Nov 29, 2021.
One of the least talked about phenomena that go under the radar but have enormous impacts on international financial markets is the trade embargo. The biggest and most prolific imposer of damaging trade embargoes on victim nations is, you guessed it, the government of the United States of America, the only global hegemon who has the willingness and the ability to make these trade embargoes work.
Ever Ready to Embargo
On the willingness front, the US government has never pulled its punches. At the time of writing, US trade embargoes are being enforced on an astonishing 29 countries all over the world, essentially on some variation of the charge that these nations support terrorism – terrorism being defined as just about anything that the US government dislikes. You are either for us, or against us, is the dictum of the only global super power and everybody else cowers in agreement unless they are willing to suffer an embargo themselves. Reflecting this unilateralism and arbitrariness is the current list of nations that are under the yoke of US trade embargoes in various shapes and sizes. The list includes the likes of Afghanistan, Belarus, Burundi, Central African Republic, China (PR), Côte d’Ivoire, Crimea Region, Cuba, Cyprus, Democratic Republic of the Congo, Eritrea, Haiti, Iran, Iraq, Kyrgyzstan, Laos, Lebanon, Liberia, Libya, Myanmar, North Korea, Palestinian Territories, Russia, Rwanda, Somalia, South Sudan, Sri Lanka, Sudan, Syria, Venezuela, Yemen, and Zimbabwe. Looked at another way, a mind boggling 15% of the 195 countries in the world are under US trade embargoes at this point in time. In addition to these embargoes inflicting damage on the targeted countries themselves, they also inflict heavy indirect economic damage on the rest of the world by, for example, constraining the supply of vital crude oil from leading oil producing nations such as Iran, Iraq and Venezuela, which has an inflationary impact on global oil markets.
The Almighty Dollar
Given that the cantankerous US government is ever willing to impose trade embargoes on nations that are unfortunate enough to incur its wrath, the question is what gives the US government the ability to enforce these trade embargoes.
One immediately obvious reason is that the US dollar is the de facto world reserve currency, being traded in 88 percent of international transactions, i.e., it is impossible to conduct international trade without involving a US bank in the process. This puts the US government in a position to intercept 88 percent of all international transactions. But then 88 percent is not 100 percent and allows for a 12 percent leakage possibility. This leakage would likely widen given that the 15 percent victim countries would aggressively explore alternative currencies to facilitate international trade with the rest of the world. In the long term, this would threaten the supremacy of the US dollar as the world reserve currency and big brother would have successfully ended up shooting himself in the foot and solving everyone’s problem. This simple fact cannot have escaped the Federal Reserve Bank of the United States and a more effective method of enforcing US trade embargoes that does away with the side effect has been implemented.
The SWIFT Advantage
The lynch pin that facilitates easy enforcement of US trade embargoes is SWIFT. For the uninitiated, SWIFT is the acronym for the Society for Worldwide Interbank Financial Telecommunication. It is a computer network that provides banks all over the world with the means to communicate information about financial transactions to each other. Cut a bank’s connection with SWIFT and you have automatically exiled that bank into international financial oblivion making it impossible for the bank to conduct business with any other bank especially on a cross border basis. This is the key to enforcing a trade embargo – nobody will trade with a nation that cannot pay and a nation cannot pay if it cannot bank and it cannot bank if SWIFT blocks access and stops that nation’s banks from communicating financial transactions with other banks.
SWIFT is a co-operative society incorporated in Belgium and headquartered in Brussels. It is owned by its member financial institutions and appears independent. But SWIFT operates out of data centres in the US, Netherlands and Switzerland and operates each redundantly so that any of these data centres can completely handle the network independently. SWIFT allows US government agencies to monitor and block international transactions – surprisingly, even intra-European transactions, despite SWIFT being incorporated in Europe. The most famous case was on 26-Feb-2012 when the US government seized US$26,000 being transacted between a Danish citizen and a German bank as settlement for a shipment of Cuban cigars imported by a German company. The reason for the seizure was that Cuba was a country against which the US had a trade embargo.
Unsurprisingly, these developments have concentrated minds in every nation and especially those in aspiring super powers such as Russia and China who want a way to circumvent this weapon of financial mass destruction so that they can continue to fearlessly cock-a-snook at big brother.
Unblock with Blockchain
Imagine a world in which SWIFT was not required to complete an international financial transaction so that the US government would be unable to block such transactions and enforce a trade embargo. Many countries have been on the hunt for this panacea to US financial hegemony and the dawn of international financial freedom. None have been especially successful.
Enter bitcoin, cryptocurrency and blockchain technology which at last offers a truly disruptive solution. The great thing about the blockchain is that it completely obviates the need for SWIFT and offers instantaneous, secure, standardized and reliable international financial transactions between entities without a SWIFT handshake and indeed without even banks in between. Entities can directly settle transactions between themselves without the intervention of any third party protocol. As an added incentive, the blockchain is impregnable whereas SWIFT has in recent years acquired a reputation for being vulnerable to cyberattacks and hacking in addition to functioning as the pet poodle of the US government.
It’s no wonder that the Chinese are at the forefront when it comes to deploying Central Bank Digital Currency (CBDC). As a challenger to the world’s only superpower and overweening ambitions of replacing the US dollar with the Digital Renminbi as the world’s reserve currency, the Chinese government has been experimenting with CBDC since 2019 and are said to be close to full deployment after many testing successes. Other major world powers such as Russia, Europe and India are trying hard to catch up.
The potency of the US dollar as a weapon of financial mass destruction is slowly but inexorably diminishing and the dawn of a new era of international financial freedom is emerging.