A shift is taking place in the business of global dominance and hegemony, from the model of expressing force through a troop presence to financial sanctions. It is led by the U.S. and has become recently visible in the U.S. and EU sanctions overload on Russia.
From rule-bound globalism, there is a move to an understanding of the management of individual economies, bound together by multiple networks of investment and trade, on a case-by-case basis. This is a global economy of individual, rather than bloc, rivalries between countries and corporations, continually shifting alliances, and contingencies overtaking assumed structural certainties. It demonstrates the emergence of an intensive rivalry among individual countries, exposing their red lines with a potential to turn into a military confrontation – the Uyghurs and Taiwan for China; the U.S. presence in the Pacific; Ukraine for Russia, the latter already militarised.
In Afghanistan under the Taliban, financial manipulations from afar in the form of sanctions may result in subjecting trading activities and investment ventures to the approval of the U.S. Treasury through a system of licensing.[1] If put into effect, such a system would give the U.S. government the ability to exercise control not only over a government or its activities or both, but also over those countries or corporations trading with or investing in those countries by confronting them with the legal and financial risk of sanctions. While this may give the U.S. a say in who trades with whom, it is also known that China has found ways of working with or around U.S. sanctions in a number of countries, including Iran.
Another measure of exerting control from afar is through the confiscation of foreign exchange reserves in American banks. Following the withdrawal of the American troops on August 15, the U.S. froze Afghanistan’s foreign exchange reserves of $7 billion deposited in the New York Federal Bank. The Taliban demanded the immediate unfreezing of the funds much-needed in Afghanistan where, according to the UN, more than half of the population is under threat of starvation.
Yet, the world is confronted with the shocking news on February 11 that the Biden administration decided to split the funds between the victims of 9/11 and the Afghans as humanitarian aid.[2]
Who are the beneficiaries? The Biden administration’s policy of engaging with economic tools for realising foreign policy and overall national security objectives, prioritises the private sector. In the case of sanctions, they are designed by the government and implemented by both profit-making and non-profit private enterprises, domestic and international NGOs (including the United Nations) that sell or deliver goods and services or are prevented from doing so by sanctions. As a result, private sector actors and their behavior become important in “leveraging and calibrating sanctions” in the service of broader foreign policy and security ends.[3] Meanwhile the economy of Afghanistan has collapsed, and its financial system is not functioning to finance private business. Recent attempts to link humanitarian aid to meet basic food requirements of the Afghan population majority of whom is near starvation to an economic development effort prioritising the development of small and medium sized enterprises- is a move in this direction.[4]
How about the secondary effects of sanctions? For instance, how will China deal with the sanctions in Afghanistan especially as the Taliban views China as its economic lifeline to re-build the war-torn country, to invest in its mineral resources? What about the economic lever which this provides to China in its dealings with the Taliban, to the Chinese state-owned enterprises and private corporations with an opportunity to invest in Afghanistan’s infrastructure, linking it to the Belt and Road project, and in its rich mineral resources of copper, cobalt, and lithium? China could also use it as an opportunity to unite investments in Afghanistan and Pakistan, isolating India. Will all these advantages and opportunities which the Taliban could provide to Chinese business, be left to the mercy of the decisions taken at the U.S. Treasury? If China wants to contest this, what would be channels for contestation and negotiation?
This is not clear. Tensions under the Taliban do not bode well for the security of future Chinese investments in Afghanistan. The ISIS attacks at the Kabul airport just as the U.S. troops were withdrawing, points to the limits of security the Taliban can provide. It raises questions about whether or not the Taliban, with its new government of hardliners – interior minister, Sirajuddin Haqqani is on the FBI’s most-wanted list and has a $5 million bounty on his head – will be able, or intends to, provide the kind of security investors desire.[5] Notwithstanding its initial promises, if the radical wing of the Taliban prevailed in Afghanistan, it may choose to prioritise a politics of terror in Afghanistan providing inspiration for the Islamic movement in Xinjiang.
Despite the exchange of niceties between the Taliban leadership and Chinese officials, the Chinese government remains dubious about a role in Afghanistan, especially in light of the recent attacks on Chinese investments and Chinese nationals in Pakistan, which China literally owns. Pakistan could not protect Chinese investments and people from its own Taliban and Baluchi rebels. A radical wing in Afghanistan would a destabilising force in Pakistan, linking with radical elements of the Pakistani Taliban.[6]
A working pattern may be provided by China and Russia, in concert. Russian military and political escalation to re-institute control over former regions of the Soviet Union, including Ukraine, Belarus, and Kazakhstan, and the reproachment between China and Russia against the West, may open up new possibilities for China in Middle Eurasia. It may also point to a recasting of power configurations between the Western alliance, Russia, and China.
Recent U.S. sanctions on Russia in response to the Russian military mobilisation first in western border region with Ukraine Donbar, then closing in on the country’s capital in Kiev- suggest that the leverage a country has in global trade and its consequent entanglements in global financial system largely determines the impact of sanctions on that country. Russia is a major exporter of natural gas (supplying one third of Europe’s requirements), oil, wheat, fertilisers, palladium and sanctions interfering with exports flows to global markets is bound to cause ripples in the operation of global financial system or banks which act as middlemen in these transactions. Hence, the U.S. sanctions cut off only ‘certain’ Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a messaging system enabling transfers of money among large numbers of financial institutions around the world. [7]
Furthermore, Russian economy is more isolated, protected and less reliant on international funding than, for instance, was the Afghan economy at the time of the Taliban take-over with 75% of public expenditures paid by foreign donors.[8] Russian external debt and links to Western economies has declined since 2014 U.S. sanctions imposed following its take-over of Crimea. Russian economy is dominated by domestic lenders while European and American banks combined hold only less than 10% of its assets.[9] So far, the possible impact of sanctions on Russia economy is estimated at around a cut of 1% in Russia’s GDP. [10]
Yet, the impact of any disruption in Russian exports on world oil, gas, palladium, wheat and fertiliser prices at time when those prices are barely recovering from inflationary pressures in Western economies due to disruptions in supply chains occasioned by the Covid-19 pandemic – is likely to off-set any leverage the Western sanctions may hope to gain against Russia. Such fear of price increases and even shortages in such essentials oil, gas and fertilisers may explain the relatively meek responses to Russian military mobilisation if one considers the highly aggresive posturing on the part of the Western alliance prior to Russian mobilisation. Germany only suspended a future project, the building of Nord stream 2 to transport gas from Russia into the largest economy of the Western Alliance.
China initially called for all parties to exercise restraint. But when Russia recognised the two breakway republics in the Ukraine’s Donbar region along sending troops to back them and in response the U.S. imposed sanctions on Russia; China held fast to its alliance with Russia refusing to follow suit, a foreign service spokeperson declaring at a regular press briefing in Beijing that ‘China has never thought that sanctions were the best way to solve problems.’ [11]
In refusing to give any support to the Western alliance beyond some general platitudes, China risked alienating (if not displaying an arrogance in its economic power towards) major trade partners in Ukraine (where China is the leading trade partner), as well as in the EU and the U.S. In its support for Russia, Beijing was also suspending its long held position of interference with internal affairs of individual countries and of respect for their sovereignty, inviting speculation whether Putin’s move to liberate Russians in different Eurasian regions could provide Xi with a precedent in Taiwan.
Above all, the Ukraine incident underlines an emerging of a division of labour between China and Russia, with China focusing on the economy, leaving the Russians to attend to the political and the military aspects of keeping the U.S. out of Eurasia while at the same time drawing a wedge between the EU and the U.S.[12] Preventing the latter may be a factor in Biden’s dramatic turn-about from its position against direct military involvement and instead rush to send troops to eastern Europe to reinforce the NATO forces against the Russian troop mobilisation on its border with Ukraine.
A new global Great Game is unfolding before our eyes with China, confident in its global economic powers, letting its ally, Russia, do the dirty work of fighting the wars, while the government in Beijing busily manipulating its own public opinion via Weibo to ensure that right lessons are drawn from the Ukraine incident, that is those of confirming the rights of old empires over various populations. In the new game, Western alliance led by the U.S. seems to have lost its way in a maze of sanctions, largely ineffective over a global economy the control of which is eluding its grip.
A part of this article was first published in The Indian Express.
Huricihan Islamoglu is Visiting Fellow, Gateway House, and Professor of Economic History, Bogazici University, Istanbul.
References:
[1] Afghanistan’s Future: Assessing the National Security, Humanitarian, and Economic Implications of the Taliban Takeover, US Senate Committee on Banking, Housing and Urban Affairs, 117th Cong. (2021) (testimony of Adam M. Smith).
[2] Savage, Charlie. (2022, February 11). Spurning Demand by the Taliban, Biden Moves to Split $7 Billion in Frozen Afghan Funds. New York Times. https://www.nytimes.com/2022/02/11/us/politics/taliban-afghanistan-911-families-frozen-funds.html
[3] Afghanistan’s Future: Assessing the National Security, Humanitarian, and Economic Implications of the Taliban Takeover, US Senate Committee on Banking, Housing and Urban Affairs, 117th Cong. (2021) (testimony of Adam M. Smith).
[4] https://www.aljazeera.com/program/talk-to-al-jazeera/2022/2/19/nazir-kabiri-can-afghanistan-avoid-economic-collapse
[5] (2021, September 7). Hardliners get key posts in new Taliban government. BBC News. https://www.bbc.com/news/world-asia-58479750
[6] Burget, Fazıl Ahmed. 2021. “Afganistan ve Çevresini Anlamak”. TEPAV Değerlendirme Notu No: 202134.
[7] https://www.nytimes.com/2022/02/22/business/banks-russia-sanctions.html. Presently only 7 banks are cut off. Christine Lagarde, director of ECB which is responsible for implementing sanctions, declared her support for sanctions against Russia but also states ECB is also responsible for the stability of the Eurozone and any rise in gas and oil prices would destabilize the eurozone. Economies.
[8] https://www.aljazeera.com/program/talk-to-al-jazeera/2022/2/19/nazir-kabiri-can-afghanistan-avoid-economic-collapse
[9] According to Institute of International Finance,European banks, including Raiffeisen Bank and UniCredit Bank, account for most of the 6.3 percent of assets held by foreign lenders in Russia’s banking sector, while U.S. banks hold less than 1 percent.
[10] Capital Economics.
[11] https://www.bbc.com/news/world-asia-china-60492134
[12] Denisov, Igor. (2022, January 18). After Kazakhstan Crisis, China Will Reassess Its Influence in Central Asia. The Diplomat. https://thediplomat.com/2022/01/after-kazakhstan-crisis-china-will-reassess-its-influence-in-central-asia/