Finances on a War Path: The “Weaponization” of Financial Markets as Legitimate Tools of Foreign Policy | By Dr. Alexander Mirtchev

Gone are the days when the world was viewed through the lens of Pax Americana; a time when the United States predominantly set the tone and rules of the game. Today, we find ourselves in the midst of a profound long-term global political and economic transformation leading to a radically changed world.

Finances on a War Path: The “Weaponization” of Financial Markets as Legitimate Tools of Foreign Policy

By Dr. Alexander Mirtchev

Gone are the days when the world was viewed through the lens of Pax Americana; a time when the United States predominantly set the tone and rules of the game. Today, we find ourselves in the midst of a profound long-term global political and economic transformation leading to a radically changed world.

This age of turbulence is defined by certain dynamic trends. One of these is the use of financial markets as legitimate tools of foreign policy. The early 21st century is witnessing an “arms race” of unconventional financial tools and a dramatic weaponization of finances with far-reaching market and other implications.

The use of financial markets as a geopolitical tool has expanded in line with the growing importance of financial flows. At approximately US$2 trillion worth of currency moving across borders every day, capital flows can have an immediate effect on the economic and political conditions in a country. This has prompted countries to use capital markets as geopolitical tools to advance strategic interests; essentially, in the words of Carl von Clausewitz a “…continuation of politics by other means.” However, when using financial “carrots and sticks” the stakes are higher and the modus operandi can be extremely complex.

World Order in Transition

Geopolitics and the methods of statecraft used to influence international relationships are in the midst of transition. During this transition, the established set of rules that have governed international political and economic interactions and the parameters of global security for over 500 years are being rewritten. Indeed, a new world order is in the making.

While the U.S. is still fulfilling the role of guarantor of the world order, it appears less involved, and at times aloof, relying on the persuasive power of its past dominance. This withdrawal, whether real or perceived, is contributing to a strategic vacuum that encourages more overt assertiveness by those who wish to challenge the U.S.-led world order.

Capital Markets as a Geopolitical Tool

The near anarchical nature of international economic relations during the transition to a new global order is characterized by the use of capital markets as a geopolitical tool. This has brought about a virtual weaponization of the global financial system.

While governments have always used companies and financial institutions to further their domestic and geopolitical objectives (the French financed the American Revolution, the British East India Company laid the foundation for the vast 19th century British Empire, and the Soviets financed communist parties and whole governments for 70 years), states are extending their influence over the economic realm in powerful new ways.

A prime example of the use of financial markets for geopolitical ends is the restriction of access to U.S. markets or U.S. banks, or the freezing of asset and bank accounts. Some of the first high-profile restrictions on access to U.S. capital markets were aimed at China and Russia at the turn of the 21st century. In the case of China, these largely focused on security issues and deterring Chinese companies from doing business in Sudan. With Russia, the goal was to limit Gazprom’s ability to raise funds in U.S. capital markets in order to limit their investment in Iran.

Perhaps the most visible use of financial tools to change another state’s behavior involve efforts to financially isolate Iran over its nuclear weapons ambitions, human rights abuses, and state sponsorship of terrorism. While the freezing of Iranian assets dates back to 1979, under the 2011 Iran Sanctions Act, foreign-based financial institutions or subsidiaries that deal with sanctioned banks are barred from conducting deals in the United States or with the U.S. dollar. Then-Treasury Under Secretary David Cohen called these requirements “a death penalty for any international bank.”

Similar financial geopolitical weapons are being used against Russia in response to its annexation of Crimea. The EU, for example, has banned Russian banks from raising long-term capital within the European Union. Individuals close to President Putin have also been targeted by freezing bank accounts and shares.

Other examples of ways in which geopolitical goals could be advanced by the use of financial tools are the purchase and sale of another country’s financial assets (bonds, stocks and derivative contracts); the ability to set, or at least influence international financial standards and regulations; and policies that intentionally distort financial markets such as currency manipulation and competitive devaluation to increase exports.

The use of financial resources as “carrots” to create geopolitical affinities is also on the rise. A persistent tactic by the Chinese, for example, is the promising of infrastructure financing. China is financing the building of roads, ports, pipelines, railways, and hydropower projects in developing markets where it hopes to create partnerships for resource extraction and exports. More than 35 African countries are engaging with China on infrastructure finance deals with estimates ranging from US$6 to US$14 billion per year.

China has taken this a step further by creating new multilateral financial institutions designed to support its strategic objectives. Examples include the new BRICS Development Bank and the Chinese-initiated Asian Infrastructure Development Bank. Each of these illustrates attempts at creating alternative multilateral bodies that are outside the current order’s framework. These new frameworks will inevitably serve political, as well as economic goals of their founders.


The weaponization of finance is bound to become another form of “soft power,” most probably with hard consequences. Unlike prior uses of economic leverage for geopolitical ends, the cavalier, naïve, short-sighted and almost irresponsible manner in which it is done today is new. These financial weapons are often wielded by those with little understanding of how today’s global markets work in practice.

When using capital markets sanctions as a surrogate for traditional warfare, the question is not whether this increases the risk of retaliation, but rather what form the inevitable retaliation will take. Global economic security considerations, including those perpetuated by using financial markets for political purposes, provide momentum for increased protectionism, anti-globalization campaigns, and fragmentation.

Along with increased protectionism, other possible implications abound. Will this lead to further diversification away from the U.S. dollar, and provide momentum for rival development banks such as the Asian Infrastructure Bank? To what extent could industry get trampled on this new war path? And most importantly, will this affect the establishment of cross-border norms for financial market instruments, banking, technology and trade, further upending America’s near universal stewardship?

To put this in context, the weaponization of finance should be considered as part of the chaotic nature of the 21st century transition. With the world poised on the cusp of a new world order, what policy-makers can practically affect is the manner in which this transition will occur. If the current transition is propelled by an escalation of security threats, efforts should focus on achieving a new balanced state of the world system. This will be no easy task.

Indeed, history does not favor a peaceful transition. As noted by G. John Ikenberry in The Future of the Liberal World Order, “A succession of postwar settlements — Vienna in 1815, Versailles in 1919, Yalta and Potsdam in 1945, and the U.S., Soviet, and European negotiations that ended the Cold War and reunified Germany in the early 1990s — allowed the great powers to update the principles and practices of their relations. Through war and settlement, the great powers learned how to operate within a multipolar balance-of-power system.”

In this light, the overarching challenge of our time is how to transition to a new equilibrium and achieve a new global system that is accepted by its participants without major conflict or global war.

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