SANCTIONS AS WEAPONS OF MASS DESTRUCTION
TRADE WARS ARE
THE WARS OF THE 21st CENTURY
SANCTIONS ARE THEIR WEAPONS OF MASS DESTRUCTION
In our post titled TRADE WARS ARE THE WARS OF THE 21st CENTURY, we analyzed how our world had evolved from military conflicts to economic wars as controlling land and populations were no longer the ultimate strategic goals in a globalized world.
In the age of Google, Facebook, 1 Trillion Dollar companies and meddling into national elections through fake news and social medias, land borders have become irrelevant and de -materialized jurisdictions have taken over.
Inter-related financial markets and global markets for goods and services are the battlefields of the 21st century where economic sanctions have become Weapons of Mass Destruction.
In less than eight months, Donald Trump, the President of the world’s largest economy and most powerful military nation has created havoc in foreign countries simply by imposing sanctions and tariffs, wielding enormous power on the Governments of sovereign foreign nations.
To be fair, it all started way before Donald Trump became the 45th President of the United States of America on January 20th 2017.
It all started with The Foreign Corrupt Practices Act of 1977 (FCPA), a United States federal law destined to prevent the bribery of foreign officials. The Act was amended in 1988 and in 1998 and its reach extended to several fields, but in effect, it amounted to a real quantum leap in legal terms and international law by making the US courts competent whenever the US currency was being used for criminal activities.
The first worldwide use of this legal change took place in 2009 under Barack Obama to force Switzerland and most tax heaven jurisdictions around the world to end their bank secrecy and tax evasion facilitation practices. And indeed it succeeded…
It was then used in 2014 under President Barack Obama when the federal government of the United States imposed embargoes and economic sanctions against different countries and activities, the most notable of them aimed against countries which the U.S. government had declared “State Sponsors of Terrorism”.
The sanctions forced Iran into a negotiation of the development of its nuclear arsenal, again , which led to the 2015 JOINT COMPREHENSIVE PLAN OF ACTION ( JCPOA ) accord, whereby Iran accepted the international monitoring of its nuclear development activities against the lifting of US sanctions.
Sanctions imposed by the United States government usually include arms-related exports,
controls over technology exports, restrictions on economic assistance, financial restrictions in the use of the US currency and opposing loans by the World Bank and other international financial institutions.
Of all the above, the most efficient by far has been the use of the US currency which made any foreign individual, corporation or even Government trespassing the sanctions liable in front of the US courts over the breach of the sanctions.
Over the past six months, Donald Trump’s salvoes against four countries had major repercussions on their economies and currencies.
The US-CHINA trade war
On January 23, 2018, President Trump placed a 30% tariff on foreign solar panels. China, the world leader in solar panel manufacture, decried the tariffs. That same day, tariffs of 20% were placed on washing machines for the first 1.2 million units imported during the year.
On March 22, 2018, President Trump asked the United States Trade Representative (USTR) investigate applying tariffs on US$50 billion worth of Chinese goods, which he estimated would affect about $60 billion of Chinese imports.
He relied on Section 301 of the Trade Act of 1974 for doing so, stating that the proposed tariffs were “a response to the unfair trade practices of China over the years”, including theft of U.S. intellectual property.Over 1,300 categories of Chinese imports were listed for the tariffs, including aircraft parts, batteries, flat-panel televisions, medical devices, satellites, and various weapons.
China responded on April 2 by imposing tariffs on 128 products it imports from America, including aluminum, airplanes, cars, pork, and soybeans (which have a 25% tariff), as well as fruit, nuts, and steel piping (15%).
On April 5, Trump said he is considering a new round of tariffs on an additional $100 billion of Chinese imports as Beijing retaliates. The World Trade Organization received request from China for consultations on new U.S. tariffs.
We all know where we stand today, and there is no doubt that several thousands of large, small and medium companies in China found themselves in dire situations as testified by the saga of ZTE, the Chinese electronic giant that went almost bankrupt.
But interestingly enough, January 23rd also marked the peak in the equity markets rally in most parts of the world, and started a significant correction in the Chinese equity markets, the world’s worst performers in 2018.
Chinese equities lost 27 % of their value in eight months, erasing more than US$ 2 Trillion of wealth from the Chinese’s pockets primarily.
The Chinese stock market was dethroned from its rank as the second largest stock market in the world, despite an economy still running at 6 % + growth per annum and corporate profits rising at a 19 % clip.
Moreover, the financial markets interpreted the trade war as a sign that the Chinese currency had to weaken to counter the effects of the trade sanctions. on the Chinese exports.
In April 2018, The Chinese Yuan ended abruptly its uptrend and went into a a tail spin, losing 9.2 % of its value as hedge funds shorted the currency and Chinese individuals started converting their yuan into foreign currencies.
Add the 9.2 % depreciation of the currency and the 27 % fall in the value of equities and the Chinese equity markets lost 36 % of their value in US dollar terms in the past eight months alone, reducing the wealth and purchasing power of the Chinese by that much.
In the past few weeks, we had signs that the Chinese Government had to intervene to stop the fall in. the value of its currency ( see CHINA DRAWS THE LINE IN THE SAND ) and is now starting to intervene in the equity markets to stop the correction form evolving into a crash that would have devastating economic consequences.
Granted, China is the second largest economy of the world and the largest consumer market of the world, and it has ample financial, monetary and budgetary tools at its disposal to fight the battle successfully, including US$ 1 trillion of US Treasuries in its coffins.
Nevertheless, its course of action is directly and significantly impacted by the US President decisions and sanctions and it may even have to amend its long term growth strategy to resolve the issue, as we expect, by letting the Yuan to finally appreciate naturally as it should.
The US-IRAN war
On May 12th 2018, US President Donald Trump withdrew unilaterally from the JOINT COMPREHENSIVE PLAN OF ACTION ( JCPOA ), the nuclear accord with Iran struck by his predecessor Barack Obama, despite the assurance by the International Energy Agency that Iran was complying with the terms of the accord.
As we highlighted in our post IRAN vs THE WORLD, Donald Trump’s decision had nothing to do with the actual nuclear capability of Iran and their development, but truly with the expansionary policies of the mollah’s regime into the Middle East and the Arab World.
The US is not waging a trade war with Iran, but a real War due to its belligerent attitude in the Middle East.
Donald Trump demands that Iran ends all nuclear enrichment and development of nuclear-capable missiles; release all American citizens; end its support for Hezbollah, Hamas, Islamic Jihad and Houthi militias; and withdraw its forces from Syria.
Despite the unanimous consideration by all the other parties to the accord that the US withdrawal was illegal from an International Law standpoint, their attempts to keep the accord alive failed.
Even the European Laws allowing European Companies NOT to comply with US sanctions did not succeed at preventing all the global corporation s dealing with Iran — Airbus, Peugeot, Daimler, etc,,- from freezing their activities there and putting an end to their investment plans.
The implementation of new US sanction on Iran next week have far reaching consequences.
The sanctions ban any transactions with Iran involving United States dollar bank notes, gold, precious metals, aluminum, steel, commercial passenger aircraft and coal, and they end imports into the United States of Iranian carpets and foodstuffs.
The threat of sanctions had already had a major effect on the Iranian economy and political fabric. The implementation of the sanctions will compound the dynamics.
In the past three months, the value of the Iranian rial fell form 30'000 to a USD to 130'000, suffocating the economy, Inflation has turned into hyper-inflation where prices have to be reset every day if not every hour, hard currencies are not available anymore and the Iranian’s are trapped inside the country by the 75 % fall in the value of their savings and their inability to find Euros or US dollars to leave the country.
Unemployment is soaring and a recent survey showed that 90 % of the young Iranians wanted to emigrate, having no more faith in the future of the country.
On the political front, the regime is destabilized significantly and street protests are erupting in may parts of the country, criticizing the mollah’s regime, the corruption, the involvement in the Middle East and the economic mismanagement of the country.
Although the US official line is that it does not seek a change of regime in Iran, the sanctions war is definitely aimed at making Iran abandon its regional expansion, withdraw from Syria and Iraq and end its military and finical support to Lebanon’s Hezbollah and the Yemeni Houthis.
If this is not a geo-political war, what is ?
TURKEY Sanctions
The rise of Recep Tayyep ERDOGAN to power in Turkey in 2014 after having served as a minister from 2003 to 2014 has brought sea-changes to Turkey politically, economically and internationally.
Erdoğan’s governments oversaw negotiations for Turkey’s membership in the European Union, an economic recovery following a financial crash in 2001, changes to the constitution via referenda in 2007 and 2010, a Neo-Ottoman foreign policy, and finally the Turkish currency and debt crisis of 2018.
With the help of the Cemaat Movement led by preacher Fethullah Gülen, Erdoğan was able to curb the power of the military through the Sledgehammer and Ergenekon court cases.
In August 2016, a controversial coup d’état was unsuccessfully attempted against Erdoğan and led to massive purges in the military, the judicial system and the press.
Political scientists no longer consider Turkey as a fully fledged democracy, citing the lack of free and fair elections, purges and jailing of opponents, curtailed press freedom, and Erdoğan’s efforts to broadening his executive powers and minimize his executive accountability.
Internationally, Turkey’s belonging to NATO, its closeness to Russia, its involvement in Syria, indirectly first and then militarily in Afrin in January 2018 as well as on the Iraqi borders have made Turkey an international partner that no one really knows how to handle, with significant military and strategic implications considering its belonging to NATO.
The crisis with the USA deepened in the second quarter of 2018 and on 8 July 2018, Erdogan sacked 18,000 officials for alleged ties to US based cleric Fethullah Gülen, shortly before renewing his term as an executive president. Of those removed, 9000 were police officers with 5000 from the armed forces with the addition of hundreds of academics.
On August 1st 2018, the Trump administration imposed sanctions against two top Turkish government officials over the detention of an American pastor being held on espionage charges.
The sanctions target Abdulhamit Gul, Turkey’s justice minister, and Suleyman Soylu, the interior minister. They were issued just days after President Trump warned the Turkish government to immediately release the pastor, Andrew Brunson — a demand he made directly the week before in a telephone call with Mr. Erdogan.
The move was an extraordinary use of financial sanctions against an allied government. It inflamed tensions that were already simmering over a litany of disagreements, including Washington’s refusal to extradite a cleric suspected of leading a failed 2016 coup against President Recep Tayyip Erdogan of Turkey and his country’s growing use of what many Western analysts have described as hostage diplomacy.
The financial consequences were immediate and drastic in a country where the once vibrant economic fabric had already started to deteriorate significantly under Erdogan’s rule.
The Trukish Lira lost 1/3 of its value in the past three months while interest rates shot up to 17.5 % and bond rates to 19.5 %.
Capital is fleeing the country and the Turkish stock market lost 27 % of its value since the beginning of the year, a 60 % depreciation in US dollar terms.
It is not hard to speculate on the real motives behind the decisions of Donald Trump to impose sanctions on Turkey in a way that is a flagrant breach of International law, non-inference in domestic affairs is a founding principle four current world order, but the fact of the matter is that the economic and political implications of the sanctions are devastating, forcing Turkey toi raise interest rates sharply higher and Erdogan to mull taking control over the independent Central Bank.
Economic damage as a political weapon is perfectly illustrated in the Turkish case and it is extremely difficult to fathom their ultimate consequences.
Are they part of a wider plan to weaken the power brokers in the Middle East ahead of more drastic global actions. ? ( see FORGET North Korea, THE NEXT WAR COULD WELL BE IN THE Middle East )
RUSSIAN SANCTIONS
The Trump administration will impose more sanctions on Russia under a chemical and biological warfare law following the poisoning of a former Russian agent and his daughter in the UK earlier this year, the State Department announced two days ago.
In a statement Wednesday, State Department spokeswoman Heather Nauert said the US had made this decision on Monday, and accused Russia of violating international law.
The statement anticipated the sanctions would go into effect around Aug. 22 in line with the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991.
Sergei Skripal, a former Russian spy, and his daughter Yulia Skripal were hospitalized and treated for a nerve-agent attack in March. Yulia Skripal was discharged from the hospital in April, and her father was discharged in May.
The State Department notified Congress on Wednesday of the first of two potential tranches of sanctions required under the 1991 law. Unless Russia takes certain steps, a second set of penalties — more stringent than this first round — must follow, according to the law.
The first set of sanctions targets certain items the US exports to Russia that could have military uses — so-called dual use technologies. These are sensitive goods that normally would go through a case-by-case review before they are exported. With these sanctions, the exports will be presumptively denied.
The US would then require Russia to assure over the next 90 days that it is no longer using chemical or biological weapons and will not do so in the future. Additionally, the criteria in the law call for Russia to allow on-site inspectors to ensure compliance.
The official said that if Russia did not meet the demands, the US will have to consider whether to impose a second tranche of sanctions as specified by the statute.The second tranche would target Russian exports to the US and theoretically could include flights by the state airline Aeroflot as well as a downgrade of diplomatic relations.
The first tranche of the sanctions could impact potentially a very great part of the Russian economy. Russian firms affected account for 70 percent of the Russian economy and 40 percent of its workforce.
The interesting part is that these sanctions could have been taken this step months. The fact that the administration took this decision now doing it now showcases that they’re under increased political pressure to target Russia for its malign activities abroad, be it in the meddling of the US elections for the power play in the Middle East.
The effects of the announcement were immediate on the Russian currency and its stock market.
It will be interesting to watch the action of the Putin administration and the escalation pattern as there is no real way out of the crisis apart form a public recognition of Russia of its responsibility in the Skripal case and a commitment not to use biological weapons in the future.
Both are highly unlikely and the Trump administration knows that full well.
The move is therefore intended to cause additional hardship in the Russian domestic economy via higher interest rates and inflation and maybe also enticing Russia to sell more oil than agreed at the OPEC conference.
Conclusion
Economic warfare has replaced military warfare and unilateral decisions by one economic power have tectonic consequences on their targeted neighbors, economically, financially but also and essentially politically.
Donald Trump seems to be accelerating his agenda and setting the stage for major confrontations.
It will be interesting to see how all this plays out, but one thing is for sure :
Iran’s, Turkey’s and Russia’s regimes are being put under significant pressure by the Trump Administration…
Another interesting side question is :
What happens the day China decides to put sanctions on the USA and bans Boeing, General Motors, Apple, Goldman Sachs and Starbucks from doing business in China?
Originally published at Mechelany Advisors.
