From Exemplary Tool to Punitive Weapon
Suppose you like chili sauce with your food, which is your prerogative. And suppose the people from another house on the other side of your neighbourhood despise having chili sauce in their food. Again, their prerogative. Now imagine, the anti-chili sauce people decide that you putting chili sauce on your food, even in the privacy of your home, is such an affront that they demand you shouldn’t be allowed to do so.
Now won’t that be preposterous?
“The pieces of green paper have value because
everybody thinks they have value.” – Milton Friedman,
Nobel Prize winner and economist
But that is exactly the scenario that is being played out in the world. Case in point, on 10 February, United States’ authorities imposed secondary sanctions on a company – Sense Shipping and Trading – for purportedly breaking US sanctions against Iran by being involved in the production, sale and supply of Iranian petroleum and petrochemicals. If ‘guilty’, then Sense Shipping and Trading will not be allowed to conduct business involving the US currency, which is a problem since the US dollar is the primary currency of international trade and settlements.
And did we mention that Sense Shipping and Trading is a company registered in Malaysia, and what it allegedly did is perfectly legal under Malaysian law? So, this is like the hypothetical scenario with the anti-chili sauce neighbours. Only worse. Much worse.
With Great Power, Comes Great Rewards
In terms of value, the US dollar is not necessarily the strongest currency in the world. That distinction belongs to the Kuwaiti dinar, which is valued at around KWD0.31 to US$1. The greenback however is the most commonly held reserve currency, with most central banks having the US dollar account for over60 percent of their foreign reserves.
Back in the 1960s, then French Finance Minister Valery Giscard d’Estaing coined the term privilège exorbitant (exorbitant privilege) to describe how the US is able to benefit from the US dollar being the global reserve and trade currency. At that time, this meant that the US did not have to worry about balance of payments since it could just print more money to pay for imports.
However, in recent years, privilège exorbitant has taken on a more sinister meaning, as the US has weaponised its monetary dominance to out the squeeze on countries, individuals or companies that it wants to punish. Or as Jonas
Elmerraji, Editor of the Rhino Stock Report, puts it, “crack down on rogue countries without putting lives on the line.”
Another way that the US and its allies control the international monetary system is through the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system, which is used to transfer money across borders.
SWIFT is owned and controlled by its shareholders and overseen by the European Central Bank with lead overseer the National Bank of Belgium and central banks from Group of Ten (G10) countries – Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, and the United Kingdom – all of which are US allies – as well as the United States.
Though it is supposed to be a neutral organisation, SWIFT has been used as a weapon against so-called rogue states. For instance,
in 2012, SWIFT ceased facilitating the transfer of money to and from Iranian banks, and more recently, in 2022, it stopped doing so for Russian financial institutions after the invasion of Ukraine.
Expectations VS Reality
Presently, the US has imposed unilateral sanctions against six countries – North Korea, Cuba, Iran, Syria, Venezuela, and Russia. According to the US Department of the Treasury, “The ultimate goal of sanctions is not to punish, but to bring about a positive change in behaviour.”
The reality however is that sanctions tend to be more punitive than persuasive. And Iran is a good example of that. When the US imposed its sanctions on Iran which essentially restricted its financial transactions, many companies and countries followed suit in not doing business with Iran lest they suffer similar consequences by way of secondary sanctions or reputational costs.
Human Rights Watch (HRW) stated that US sanctions are “harming Iranians’ right to health including access to life-saving medicines” when Swedish medical company, Mölnlycke, stopped exporting its trademark Mepilex absorbent foam dressing to Iran. This life-saving medical dressing helped relieve the pain caused by skin conditions suffered by Iranians with the rare and deadly hereditary disease, epidermolysis bullosa (EB). HRW Researcher, Tara Sepehri Far, said “it’s not uncommon to see companies ‘over complying’ with sanctions that are very expensive and complicated due to fear of getting punished.” And as a result of that fear, around 30 Iranian EB patients, most of whom were children, have died.
And things did not improve even during the global COVID-19 pandemic. In fact, it got worse.
“Despite acceding to Iran’s right and existence of no economic or legal barriers, the International Monetary Fund (IMF) didn’t even dare raise Iran’s request for a humanitarian loan at the Fund’s board of directors,” according to then Governor of Iran’s Central Bank, Abdolnasser Hemmati. Iranian efforts to purchase vaccines through COVID-19 Vaccines Global Access (COVAX) were thwarted because “any methods to make payment and transfer the required currency have faced obstacles due to the inhumane sanctions of the US government and the need to obtain permits from OFAC.”
In the words of former Iranian Foreign Minister Mohammad Javad Zarif, US sanctions imposed on Iran are “nothing but economic and medical terrorism.”
The Cuban Crisis
Of course, when it comes to feeling the full brunt of US unilateral sanctions, no country has more experience that Cuba. US sanctions against Cuba started as far back as the 1960s after the Cuban Revolution overthrew the US-backed dictator Fulgencio Batista and brought Fidel Castro and the Communist party into power.
Six decades on, and despite the best or worst efforts of successive US governments, the Cuban system of government remains in place. Not even the death of Castro, who has since been replaced by his brother Raul, seemed to have rattled the status quo.
Instead, as Dr William LeoGrande – Senior Fellow at the Washington Office on Latin America (WOLA) has mentioned, “El Bloqueo (The Blockade) is a reminder that the US has “failed to achieve any of its stated policy goals while exacting a high human cost, stifling the development of the Cuban economy and making daily life harder for Cuban families.”
When you compare Cuba and Malaysia, Cuba is a small island about 110,860 km² in size
compared to Malaysia’s land area of 329,847 km2. As a small island, trade is instrumental in Cuba’s survival and the embargo has cost the country’s economy around US$144 billion, according to leading Cuban economist and Research Fellow at American University,Dr Ricardo Torrez Pérez, with a similar figure acknowledge by the United Nations.
Assistant Director for Cuba at Washington Office on Latin America (WOLA), Mariakarla Nodarse, remarked in a discussion between WOLA and the National Security Archive regarding the US embargo on Cuba, “The United States cannot be oblivious to the damage caused by its own actions. The administration has an obligation to address the many ways US policy contributes to the worsening humanitarian situation in Cuba.”
Then if the initial problem between the US and the Cuban government was because Cuba was nationalising US industries and companies, surely, they would understand how it feels to have a business you’ve built from the ground up be taken from you?
The American Standard
Ted Galen Carpenter, Senior Fellow for defense and foreign policy studies at American think tank, Cato Institute, said “US leaders need to be candid with the American people and acknowledge that their decisions are based on cold calculations of national interest, not ethical considerations.”
The true colours of Uncle Sam has been seen repeatedly throughout recent history.
Former French President François Hollande turned heads with his accusation of power abuse by the US with his statement, “When the (European) Commission goes after Google or digital giants which do not pay the taxes they should in Europe, America takes offence.”
The aggressive nature in which the US seemingly overstepped its legal bounds and deemed stringent against non-US firms were criticised in a French parliamentary investigative report.
“And yet, they quite shamelessly demand US$8 billion from BNP Paribas or US$5 billion from Deutsche Bank.” Since 2009, European banks have paid the US an estimate of US$16 billion for sanction breaches.
The two set of rules that the US is evident in its treatment towards Israel and Iran. The main stipulation in the JCPOA for Iran is that the country has to submit for inspections of its nuclear programme under the Treaty on the Non-Proliferation of Nuclear Weapons (NPT). Israel is not a party to the NPT nor accepted International Atomic Energy Agency (IAEA) safeguards on some of its nuclear activities. Experts estimate Israel possess about 90 nuclear warheads with enough fissile material for 200 total warheads.
Do as We Say, Not as We Do
Since 1974, a trade ban has been imposed against Israel by Malaysia which means Malaysian companies are not allowed to trade with Israel directly. Does this give Malaysia the legal right to fine Walmart, the American multinational retail corporation known for its supercentres, for doing business with Israel even though Walmart is a company based in the US that is not registered nor does any business in Malaysia?
Sure, the US (or any other country) can impose penalties on companies registered in their own countries for violating their law. But what legal right, does the US (or any other country) have to impose penalties on companies from other countries for doing that?
A statement from the China Embassy in Mexico, The US Wilful Practice of Long-Arm Jurisdiction and its Perils, stated that despite adaptations, the hegemonic nature of the US long-arm jurisdiction has not changed. The US continues to use sanctions as a means to “maintain US hegemony, suppress foreign competitors, interfere in the internal affairs of other countries, and even subvert the governments of other countries.”
The disruption caused by the abuse use of its long-arm jurisdiction needs to be stopped and the US needs to step up to plate to “truly take up its international responsibilities as a permanent member of the UN Security Council.”
Sentiments of US imposed sanctions were shared by United Nations Special Rapporteur Idriss Jazairy when he said, “International sanctions must have a lawful purpose, must be proportional, and must not harm the human rights of ordinary citizens, and none of these criteria is met in this case.”
So, what is the alternative if this all started from the US Dollar? Would a proposal to create a new reserve currency be the game changer we need to bring back the balance of power?
Look out for the next issue of International Business Review where we explore more on the topic of a new reserve currency, supported by five largest emerging economies in the world.
