US Sanctions reach a Turning Point

Posted on September 27, 2018 by Martin van Creveld

By: Karsten Riise*

A defining moment for the US sanctions regime

Each year, the USA finds a new country or group of countries to target with sanctions. Each year the USA adds about 1,000 individuals to its ever longer sanctions list. Now, US sanctions are coming to a turning point.

Up till now, the EU – representing around the same percentage of the world economy as the USA – was sitting put, as the USA grew its sanctions regime to ever more bizarre proportions. Together, the USA and the EU constituted nearly half of the world economy, and US sanctions previously “only” used to target the other half of the world’s economies. Hitherto, the EU had no compelling reasons to strain is relations with the USA because of US sanctions not affecting themselves.

But now, “secondary sanctions” regarding Iran also hit hard at strategic EU companies and financial institutions and negatively affect EU global strategic interests in energy from the Persian Gulf. US sanctions in effect attack the liberty, security and sovereignty of its biggest group of friends, the EU.

Thus, we have now come to a defining moment for the global sanctions regime, run by the USA.

The US economy is already less than a quarter of the world’s GDP in USD dollars, and in 2023 it will fall to only just about one fifth of the world (source: IMF). The non-US part, the 4 fifths of the world economy (now including the EU and China), constitute an increasingly advanced group, and they are about to collude against the US sanctions regime. Collusion is the result of parallel interests, and the EU may not actually (or at least not publicly) coordinate all its counter-sanctions with other major power centers.

We talk about the world’s most powerful and complex political-economic structures starting to fundamentally change, here.

So we need to analyze the bigger picture, how complete systems of counter-strategies against present and possible future US sanctions are being planned and implemented by strong powers around the world – all directed (but maybe only sometimes coordinated) against the USA. These systems of counter-strategies will include, but not be limited to, the following:

Finance

Payment transfer streams will develop to avoid US banks – hurting the global position of the USA’s major “growth-industry”. It will be a chance (as well as a good excuse) for the EU, China, Japan, India and everybody else, to nationalistically promote THEIR banks in the international system, at the expense of US banks.

Looking at the long-term trend, the US financial industry has become really the ONLY big growth industry which drives upwards the USA economy. No other sector in the US economy has the combination of size and growth, which finance has (weapons are a bit the same, but finance is unique in size) – so this will be very hard for the USA.

US banks hitherto have a central role in facilitating all global money transfers, and a lot of international money transfers between third-countries somehow technically go via the USA. This system architecture will now be stopped – not just by China, but also by the EU, and probably by India.

Everybody outside the USA will be reluctant to let their money be touched by US financial institutions, or let their money touch US shores even for a milli-second. And of course, the EU and China know how to engineer legal and technical solutions for this.

The growth of US credit card systems will be impeded. Instead, cards from China, the EU (and India?) will take bigger shares of this profitable and fast growing world market. Russia was the first country on this trend, kicking out all US credit card companies, and inviting in the Chinese credit card system. The EU may well strengthen the role of EU credit cards, and create actions which “incidentally” (oops!?) will hurt US credit cards in EU markets. The finance center of London, UK will after Brexit be caught in this cross-fire between the EU and the USA – if the UK sides with the USA against EU counter-sanction initiatives, the EU may develop strong tools to draw UK credit-card business into EU-jurisdiction.

New global IT money transfer system regimes, which counteract US influence on SWIFT, will erode US political influence. The SWIFT system is based in Brussels, but under heavy US political influence. Russia has already built itself an alternative to that. The EU can no longer accept that the US might be able to hurt EU companies on their SWIFT transfers. The EU will therefore have to take actions either to liberate SWIFT from US control, or to create a parallel EU-system.

Avoid Wall Street

Why should countries take up loans in the US, if they can have the same loans without risk of future sanctions from China or even the EU?

The IPO of the Saudi ARAMCO oil company has been stalled – unconfirmed information states that fear of US courts reaching out against Saudi assets after 11 September, is part of the reason. Already, the trend is that the biggest IPOs in the world move to Asia.

De-dollarization

The EU now will shift trade of energy from dollars to Euro – this trend will also diminish dollars in other international trade. Trillions of international dollars flowing around in trade may come back “home” to the USA – risking inflation and economic crisis. Gold is according to unconfirmed reports being speedily bought up by governments, not only by Russia and China, but even Turkey, recently also hit by US sanctions.

Strategic supply

Airbus cannot deliver airplanes to Iran, because, among other things, vital parts are sourced in the USA. This will change. Strategic supply chains will morph to avoid US sub-suppliers, carriers (ships, airplanes, IT), technology, service partners etc. – fundamentally hurting the US global position. We are not speaking used-cars, here, we speak strategic business sectors. The EU and China may not state this anti-US sourcing publicly as an official policy, they will just pull the strings to do it VERY effectively in strategic sectors.

Also, US deliveries in other strategic sectors like food (grain and soy from US farmers) and US energy will be affected by counter-sanctions. China sheds US soybeans and pushes their price down – the EU (less dependent hereof) may then offer to pick-up cheap surplus soybeans from the USA as a bargaining card. The idea of larger US delivery of LNG to the EU probably will be mostly words, but the amounts of LNG from the USA to the EU may possibly increase marginally. The EU may even come to a cold calculation, that the EU in the gas sector might have a more maneuverable partner with Russia than with the USA. The EU has in several aspects a substantially advantageous size-relation towards Russia, and not towards the USA, and while Russia enjoys a good relationship with China, Russia will like to balance its relations too.

Tourism and education

Tourism is one of the fastest growing industries in the world, and the USA sells its cultural influence to all tourists coming. University education is not only a strategic business to finance national research – Universities are also a cornerstone for the USA to influence future management generations around the world. Why not send tourists and students to other places than the USA? Chinese tourists and students are of significant importance to the USA, and China has plenty of other destinations to send tourists and students, other than to the USA.

Using the state to shield business

As a counter-sanction, the EU now moves central banks and state-owned companies into the fray in financing, and as business partners and intermediate partners, when dealing with Iran. US sanctions on EU state-owned entities can then amount to a US declaration of (economic) war, not only against EU private entities, but directly against EU states.

Buying other than US weapons

The EU recently is implementing a grand and ambitious strategy to increase its own weapons-industry – independent of the USA. To increase the volume strength of EU weapons-makers, the EU will need to minimize imports of US weapons. The EU will have to make their own, only importing as few items as possible from the USA. Saudi Arabia is by far one of the world’s biggest arms purchasers – and nearly all is bought form the USA. However, should the romance between the leaderships of Saudi Arabia and the USA cool down, Saudi Arabia would be well advised to diversify their weapons sources too. And Saudi Arabia even already has Eurofighters from the EU and embryonic arms-relations with Russia and to build on.

The collusion against the USA

US trade war unites the EU, China, India, and the rest of the world (even the UK) against US interests. With aggressive, unilateral trade-war, started by the US, all the rest of the world will now have even more motives to coordinate their counter-strategies to the US sanctions regime.

The EU may seem slow to react – and this may lure US politicians in their hubris to believe that the EU cannot or will not. But believe me, the EU will – because this has become a strategic must. The EU has seen the hand-writing of US sanctions on their wall – they will think this through, plan and make deep preparations to free EU sovereignty from US control. Just read between the lines of EU’s Commission President Jean-Claude Juncker’s recent State of the Union speech. When the EU rolls out their US counter-sanction measures, it will be big, comprehensive and VERY effective.

Negative changes for the USA will last

Once alternative systems to US banks, finance, the US dollars etc. have developed and matured, they will NOT go away.
The USA is in its hubris about to destroy its global claim for economic hegemony – and that is a good thing.

Karsten Riise is former senior Vice President Chief Financial Officer (CFO) of Mercedes-Benz in Denmark andSweden C urrently he conducts research and management of major changes with Change News and Change Management.

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Guest Article: US Position is Untenable

Posted on August 18, 2016 by Martin van Creveld

by Karsten Riise

The US Congressional Budget Office (CBO) has newly released a projection of Federal debt 2016-2046.

The CBO analysis shows that Federal debt is on path to increase from 75% of GDP to 146% of GDP in 2046. These figures exclude state & local government debt of approimately 16% of GDP (source: Fed.Reserve Z1,D1 and BEA.gov), meaning that the total public debt in the USA is on track to increase from 90%+ to 160%+ of GDP.

A public debt of 100%-200% of GDP is possible in Japan and Italy, where nearly all public debt is owned nationally—in Japan, by (often state-promoted) enormous private entities. However, for the USA, such high public debt figures are bound to lead to a fundamental crisis of non-confidence in the US dollar.

Falling dollar rates and rising interest rates will incur still higher deficits to pay the interests on the public debt.

A vicious circle threatens the US economy.
When and how it may start, we don’t know.

The biggest driver of the US Federal debt is the aging of the US population. Today 15% of Americans are aged 65+. This percentage will increase by two thirds, so that by 2060 about 24% of the US population will be 65+. Until now, the USA has benefited from a young population. The strain on medicare and social spending of an aging population, even with the still limited entitlements in the USA, will be enormous.

The CBO has calculated, that just to keep the Federal debt at its present level, the balance between tax revenues and federal expenditures must be improved by 1.7% of GDP—every year the next 30 years. In other words, tax revenue must increase and government expenditures must be curtailed.

The US economy is becoming less and less competitive. One reason for this is because the USA has some of the worst 3^rd world-like public infrastructure in the western world. Roads, bridges and railways in the USA are a sham. High-speed trains are non-existent. Not only is China building far more kilometers of inter-state high-ways than the US, but it is also one of the world’s leading countries in the field of high-speed trains; in fact, China may become the main-supplier of America’s first high-speed railway line.

Furthermore, American public schools, hampered as they are by violence and other problems. are not exactly the best in the world, The US level of education is going down, as pointed out by the economic guru Michael Porter, who also points out, that the level of bureaucracy and red-tape hindrances to business are enormous in the USA. The middle class is disappearing in the USA, with now barely 50% of the population perceiving themselves as middle class. Median incomes have barely improved or even gone down the past 40 years, significantly reducing the middle-section of the tax base, which is normally the most reliable. The American Dream is a night-mare for most Americans. The Laffer-curve, stating that heavy tax-burdens on the rich will incur less total tax-revenues, still applies for the top-section of the US tax base. Any attempts to heavily taxate (fiscate) the upper 10% (or 0.1% !) of the US tax base will lead to US dollar capital-flight, and acute economic crisis.

Ueber-rich people in the US will prefer to dump their American passports and go with their money to the Bahamas, Belize, the UK, Australia, Singapore, UAE, or even South Africa, or Brazil, if doing so is what it takes to protect their enormous fortunes from high taxes.

Poor Americans lack education and training to make them competitive in the global labor-market. America’s left erroneously blames the high percentage of unemployed poor on free trade, but the real problem is the lack of education which prevents the under-class from obtaining productive jobs. Poor Americans are too expensive compared to Asians, and too badly educated and trained, and the infrastructure around them too lousy, to make them able to earn a higher pay. The risk of starvation amongst the poorest in the USA remains high: In Obama’s presidency, one in seven Americans (14%) face the risk of not having enough to eat.

At the same time, the US military inventory is aging, and declining. The number of US ships and combat aircraft is declining, their average service-age goes up and their operativeness goes down. New US military hardware often take the form of useless “white elephants”, meaningless prestige-products like the 20-30 billion dollar Zumwalt class destroyer. The US addiction to over-investments in such relatively useless symbols of “strength” as the Zumwalt, in spite of economic problems and American city-disintegration, violence and poverty, is in the USA a sure sign of decay and decline – just like Rome in its latter days. The US Government Accountability Office (GAO report 15-364 ) has demonstrated, that the US military, in spite of spending 4% of US GDP (source: BEA.gov – extra spending is hidden in separate budgets), has no overview of its own economic needs, and the economy of the mega-expensive F-35 aircraft, according to GAO, has a big chance of not being economically sustainable over time, even for the USA.

http://www.gao.gov/products/GAO-15-364

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In absolute strength levels, the American military is standing still or going backwards.

The US military now delays military purchases in order to keep overall military expenditures flat the next 5 years.

https://www.cbo.gov/publication/51050

If military budgets are not increased, the aging of the US military will be tough in the 2020’ies. In light of the overall budget problems of the USA from now on until 2045 (as mentioned above), it must be expected that the US military will be economically forced to cut down on absolute strength levels the next 10 years.

At the same time, absolute strength levels of militaries in Russia and China is going up.

The qualitative lead in high-precision weapons, cruise missiles, and high-quality combat aircraft has come to Russia and China too. Though the USA still has a number of unique capabilities, especially its carrier fleet, advanced submarines, other ships, and “stealth” aircraft, Russia and China are specifically building up (and exporting!) cheaper weapons to off-set US advantages.

Military lobbyists in the USA dream of a new US “revolution in military technology” to regain American tech-lead in weapons, but so far such US “wunder-weapons” as rail-guns, laser-cannons etc. have shown to be elusive and too costly, even for the USA.
On the political front, the UK exit from the EU is a devastating blow to the US system of alliances.

The US economy is unsustainable – and the US military is going down in absolute as well as in relative strength.
Costly wars like Libya have been counter-productive. Afghanistan is becoming a failure. China is getting the upper-hand in the Straight of Taiwan, and Russia surprises (though still under-estimated in the west).
Without the tools-of-power or greater wisdom, Mrs. Hillary Clinton wants to increase the force-confrontation against Russia, China, and others.

A new world order is already developing. Mr. Donald Trump seems to have realized the new situation of the US. Mrs. Hillary Clinton has not – which makes her dangerous in world affairs.