goods to be exported to Sudan, North Korea, Iran, and other countries subject to international sanctions and embargoes. The presence of billions of U.S. dollars’ worth of restricted military goods in embargoed countries and regions demonstrate that the U.S. dollar chokeholds are too often illusory.

Motivated by mostly legitimate but political objectives, a dramatic increase of bilateral currency swap agreements is the most powerful de-dollarization mechanism in international trade and lending. But they stake out the environment for the effective concealment of illicit payments of embargoed goods and services, and amplify sanctions-defying practices like Russia’s barter agreements, China’s lender-controlled commodity revenue accounts, and international criminal network’ moneylaundering with cryptocurrency or theft of virtual assets. These trends are substantially enabled by China’s rise as the world’s largest creditor [1], especially to distressed economies, [2] and Russia’s reduction of its reliance on the U.S. dollar by developing alternate payment platforms with China [3]. These factors significantly undermine the effectiveness of U.S. dollar clearing systems and consequently defeat financial sanctions’ coercive purpose.

Drawing on the author’s extensive experience as a financial sanction investigator and ongoing observations of China’s and Russia’s financial practices in sanctioned jurisdictions – supported by recent research from academic and government institutions – this article issues an urgent call for policymakers to strengthen the effectiveness of their coercive conflict-resolution policies.