May 5, 2015 | Monograph
Economic warfare is now the default instrument of coercive statecraft for confronting challenges to the international order. Sanctions have become President Barack Obama’s weapon of choice to combat Iran’s nuclear program, Russia’s invasion of Ukraine, the Assad regime in Syria, and the financing of terrorist groups such as the Islamic State, al-Qaeda, and others.
Leveraging the power of the U.S. dollar to isolate rogue actors—from the terrorists and nuclear proliferators of Iran’s Revolutionary Guards to Sunni jihadists to Russian arms dealers and oligarchs—the U.S. Department of Treasury has established itself as a key national security agency. Economic sanctions, once thought to cause humanitarian crises without impacting the calculus of authoritarian regimes, have become a sophisticated tool for targeting the financial resources of a range of rogue actors. Financial sanctions became the key driver of an overall economic sanctions architecture that used conduct-based sanctions to isolate illicit financial activities.
The transformation of blunt and broad state-based embargos into the “smart sanctions,” as they are characterized today, has its roots in the wake of 9/11 and the all-out offensive against al-Qaeda, when the U.S. government began targeting not only its top operatives, but also the funders that enable and facilitate the terror group’s violent activities.
These tools of economic coercion treat reputation as a currency in an environment in which companies cannot afford the risk of being associated with bad actors. The rules of this new world are straightforward: You can do business with the United States or you can do business with rogue actors. You can choose, but you can’t do both. And if you choose the latter, prepare to be excommunicated from the global financial community.
The system is self-reinforcing: As rogue actors become more isolated, they engage in more suspicious behavior to evade restrictions. And the more suspicious their behavior, the more they find themselves isolated from financial networks. The approach is based on persuading private sector players—principally financial institutions—to act in their own self-interest to avoid unnecessary business and reputational risk.
As smart sanctions matured and the U.S. government discovered a new form of coercive power, the use of cyber-enabled financial measures became an integral part of the global financial sanctions architecture. At the heart of this architecture is SWIFT (the Society for Worldwide Interbank Financial Telecommunication), a financial messaging service that is the electronic bloodstream of the global financial system.
The story of how Iran became the first country to be expelled from the SWIFT system provides a glimpse into how economic warfare has changed in the past decade, and the importance of American economic preeminence in this pursuit. It also raises questions, however, about whether Washington is prepared to respond when states like China and Russia, looking to challenge the U.S.-led international order, turn their own economic power against the United States and its allies.
While tools of economic coercion in general, and cyber-enabled economic warfare in particular, have both offensive and defensive components, the United States, to date, has primarily used those of an offensive nature. This paper analyzes offensive tools while acknowledging the importance of, and the danger in neglecting, defensive planning. While economic warfare encompasses a broad range of tools, financial sanctions are the foundation for the larger architecture of economic sanctions. As a result, this study addresses the rise of financial tools generally and cyber-enabled financial and economic sanctions specifically. This study also focuses on the tools used by the U.S. Treasury Department rather than attempting to address the range of economic coercion tools available to all agencies of the U.S. government. In the final section of this paper, however, we provide broader economic warfare recommendations and highlight ways that greater coordination across agencies might be facilitated.