School of War - Ep 31: Rich Goldberg on Economic Sanctions and Financial Warfare

Episode Date: May 31, 2022

Rich Goldberg, senior advisor at The Foundation for Defense of Democracies and host of both the Cryptonite podcast and Jewish Insider’s Limited Liability podcast, joins the show to talk about economic sanctions and financial warfare. Times  • 01:30 Introduction • 08:19 The Dollar Is Still King • 10:10 Access Is Everything • 13:00 Whom Do Sanctions Effect  • 15:42 Uneasy Lies The Head That Wears A Crown • 21:50 Warfare By Other Means • 30:20 Working With Allies • 38:33 Exquisite Calibration  • 43:42 Usurping The Power Of The Dollar • 49:02 Integrated Deterrence  • 51:01 The Potency Of Sanctions

It's not an original observation to note that money matters in war. The side with more of it has an enormous advantage. And while it's not an infallible advantage, that side often wins. What about money as a tool of war? Today we'll take a look at how economic sanctions actually work, learning from an experienced practitioner and an architect of some very potent American sanctions against the Islamic Republic of Iran. What works, what the risks are.

We'll also learn what doesn't work, especially what's not worth. with Russia right now. It is a prescription for war, this Iraqi invasion of Kuwait. December 7, 1941, a date which will live in infamous. The bloody experience of Vietnam is to end in a stale. We continue to face a grave situation in Iran. The people who not see these buildings down. We shall fight on the beaches.

We shall fight on the landing grounds. We shall fight in the fields and in the streets. We shall never surrender. Hi, I'm Aaron McLean. Thanks for joining School of War. It's my great pleasure today to welcome Richard Goldberg, Rich's senior advisor at FD, from 2019 to 2020. He was the director for countering Iranian weapons of mass destruction

for the White House National Security Council. It's been a chief of staff to the governor of Illinois, senior foreign policy advisor to Senator Mark Kirk of Illinois in both the House and the Senate. And he is currently sanctioned by Iran. Rich, thanks for joining the show. Pleasure to be on, Erin. So, Rich, you are one of the country's foremost experts on financial warfare and on sanctions, their purpose, the method of employing them. So I thought we would just get into that today. This is a show devoted to military history. So I think it would be appropriate to start with the long view. America obviously occupies kind of a unique place in the global financial system and has for some decades. And that conditions how we go about imposing sanctions today. But let's actually go back.

back before that, you know, what is, what, what are some episodes or what are, what are ways to understand how nations have gone about using, you know, money, finance, economic measures to pursue, pursue their, their goals of statecraft. Yeah, I mean, sanctions is this word that gets thrown around and it has so many different meanings to different people of what sanctions actually include and encompass. And it depends how far back in history you want to go. Some people like to go back all the way to like 432 BC, right? Just before the Peloponnesian war begins, the Athenian Empire rolls out what are believed to be the first economic sanctions against the key ally of Sparta. And the sanctions are you're banned from our marketplaces.

You can't, you can't shop here. You can't rely on our goods, right? And it's supposed to be a crushing blow to their economy and it's foreign policy and, you know, will Sparta intervene on behalf of their ally and what will happen. And some people say, actually, it precipitates the war. Some people say it just happened to have happened. And you fast forward throughout different historical times and eras. And you see different examples of countries using economic tools or military tools to exact economic pressure, not necessarily military objectives, but economic objectives to drive military objectives, right, to increase pressure, to try to get the other side, either to have a critical shortage of goods, materials, either directly related to the war effort, directly

related to the population, exhaust the government, exhaust the regime, not just on the battlefield, but in economic terms, and hopefully drive surrender. And where do you see that? The civil war comes to mind, right? We think about embargoes on the high seas, trying to stop cotton from getting out of the South trying to cripple the southern economy, World War I. We saw similar embargoes, World War II. We have famous battles on the high seas and merchant ships being stopped and seized and attempts to cripple the German economy. We had, obviously, leading up to the U.S. involvement in World War II, trade sanctions and embargoes being put against Japan in various key sectors and goods that Japan relied upon. That obviously led in some ways to Pearl Harbor

and the U.S. being sucked into the war directly. We have the Soviet era and sanctions going back to very close to post-war, 1949, Export Control Act. Fast forward, we have a grain embargo. The Reagan administration comes in with their big victory plan, and economic warfare is a core tool of that, and they're looking at what are the key elements of the Soviet economy that rely on Western technology,

particularly their oil and gas sector and they try to close off delivery of those equipment to cripple the mainstay of the Russian economy, the Soviet economy. They also work with the Saudis to increase the supply globally of oil to drive down the price to interfere with the revenue that the Soviets are getting to continue to cripple that economy. So you see all of these elements. They're not all the same. A lot of it is military enforced throughout history. a lot of it is imperfect, where because at the time at least, you don't have sort of that one dominant currency, that one dominant player, you have other neutral parties out there, you have an axis, you are able to get around these types of sanctions, they're not perfect regimes.

And so Germany is never truly strangled sort of at the outset of the war. They are able to find different countries that are either quote unquote neutral, or part of their access block that they can rely on. The Soviets take a while to grind down. But, you know, one of the primary examples in history of sanctions really working well is the Soviet Union. It's not an overnight process, right? It's a decade's long process of really chiseling away an economy and denying it access to equipment, access to modernization, manipulating oil markets to dry up revenue, et cetera, at critical points.

So, you know, different stories, different kinds of tools used. And that brings us sort of to modern day. And we have this real shift that happens post-Cold War in our thinking on sanctions. And in the 1990s, we're still thinking really small, in my opinion. The U.S. economy has obviously grown, has already become dominant. We are the superpower. And especially now with the fall of the Soviet Union, we are the unquestioned superpower. And so we start having interesting sanctions.

coming forth from the Congress against enemies perceived terror sponsoring regimes, Iran, Libya, North Korea. It becomes a target at certain points from Congress at least. Obviously, the Clinton administration engages in negotiations like we see with Iran today. But Iraq, obviously, subject to sanctions as well. And in all of these cases, we think about, okay, let's try to prohibit companies from investing in a key sector. We don't really think that we can, as an economy, leverage the entirety of the U.S. market and U.S. dollar against other countries and really force compliance. We go relatively narrow and small because we think if we keep it manageable, we can get allies on board. Sure, the Chinese may break our sanctions. The Russians may break our sanctions time to time,

but we can get Europe on board for these incremental type sanctions, and that's how we do things. And they're completely ineffective. They're completely ineffective. Let's take a step back for a second. And for those in the audience who may not be familiar with the issues here, what do you mean leverage the dollar, leverage our unique position, you know, financially speaking in the world? What is the post-Cold War American position in the global economy and what opportunities does that provide? for financial warfare that in your view, the country was too timid for too long at employing? There's two main phenomenons that have happened over the last century that allow the United States

to be the unquestioned economic powerhouse to leverage its economy against others in the sanctions, economic warfare, financial warfare to be more specific space. Number one, the dollar being the reserve currency questioned. And number two, because the dollar being the reserve currency, oil being settled in dollars, those two phenomenons work incredibly to the U.S. advantage in the space of financial warfare. The size of the U.S. economy also does, right? But as you see other powers rising, think of China, to be able to rival the size of our economy, we don't want to necessarily rely completely simply on the size of our economy. That, oh, you need to choose between the U.S. market and the Chinese market, right?

The question is really, can you live, can you operate in this world without access to a U.S. bank, to a U.S. Fed Reserve system, to the dollar? And that is what drives today over compliance throughout the world when the U.S. issue sanctions that are tied to such penalties. So I'm a politician in some, you know, relatively small country. Let's pick one at random like Uzbekistan. I don't actually know what it is off the top of my head, but there's presumably an Uzbek currency and an Uzbek economy and trade with, you know, the other stands and probably China and Russia, maybe some out to the United States, I presume. But, you know, what, what does spell it out for us? Why do I care about access to the U.S. dollar? Why does that matter to me? The Somme, I believe, in Uzbekistan. I don't know if I'm pronouncing that right.

But sure, you know, that's an interesting case there. So if there is an Uzbek company that trades internationally, that has a bank account, and that does transactions internationally with a U.S. dollar code, that has trade with the United States. then they will have major legal compliance question marks looming over their heads in the C-suite of that company. Even though, you know, it's like, who is this Uzbek company? Well, if it's a multinational company that operates outside Uzbek borders, then they have to consider the fact that if they end up on a U.S. sanctions list, first of all, they get cut off from the U.S. market and the U.S. financial system and the dollar.

Okay. Well, maybe you could live with that. Maybe. You know, to have to look at the facts of the case and what the exposure of the company is and the exposure of Uzbekistan, et cetera, in certain sectors. But here's where number two comes in. We don't just stop there with U.S. sanctions today. And this is the evolution of our sanctions regime. We then move into something called secondary sanctions, where we say, you know what, if you are in France, if you are in Russia, if you are in Kazakhstan, if you are anywhere in the world that's trading with this now sanctioned Uzbek company, we get to do the same thing to you too if we catch you doing a transaction with the Uzbek company. So now suddenly the bank in France, the bank in Russia, the bank in Kazakhstan could be subject to the same U.S. sanctions. And now they're on the sanctions list. And secondary sanctions apply to them. And so you just keep climbing the ladder or the rope continues, wherever metaphor you want. And so it's sort of like, you know, sanctions today, the financial warfare of today is like the Kevin Bacon game.

Right? It's like only it's like one degree away and you're in real trouble. And if you're a couple degrees away, you might want to start doing a lot of due diligence because it may end up being one degree away real soon. And that is the power of U.S. sanctions and why it cascades down the line to have compliance. So just to kind of repeat that back to you. So even if your exposure to the American economy or to the dollar is limited, at any level of international trade, you will probably have exposure to somebody who has that kind of exposure. And that's where things become really potent. Because even if you could live without access to those things, you're ultimately going to if we are effective in the imposition of the sanctions, you'll ultimately have to live without

access to anyone who needs access to the American economy and to the dollar. That's correct. Because the way we draft our sanctions, typically, if you want to be most effective, which has not been the case for Russia, which we can certainly talk about. is to be very broad and not care about what kind of trade you're doing, what currency you're doing it in, where you're doing it in the world. But the very fact that the transaction is happening, transaction being a very broad term that could be a bank transaction, it could be a swap, it could be barter, but broadly defined a transaction that takes place, makes whoever's on the other side of that transaction subject to these U.S. financial sanctions.

And so you can say, okay, I don't need the dollar. I can survive on euro. Okay, well, I'm kind of curious how you're going to be settling your oil transactions if you rely on oil. But we'll put that aside for a second. Let's see, I can do my entire economy just built on euros. Well, it doesn't really matter because that European bank you're doing euro business with knows that they're on the hook for the U.S. sanctions, no matter what currency they're doing

the transaction in, and they're not going to do the transaction with you. Now, by the way, a lot of companies don't know this in random parts of the world. And so you do run into cases where, you know, companies run afoul. They don't care. They don't think it matters. And, you know, obviously at some point, they either show up on the sanctions list or there's corrective action if they haven't gone too far. There's an investigation. And, you know, okay, so some Uzbek company ends up on the sanctions list.

maybe they don't really matter in the broad scheme of whatever we were after. But the fact that they're now on the sanctions list and we took action and we named and shamed them and threatened everyone around them does matter. So we'll get into efficacy and claims of counterproductiveness here in a minute. But just this kind of stayed an obvious point and get your reaction to it. So all of this then clearly depends upon the central position of the U.S. economy and the dollar, such that if either position, if either position, were to become less central, we would be less effective in going about the imposition of these kinds

of consequences. Presumably, this is on the minds of our adversaries. You know, what are the trends that you see there? What do the bad people in the world talk about when they talk about, you know, getting out from under this regime? I think that's correct. And it's not a completely new phenomenon, of course. And this is, to be clear, when we are speaking simply in the very narrow lane of financial warfare. I think the broader economic warfare and the enforcement of sanctions in certain cases like a North Korea, like a Cuba, like a Venezuela are likely not successful and cannot be successful without a military supported component to enforce sanctions. And I can talk a few examples of that. But in the financial warfare game where you have a country that does trade with the world,

that needs trade with the world, that holds reserve currencies, that has foreign exchange reserves in different currencies. You know, the Federal Reserve played a very important role in World War II in freezing dollar assets that belong to Nazi Germany, right? The phenomenon that a foreign central bank may hold your foreign exchange reserves and be able to restrict them in a time of crisis isn't new. And in fact, we saw that happen again more recently in the case of Afghanistan, right? Afghanistan goes down in a few days when the president decides to go to Camp David and not actually stand by an ally, a different conversation, different podcast. And we have Kabul fall and the Taliban take over. And to their credit, the Biden administration does move quickly on the financial warfare side.

And one of the first acts is to freeze and restrict their access to their dollar reserves that are held. here in the United States. Great Britain does the same for the pound sterling. The Europeans are doing the same for their euros. So there is a susceptibility that countries have simply by doing business in, you know, the global economy if Western economies are willing to stick together. Now, they may want to diversify away from the dollar. And we've seen in the Iran context, for example, examples where our European allies didn't want to go along with our sanctions regime. But that's an interesting case because it stands in contrast and actually proves the ability for the U.S. to project its power even without allies compared to the Russia sanctions regime we have today.

What do I mean by that? Well, back in 2018, when Donald Trump said, I'm getting out of the Iran deal, I'm going to reimpose all of our sanctions. The Europeans said, no, we object. We like the Iran deal. We are not bringing back sanctions. European sanctions will not be restored on Iran. We will continue to trade. And if you try to impose sanctions on a European company, we will retaliate.

We have a blocking regulation they claim that goes back to the 1990s, which actually did deter the Clinton administration many years ago with respect to Cuba. sanctions. But we said we will use this. We will retaliate against your, against your companies, and we will not go along. Well, it turns out that a Western company in Europe does go along with U.S. sanctions because they don't really care what the E. Regulator says. They care about their access to the dollar and to the U.S. market for the reasons we've already discussed. But in a regime or in a presidency, if a U.S. administration says, I don't want to do secondary sanctions, I don't want to force a European company to do something unless their governments tell them to. That's not multilateralism.

That's unilateralism. I can't force my will onto other countries, my foreign policy and others. We have to come to this together. And so our sanctions on Russia are U.S. only sanctions, right? They apply to U.S. persons. They apply to the dollar. And we work with Europe to get European sanctions to align with our sanctions as well. But if there was a case where a country doesn't go along and isn't going to simply match U.S. sanctions, China has no sanctions on Russia. India, there's no sanctions on Russia. They are free to continue their trade, free of the fear of U.S. sanctions, let alone European sanctions or anyone else. And so in this case, you see Russia looking to China for a lifeline.

looking to India for a lifeline and looking to other countries as well and other, you know, ways that they can move money around evading the threat of U.S. sanctions or European sanctions, which, by the way, is why in these last few days you're finally starting to hear conversations about maybe it's time for U.S. secondary sanctions, which we should have done from the very beginning as Europe is contemplating an oil embargo. What explains then, because if we walk this back a few months, you know, to February and to March, there was a lot of self-congratulatory rhetoric about the sanctions regimes that were being imposed on Russia by the United States, by European countries. And at least a brief period,

I remember, lasted several weeks where there was a general expectation that the Russian economy, certainly the RUBel, and presumably, you know, as a consequence, the Russian economy, were going to be brought to their knees. And the RUBEL did, you know, take a kind of dizzy dive. But then it recovered and Russia seems, as you point out, to be hanging in there. What was the arch, just talk to sort of the architecture of the regime that was put in place in February March. And you've already identified one reason, sort of absence of secondary sanctions for the American approach that it is failing, but be a bit more comprehensive. What was the goal? What were we and the Europeans trying to achieve and sort of systematically, why are we failing? So it's important to understand that just as war is

an extension of politics by other means, sanctions is an extension of politics by other means, and financial warfare being simply part of warfare. And so the politics of this conflict derive in many ways the flaws in the response that you've seen via our sanctions regime. And by that I mean, in the lead up to the invasion, you clearly had a small group within Europe, led by Germany that was quite attached to Russia and quite opposed to any sort of sanctions that would cut off their trade with Russia. You also had a U.S. president who was, you know, just a few months on the heels of the withdrawal from Afghanistan, clearly demonstrating an eagerness to avoid any conflict, any sort of military entanglement where U.S. could become

involved, that U.S. troops could become involved. And his press conferences prior to the invasion of Ukraine signaled that, that that sort of mentality was being extended to Ukraine. This is not a NATO member. We have no legal requirement to come to their defense. Our intelligence at the time clearly told him, or he perceived from his briefings, the president he, that Kiv would fall within days, three days, when the Russians started invading. And it was just, you know, we're just pulling out. So you see the embassy evacuated, our U.S. troops that were there for training pulled out, you know, pretty much a green light for Putin and say, okay, you're going to take Ukraine. We're not going to stop you. It's going to be three days. Well, as it turns out, the Ukrainians can

fight. And they can fight pretty well. And they have an incredible inspiring leader that inspires them to keep fighting. And as it also turns out, as I'm sure you've discussed in your own other conversations, the Russians aren't quite as good as we thought for various, various reasons. And so now we're in a catch-up, total catch-up. And the Biden administration now is saying, well, this isn't my deal, right? This is a European deal. And Germany's opposed to secondary sanctions. And we thought this was going to be over by now. You know, basically the 96 hours, runs up and the White House is like, oh, we need sanctions? Oh, man. So you see a massive delay in the first sanctions rollout. There's no consensus on the European side of what sanctions should look

like because they're still fighting because they didn't expect this to still be prolonged. They didn't expect Zelensky to be on social media and YouTube and on international television, calling them out as standing by a genocide and actually for popular support within Europe to start growing for the Ukrainians. So now the Biden administration, I think, is saying, Okay, you guys tell us, Europe, what are you going to be able to get consensus on? What are you cool with us doing? And so the rollout is a very scaled-back, calculated sanctions regime to impose U.S. secondary sanctions on some but not the most important Russian banks, have the swift system, which we can talk about, which is the Society for Worldwide Interbank Financial Transcernation. transfers. It's based in Brussels. It's cooperative. It is literally the backbone of the international

banking system where banks send money and rely on the ones and zeros to actually push send and have these messages go back and forth, which is your money going back and forth. That is the SWIFT system. If you're not connected to the SWIF system, you have a major, major problem doing transactions quickly being part of international commerce. We did that to the Iranians back in 2012. with incredible effect. We did it again to them in 2018. And so this idea of like, let's kick the Russian banks off of Swift

was sort of out there from people like me and others, you know, pretty early on. And so they cut, they sort of cut the baby in half. We're going to put U.S. restrictions on the central bank of Russia,

not secondary sanctions. We're going to put U.S. restrictions on Subur Bank, the largest government-owned bank there, on gas prom bank, the bank that handles a majority of their energy transactions. But for, you know, some of these other smaller banks, and there's still important banks, you know, for commerce and for the population, we'll put

secondary sanctions on those and we'll, Europeans are good with that because it doesn't interfere with energy transactions. And we'll have Swift kick those banks off. So we'll say we're doing something. We're responding. The Ukrainians had already sort of figured out the swift idea. and it's kind of funny that whenever sanctions experts in the United States write an op-ed or do a tweet and we say, you know, here are the things you should do. We should have secondary sanctions on the Central Bank of Russia and Suburbanic and Gaspron Bank. And we should blacklist the energy sector. And you should kick all these banks off of Swift. You see it takes a little while, but the Ukrainians hear about it and they say, yes, kick off Swift, ban Swift. And so this was like this big movement by the

Ukrainian politicians in Europe ban Russia from Swift, kick off Swift. This will be the magic bullet. And so there's this political pressure growing to kick banks off of Swift. And they decided to not attack the major banks of Russia, not attack any of the energy trade of Russia, guard the central bank, and leave them all on Swift, which they remain on today, which means transactions are pretty easy with China and India, et cetera. For U.S. persons, however, you can't do business with those banks. Dollar transactions are restricted for those banks. The Europeans adopted the same for Europe. You're not supposed to do business except for energy, by the way, for both U.S. and for Europe, except for energy. Big, big exception. But they remain on Swift. Other countries can still do business with these banks.

There's no secondary sanctions applying. So China, India, et cetera, free to help bail them out. But yeah, you know, it's sort of like the market has not the perfect. understanding of sanctions at all times, and they don't really perceive that not all sanctions are created equal. But if you're going to, in the midst of uncertainty and royal markets and there's missiles flying, announce there are sanctions being rolled out on the central bank of Russia from the White House, that's going to startle the market, right? It's going to have an effect on the Russian economy. It's going to have an effect, the fact that they're restricted from dollars, that's going to have a big effect immediately. So it's not like, you know,

We haven't imposed tough sanctions on Russia today. We have. We have. And it had an immediate effect on the ruble. It had an immediate effect on the Russian economy. And it's continuing to have a slow, strangling effect on their ability to make certain payments. But there was a political decision until today made not to go after the energy sector, not to impose secondary sanctions, not to kick the central bank of Russia, gas prom bank and suburb bank off a swift. and you're leaving this just massive gaping hole in your sanctions.

And so, you know, it's sort of like like a ship where you think you've sunk the ship and it's going to sink over time. But actually the hole is not exactly like at the hull. It's sort of in the side. And there's a lot of water coming on as the waves come. But it turns out that there's a whole bunch of people on the ship and they're able to get rid of the water really, really fast. And those people actually are from China.

India and they're like getting rid of the water. And so like you need to just hit the hull, you know, and make sure it's just completely hemorrhaging. Otherwise, he's making a lot of money off of oil every day. And you're not denying him the revenue, he being Vladimir Putin. And so on the on the energy front, I mean, whether or not one agrees with it, it's fairly straight. The rationale for the exceptions on energy are fairly straightforward, right? Or is fairly straightforward. We're in an inflationary period. Prices are up at the pump everywhere. And in particular, Europe on the question of natural gas has real energy needs. And they don't want to, you know, in their view, I'm just summarizing what I take to be a simplified version

of their view. They don't want to do more harm to themselves than they're doing to the Russians. Feel free to quibble with that characterization. But I'm also, I'm interested in the other part of it, sort of the failure to crack down on non-European, non-American, you know, actors doing business with Russia. What's the rationale there? Because to hear you describe it, it just seems sort of obviously self-defeating, but presumably the architects of all this have a reason. So I think this has entirely to do with a misunderstanding of how to apply sanctions and ignoring of lessons learned, particularly from our Iran sanctions regime over the last decade. And sort of a knee-jerk, emotional response from the White House that has been developed now over the last year,

where this is an administration that fundamentally is opposed to the concept of secondary sanctions, right? They simply are uncomfortable with the idea of secondary sanctions. It may take a situation to have to do secondary sanctions if our allies support them, quote, unquote. But absent consensus from our allies, this is America first. right? This is Donald Trump's unilateralism, and we don't do that anymore. We work with Europe. We work with Japan. We work with South Korea. India is our ally. We don't just impose things on India. And so that is why we don't right now have secondary sanctions. On energy, I mean, this is where really the administration has gotten it completely backwards. And I believe they have contributed to the problems we face in the market today. by continuing to jolt and excite and scare the oil market, by incrementally increasing pressure, rather than putting into place a smart, tough, maximum pressure regime from day one

and having the market adjust. And by the way, you don't have to do it in a way that just immediately grinds oil off the market today. Right? That's the other big problem here is we're having a debate right now over a complete cutoff of oil or a complete cutoff of natural gas by Europe, right? And will we force China to stop all purchases of Russian oil if we did secondary sink, which hopefully we get right in reverse course to actually work with our Saudi allies to increase supply to lower the price right now? But absent that, we're at this crisis point.

And the market's looking and saying, oh, my gosh, Europe may actually adopt this oil embargo. They may go further. What if the U.S. does have secondary sanctions? So you keep having this upward pressure on oil. Whereas 10 years ago, the U.S. Congress looked at this situation vis-a-vis Iran. Now, I understand smaller economy and smaller export of oil. But still, at the time, very tight oil market, 2011, when Congress adopted central bank sanctions, sanctions on the central bank of Iran, that is, enforced a state. steady reduction in the import of Iranian oil and then followed up just a few months later by trapping all of their oil revenue there. I'll talk about a little bit how we did that.

The price of Brent was like $110, $111. And people said, oh, you can't do these sanctions. You're going to spike the oil market. The Obama administration went all in to try to stop these sanctions. Yeah, we have a letter from the Secretary of Treasury back then, Tim Geithner, that says if you adopt these sanctions, you're going to blow up the world oil market. Don't do this. Well, we did it. I was working for Senator Kirk at the time. It was the Kirk Menendez Amendment, Menendez Kirk, however you want to put it.

And we did it 100 to nothing in the Senate, right? Bernie Sanders, his last triumphant moment. Those were the days. Those were the days. And we followed up very quickly in the spring of 2012, and we said, okay, we like what we did here. What we did was originally, we said, we are going to threaten. any country in the world, any bank in the world, I should say, with a cut off from the U.S. financial system, all the secondary financial sanctions we talked about, if we find you conducting

any type of transaction with the central bank of Iran. And when it comes to oil, you can keep doing those transactions so long as every six months you demonstrate a quote-unquote significant reduction in your imports. You don't have to go to zero today, but it has to be a significant reduction, and it has to continue every six months in order to get this exception to the sanctions. And then we will allow you to keep doing that. So it was initially like a million barrels came off. Then the next million really was more gradual. And the oil market did not get scared because they're like, oh, this is a phase in.

It's going to be okay. The currency in Iran already started freaking out. We hit them with the SWIFT sanctions, took the Central Bank of Iran off of SWIFT right afterwards in February March of the following year. You're still allowed to do the oil imports. but a lot harder for a round to do the transaction off of Swift. And then Congress came back and said, you know what, we could make this even better and tighter?

Let's require all the banks that are conducting the oil transactions that are allowed while the country is significantly reducing their imports. Let's require them to keep all the money paid for the oil in escrow, in the capital of their country. Right. So if Germany is importing oil and Deutsche Bank is the facilitator of the transactions, the money that Germany pays must be deposited into an account at Deutsche Bank in Berlin and never allowed to move. It has to sit there. The Iranians can't get access to the money. And the same thing in India and in South Korea and in Beijing and anywhere in the world that is importing. Iranian oil and it worked beyond our wildest dreams. All the actual imports continued to reduce. Meanwhile, the actual revenue went to zero or near zero because the Iranians couldn't get access

to the money anymore. Do that for Russia, right? Think about that idea and do it to Russia. Put maximum pressure on the central bank of Russia, secondary sanctions, kick central bank of Russia off a swift, kick kick gas prom bank off a swift, kick suburb bank off a swift. Secondary sanctions applied to the entire world, with the exception for energy. And the exceptions are you must begin dramatic reductions of those imports, not total cutoff. But any revenue can't go back to Moscow. Putin can't collect the revenue. They must be put in escrow. Now, Putin would have options. He could do what you're seeing him do in certain cases. Well, I'm just going to turn off natural gas. I'm just going to turn off all. Well, that only works so long, right? Now you're in like a staring contest and you figure out who's going to call who's bluff real fast because it's also national suicide for Putin. If he does that worldwide for a sustained amount of time, he can't. He needs to keep pumping. He needs to keep exporting.

At least on paper, he has some money that's inaccessible somewhere overseas that he may be able to collateralize at some point. So the enormity of the pressure we're missing. Meanwhile, the pressure we're putting on the oil market on ourselves at the pump on Europe, while by the way, European citizens, American citizens freaking out saying, why is this happening to me at the pump? What the Chinese can buy and the Indians can buy. Makes no sense. Yeah, it does seem to be, it seems to me to be of a piece of the broader approach that the administration has taken towards Russia. since it became clear that Ukraine was not going to fold in the matter of a couple of days, where this effort to sort of achieve some kind of exquisite calibration across all the various domains of this war, whether it's weapons supplies or, as you were just describing, economic or financial warfare, where we want to pressure them, but not too much.

You know, we want to send the Ukrainian arms, but not the really good stuff. You know, we want to kind of achieve this point that's sort of midway. we would prefer that as opposed to a more comprehensive imposition of pressure on Russia as a bit of a mystery to me, though I presume their arguments. And then why we are so confident, by the way, why we are so that we can actually calibrate these things just so is also a bit of a mystery to me. Both good questions. I will say your first question ties back to a question you asked a while back, and I should add on to that answer, and that is what are our enemies thinking and where are our weaknesses and where is the vulnerability of this entire approach long term? There have been

a lot of academics who have been writing, and there are some practitioners who believe this and have internalized this certainly is a belief on Wall Street for some. I think it was a belief for former treasuries of secretary who hear people from Wall Street telling them this, that we are overusing sanctions and that at some point the world will figure it out and say, okay, how does the United States able to do all this? Well, it's because the dollars are reserved currency, because oil is settled in dollars, you know, because the SWIFT system, you know, because the SWIFT system, is vulnerable to U.S. financial sanctions pressure and legal authorities. We need to have alternatives, right?

We need to expand beyond the dollar. We need to find settlement platforms that are non-dollar settlement. We need an alternative to SWIFT, right? And Russia has been developing some of these. China has been developing some of these. There are examples now of China trying to settle oil in Yuan. They've been trying this for years. It's a whole other conversation.

There is the sort of libertarian camp that is pushing the idea of no more dollar reserve currency, crypto reserve currency. That's the way of the future. That's what we should have. And then there are the real inflationary pressures you brought up a little bit. And that is if you really decide to destroy your own currency and your own purchasing power and economic leverage by spending money you don't have, yes, that is a long-term threat to the United States and our financial power. But I think to me, all these alternatives and oh, they're going to figure out how to get around sanctions and, oh, you're going to spur the Chinese to all these different other platforms that will compete and dilute the effectiveness of our sanctions.

I heard that all in 2011 before the central bank sanctions on Iran. I heard that in 2017 and 2018 right before the president got out of the Iran deal and reimposed our sanctions. that has always been proven false. What is true is our ability to conduct effectively financial warfare, and effectively is the other question, which you probably ask, what does it mean to be effective with our goals, objectives are simply economic ruin that we are able to level.

But our ability to conduct financial warfare in whatever you consider an effective manner is tied to our financial power. Right? That's it. So if you care about keeping America economically strong and financially dominant, this is one of the side effects for good or for bad, depending on the trajectory of U.S. financial power. We spell out the case for sort of what the worst case scenario would look like and what the dissipation of this power would look like. I mean, what we're contemplating, right,

would be, and I'm just going to kind of think out loud here and you correct me where you see fit, what the folks who met the critique you just outlined would say is we're looking at the at a situation where, for example, China, it seems like the most likely candidate because of the size of its economy, its economy continues to grow relative to the United States. It reaches a point where it becomes, in the years to come, where it becomes, in terms of its scale and connectivity to the rest of the world, significantly more dominant than the American economy. And here's, I actually feel like here's a kind of a chink in the problem that would have to be solved. In addition to that, in addition to questions of scale and connectivity, the

Chinese financial sector specifically would have to achieve the kind of centrality that the American financial sector has achieved. Or maybe you have a network of countries that somehow cooperatively among, like, pool their financial resources and thus become central collectively in a way that the United States is currently central collectively. And that seems to me to the fact that the Chinese economy could grow like that is, you know, alas, you know, far from out of the question, though I think they're, they have real problems. But the question, the, the, the suggestion that the, the, the, the that their financial system will come to have the central role that America's has seems much more problematic to me because the centrality of the American system is not just based

on questions of scale, which are obviously there, but on questions like the rule of law, accountability. People are comfortable doing business in America and with American institutions because it is not, in fact, the Wild West. If you were wronged, we have courts and laws and administrative bodies where there's some level of transparency in normality, which is not, I think, an expectation you can have in a place like China. So, you know, it just seems like replacing us. I'm not saying, you know, the long sweep of history does not suggest that we will be sitting here in a thousand years having the same exact conversation, but the notion in the next 10 or 20 years or even 50 years is just going to happen. It seems to be a pretty heavy lift to me.

Yeah, I don't think replacement is the idea here, I think is displacement. And so I think if what people who fear this would argue, and there are reasons why I don't necessarily agree with this for some of the reasons you just stated and others, if we weaponize swift, then Russia and China with quote unquote revisionist powers get together and say, well, we have our own swift. We're getting off of yours. We're not using yours. We're using hours. And if you want to do business with us, if you want to have quick transactions with our markets, you're going to need to be on this system to move money around. We're not using your settlement platforms anymore. We have our own settlement platforms and we have enough participants,

enough of the market share now to drive actual competition. And if you want to have settlement with us, you're going to have to use these settlement platforms. And there is certainly in the counterterrorism community and the financial counterterrorism, community post 9-11. One of the arguments you will hear is there are benefits to keeping all of these countries in Western products, in Western platforms for intelligence reasons, for counterterrorism reasons, which you can Google some New York Times articles about and programs that the U.S. has developed over the last 20 years post 9-11 to intercept illicit transactions, right? The more there are, and we know that a lot of illicit transactions go through China, go through Russia, right? Not necessarily the Russian government's

involvement or the Chinese government's involvement, but actors that are based there because it's easy to be based there and do illicit things and there won't be government intervention, or perhaps there will be government enabled in certain cases. We see that in the cyber realm, certainly with Russia hand with China. You know, better to have them in the tent where we can watch this stuff than outside the tent where we lose perhaps some visibility into illicit transactions. I'm not completely ignoring that argument. I think it's a valid concern. But it really goes back to, again, the fundamentals of, can China really afford to leave Swift? You know, not today. Certainly not today. Can China really compete with and dare the U.S. to impose financial sanctions one of its large

government-owned banks or one of its state-owned enterprises? Certainly not today. I don't see that happening soon. But, you know, this is an interesting question, not just with respect to how we enforce secondary sanctions against countries like China for events that take. place in other areas of the world. So we have a sanctions regime targeting Iran that we hold China accountable to, right? We have a sanctions regime targeting Venezuela that we could hold others accountable to. But that's a very interesting conversation that we're having today and Russia, et cetera. But what happens in the future if we actually have to have financial war alongside other kinds of war with China? How do we game out financial war, US v. China?

in this sort of increasingly bipolar economic world. That is a very interesting question to study and one that should keep everyone up at night. Because I don't think there are easy answers. I think we win. But I think if you think that this has been a difficult ride in the stock market and oil market today with Russia sanctions, if there is an invasion of Taiwan or an attempt to the division of Taiwan, you know, buckle up Buttercup. Right. Look, I want to talk about Iran, but I also want to be respectful of your time and we're running a bit low for today. And that's such a rich subject. It occurs to me. Maybe we just do this again sometime and just talk about Iran, which I think would be really interesting. So for now, why we sort of stay general for the last few minutes? You've talked about, you know, efficacy or what are we actually trying to accomplish with sanctions? And I want to hear your your thoughts on that. Like, what does it mean to be effective with sanctions as opposed to, you know, ineffective as we seem to be with with rush right now. So that's that's the general question. And then let me

just, I'll throw a little seasoning on it with I along with others, Congressman Mike Gallagher is a good example of this, have been somewhere on a spectrum between bemused and like aghast at the discussion in the Department of Defense of this new thing called integrated deterrence, which I presume you've been following to some extent. There, there seems to be a belief that sanctions amongst other non-military forms of national power are so potent, so potent that you, I'm going to exaggerate slightly for comic effect here, but like you hardly even need the military anymore. That's slightly unfair, but only slightly unfair. You can, you could, the military need not play as central a role in deterring bad actions by bad countries because these other forms of national

power to include economic sanctions or financial sanctions exist and can be used to, to deter. So there is a belief at the Pentagon right now that sanctions are very powerful and very potent. So how do we make them potent, but also, you know, curious to know your view on integrated deterrence and the role that, you know, military force actually does play in the execution of foreign policy? Well, it's a breadth of fresh air at the Pentagon, which virulently opposed all of our sanctions we put on Iran after the president's hold out of the deal, though don't tell anybody I said that. Listen, great term of art. I like it, integrated deterrence if you actually have the political will, to integrate all your, you know, forms of power of the state to use that for deterrence purposes.

Obviously, there is a question mark as you're putting of whether or not simply it's a politically convenient way to the use of military deterrent and say we have other options. Don't look it up. We don't want to do this. But, you know, ultimately, that's a political decision that comes above the Pentagon, right? That's coming from the White House coming from the president. and maybe they're rolling out phraseology to help justify their aversion to the use of military power. But I do like the idea of an integrated deterrent.

When you look at a problem set like China, when we had a problem set like Moscow, like Russia before Putin invaded, I think an integrated deterrent would have been very powerful and still could be in the future vis-a-vis China. right, if you lay on the table all your cards of what you're willing to do militarily or leave something to imagination still and you integrate that with what you are willing to do economically and financially, then you have more powerful deterrent that there will be a lot of different costs if you want to go ahead and attack Taiwan. And better that you not take that course because we have multiple deterrence in place. I don't mind that concept. I like it. As far as what is effective on sanctions, again, different kinds of sanctions for different objectives and different targets. And I think we have

to examine each case on its own and study why did this work or why didn't it work. And what were we trying to achieve, right? In the case of sort of the scalpel type sanctions, I would call them, right? The sanctions we've been talking about mostly on the podcast are the hammer, right? Really like maximum pressure is this term has been adopted since the Trump administration and potentially for either combining with a military deterrent for actual victory in a conflict and or regime change or destabilization, really to force capitulation on American or Western terms, right? That's sort of the maximum pressure hammer. There is a scalpel. approach that was developed by the Treasury Department during the 2000s before we went into this

maximum pressure style mode in a lot of different sanctions regimes. And that was the counterterrorism idea got applied to other countries like because of illicit finance reason. Idea was, what if we isolate banks? What if we isolate people? What if we isolate networks from the financial market deny the resources, deny the flexibility for terrorists and other illicit actors to move money, year round. We don't have to hammer the Russian economy. We could, if we find that there is a Russian bank that is being used by a terrorist organization or by ransomware attackers, which is more likely today, we could go after that bank and isolate it and all the people involved and make them examples and put them on lists and threaten other banks not to do business with that bank

and just squeeze these illicit networks as much as possible. You know, you can debate how effective that has been, I think, to a large extent, in the war on terror context, it was quite effective against al-Qaeda. We did work with our allies and others to have their own regimes in place. Corporations had to adapt to this lifestyle and hire tons of people inside their banks and companies for compliance purposes, new anti-money laundering regimes, counter financial terrorism regimes. So good stuff happening in that regard. Then you go to sort of that larger picture of when we are actually in some sort of a tense situation or actual conflict with another actor,

another country. And there's various examples, right? You have North Korea, the hermit kingdom, and we have sanctioned the heck out of North Korea. We would say, we say, okay, well, where are there vulnerabilities and where are the opportunities and why haven't we been able to bring that regime to its knees? Well, because they don't actually need much from the world, they have figured out how to get their illicit cargoes to themselves. They rely on China for energy. You either need China on board to cut off North Korea and turn the country dark. And then you also need military will on the high seas to deny illicit cargo's access to land in North Korea. At times, we've modulated with the Chinese, depending on relationship, but we've never really, outside of a

couple of cases, really had the political will to intercept cargoes on the high seas using the military. When we talked about history of embargoes, military export embargoes, that's what's missing in a lot of these cases. Iran, by the way, bringing ships into port in Venezuela to break sanctions, both for Iran and Venezuela, again, you would need DOD support to actually enforce your sanctions militarily to board ships, to deny ships, et cetera. There is a lack of political will today to do those sorts of things. Okay, so the president, last president, President Trump rolled out some sanctions on Turkey when we were in a big dispute with Turkey over there taking hostages, U.S. hostages,

remember Pastor Brunson. And we like totally tanked the lira overnight with a couple of big sanctions that weren't like maximum pressure at all, right? A couple of sanctions. There were some tariffs going on. And then we hit a couple of ministers with relatively symbolic sanctions. The Turkish economy freaked out and Pastor Brunson suddenly was back home. Well, that's a good example of a limited use of sanctions for a certain purpose and effectiveness.

Iran, we collapsed that economy from $122 plus billion of accessible foreign exchange reserve down to $4 billion of accessible foreign exchange reserves in two years. two years. And they would say, critics would say, well, you didn't succeed. They still have a nuclear program. They're still kicking.

And I would say, well, we had an election, we stopped maximum pressure, and we'll never know what had happened. Because measuring all of these things is difficult.

What is your goal? How long will it take? How can you prove a negative? How can you prove something that never happened? And so that's why I think a lot of this conversation, is interesting and academics should have this conversation. But it's much better to just think of this as

an integrated approach, which is why I kind of like the integrated deterrents. But it's not just an integrated deterrence. It's integrated warfare. And when we are going to impose our will or stand up for ourselves or try to take on an aggressor, use it as you would other tools of power. Use it in your toolbox. Have political warfare, have military warfare deterrence, have covert. Have covert. Have covert warfare and by God have very strong robust financial warfare. Yeah. Yeah, just to explain my cynicism on integrated returns, I think it's a hangover from the Obama administration and the pivot to Asia.

And I think there's like a structural similarity between the two concepts in this way that as with the pivot to Asia, there's a certain superficial reasonability to it. I mean, who can survey the threats to American national security and not conclude that long run, China is by far the most significant threat. So, okay, we're going to put more stuff in the Pacific to deal with them. It seems very reasonable, necessary even. But as you know, that policy, that headline was as much designed to provide rationale and cover for avoiding commitments, especially in the Middle East as it was about pursuing new commitments in the Pacific, as indeed the anemic pursuit of those new commitments, commitments showed at the time. So anyway, that's my,

my somewhat cynical take, but I take your point that actual integration of instruments of national power, of course, who could be... Well, I think the bottom line is we need to pivot to Asia with an integrated deterrent and remain strategically patient. That would be the ultimate connecting the buzzwords. We should, yeah, we should try sometimes just see how long we can go talking like that. There are professionals at the Pentagon who can do it for a lifetime. In PowerPoint.

Rich Goldberg, fascinating discussion. I hope we have a similar one, but focused in on a... ran sometime soon and thank you so much for joining thanks for having me here this is a nebulous media production find us wherever you get your podcasts you're