The weaponization of money

Could This Be The First Economic World War?

The Russian invasion of Ukraine has led to the biggest ever economic sanction response since World War II. Although economic warfare has been fought before, we are entering a new, unprecedented era of the weaponization of money, writes Alan Bollard. 


When Russia began its invasion of Ukraine it was soon clear that there would be widespread condemnation by other countries, but little military assistance. What has eventuated is the biggest declaration of economic warfare since World War II.

Every war has an economic element; financing military engagement has always been a costly exercise, made more difficult by disrupted funding markets. Wars have always been paid for by looting, by taxing, by borrowing and/or by inflation. The mid-19th century Crimean War nearly bankrupted the Russian Treasury, and forced the British into reforms for financing the military. Ultimately, the two world wars left a legacy of big governments and huge debts; most public debt built up in Europe has originated from warfare.  

Economic warfare has been a tool for military strategists forever. The castles of Middle Ages Europe, the palisades of Central America, and the fortified hills of New Zealand Māori were built to withstand military attack, but often fell to economic siege, if the attacking army could cut off water and food supplies long enough. Economic siege on the battlefield might extend to blocking supply lines and trade routes. Such economic blockades have a long history in China. Napoleon tried them against Britain without much effect. More ‘successful’ was the British naval blockade of the Central Powers in World War I, that cut critical food supplies to Germany and Austria-Hungary contributing to many civilian deaths but ending the military stalemate. Russian coastal blockades in the Black Sea similarly helped starve many Ottomans.   


Today computerised econometric models offer much more sophisticated ways to target economic sanctions.


Peacetime blockades took the form of economic embargoes. Concerned by growing Japanese economic aggression in China and threats to Southeast Asia in the 1930s, the US and UK imposed a series of embargoes.  The final step was the US oil embargo in 1940, which created a siege mentality and ultimately sparked the Pearl Harbour attacks. 

Realising the potential of such embargoes, economists have developed tools to map out pressure points in an adversary’s economy. Most well-known was Russian-American economist Wassily Leontief’s input-output mapping, which was used by US Bomber Command in World War II to determine ways to paralyse an economy: bomb rail lines or oil refineries or aeroplane plants? As World War II gave way to the Cold War, input-output mapping was used by both the United States and the Soviet Union to guide their nuclear targets. Today computerised econometric models offer much more sophisticated ways to target economic sanctions.

Economic Sanctions

In recent years, economic sanctions have been used in peacetime to exert pressures on territorial and political disputes. As a virtual form of hostility, economic warfare has some obvious advantages. One is its moral clarity – sanctions do not kill people, at least not directly (though sanctioned states may suffer higher mortality and poor living standards). There are no photos of smoking tanks and bombed-out hospitals. They do not require ‘boots on the ground’, and there are no body bags to alarm the public. They also make it possible for third countries to show support to a bilateral dispute. It is much easier to sign up to a UN sanctions obligation than a NATO military obligation. And it is relatively easy (domestic politics permitting) to terminate sanctions, without the drama of military evacuation (such as Kabul). 

For these reasons economics sanctions have become much more common, particularly as a way for Western nations to show their disapproval of smaller “rogue’ states. Since 1950, around 40% of sanctions have been initiated by the US. Some states, such as North Korea and Cuba, have been sanctioned for many decades. Today, Venezuela, Iran, Syria and Myanmar are heavily sanctioned. The objective is to cause economic disruption which in time causes popular protest and either policy reversal or regime change. Ironically, one of the most successful examples of sanctioning was the threats on IMF relief by the US against the UK during the 1956 Suez Crisis, which drained the pound sterling and forced British and French withdrawals. 

Russia was sanctioned for its 2014 invasion of Crimea, and some analyses show a significant hit to Russian GDP. Researchers from the Global Sanctions Database have found that most sanctions cause economic pain, while about half contribute to a partial achievement of the specified goals of the sanctioning country. Earlier sanctions were focused on arms, trade, travel and especially financial flows. Researchers record examples of sanctions worsening human rights and media freedom.  

Economic sanctions only work if they are broadly applied and tightly policed. A sanctioned economy will seek alternative sources of supply, which might be on the “illegal” black-market (e.g. oil transfers to unflagged tankers mid-Pacific bound for North Korea) or they might be from sympathetic countries (such as Russia in Syria and Myanmar). The US uses its strong extraterritorial reach to limit such third-party workarounds. It can impose penalties on foreign entities that bank or trade with US companies, or use the US dollar, or are otherwise caught by the wide US regulatory umbrella (especially the SEC). 

In practice the need for legitimacy and multilateral support has meant that United Nations Security Council or General Assembly resolutions are typically used to justify sanctioning. When Russia used its Security Council veto to block a sanctioning resolution, each country had to use its own legislative authority to impose economic sanctions. Economic sanctions do not require a declaration of war, and hence in the US avoid the constitutional tension between presidential and congressional powers that prevented the US from ratifying the 1919 Versailles Peace Treaties and join the League of Nations (which instituted multilateral sanctions against Italy over the 1935 Abyssinian invasion).


Russia may end up in control of Ukrainian assets - most importantly nuclear energy, gas pipelines, and certain valuable minerals.


Economic Sanctions and Trade Wars

Economic sanctions are generally applied to force another country to change its behaviour. But at times they can look rather like trade barriers aimed at protecting a home economy. During the globalising decades after 1970, trade barriers reduced, regulated by the World Trade Organisation. The Trump era challenged this - its trade war with China invoked restrictions on imports, exports, technology transfer and some financial transactions, and added to earlier human rights sanctions imposed on China. It also created a country block of countries that viewed US-led sanctions as a misuse of the global economic system, and consequently offer support to sanctioned countries. 

Another modern complexity is supply chains; today’s trade involves complex webs of upstream and downstream cross-border connections. This may offer the sanctioned state more options for bypassing supply barriers, but it might also give the sanctioning country more ability to apply secondary sanctions on suppliers or customers. This poses problems for companies that have no direct transactions with the affected state, but find themselves caught up in supply chain links, and for banks that are using anti-money laundering techniques to screen for sanctions compliance.


The Ukraine Sanctions on Russia  

Since the Ukraine invasion started, the US and the European Union have responded rapidly with a growing list of economic sanctions designed to show their opposition to Russian actions, to damage the Russian economy, and to make the completion of invasion more difficult. 

The US President uses executive orders, usually operationalised by the Office of Foreign Assets Control in the Treasury, under the 1977 International Emergency Economic Powers Act. This way, the US Administration has sanctioned many Russian exports, most significantly including oil and gas production, the operations of several Russian banks including their access to the critical international financial messaging system SWIFT, the Nord Stream 2 pipeline, a number of large Russian companies operating offshore, certain technology imports from the US or from third countries using American technology, the accounts and travel rights of Russian leaders and oligarchs, and other entities linked to the Russian military. Significantly, the foreign assets of the Russian Central Bank held in the US, once thought immune from US control, have now been frozen.

The European Union took time to get cross-country agreement to act, but has now followed the US with most of these sanctioned targets. The single obvious exception (at time of writing) has been the absence of Russian oil and gas exports from the sanctions list, an indication of the huge dependence of some European countries on Russian supply. The UK, Switzerland and Singapore, traditional safe-haven financial hubs, have all put in place measures to penalise Russian oligarchs’ activities and their companies. 

Many other countries around the world have followed with their own sanctions. The major hold-outs have been China and India, unwilling to risk their strategic relationships with Russia. 

As well as these official sanctions, many Western banks, retailers and other corporates have declared they will cease their own commercial activities in Russia, partly for fear of sanction non-compliance, partly to meet shareholder and consumer demands. In some cases, this represents a huge loss of value on corporate balance sheets. Other companies are eliminating Russian inputs from their supply chains.

Taken together, these sanctions represent by far the broadest and deepest economic sanctioning exercise in the world outside of declarations of war, with the economic hostilities now in place from Scandinavia to New Zealand.


Bottlenecks and price pressures present central banks with a difficult trade-off between the need to increase interest rates at a time when economies are already hitting head winds, risking stagflation.


Impacts of the Sanctions

The Russian response to these sanctions has been to vigorously condemn them, threatening to seize Russian-based assets of Western companies, and to ban exports of a list of key products in demand by the West. They have threatened sanctioners with military attacks and (unofficially) with cyber-attacks. 

It is too early to be clear about the impact of the sanctions on the world economy, but certain trends are evident. The financial sanctions have worked fastest. Already, the Russian rouble has lost a third of its value, and real-time data suggests a major contraction underway in the economy. The trade sanctions are a slow-burn, but already there has been a massive shock to some commodity markets where Russia and Ukraine are major players (including maize, wheat, barley, sunflowers, fertiliser, valuable metals, rare earths). The global commodity price index has have risen 26% since the invasion. Prices of some key minerals have increased two to three fold. The London-based nickel exchange has temporally closed. The global oil price has risen to around US$130 a barrel, at which point it is exerting a major contractionary effect on the global economy. In addition, materials restrictions are causing many shortages throughout global supply chains.

These bottlenecks and price pressures come at a time when many economies are already suffering economic problems from covid. They present central banks with a difficult trade-off between the need to increase interest rates at a time when economies are already hitting head winds, risking stagflation.   

Economic Impacts on Russia

The economic sanctions are broad-based and likely to be tightly enforced. But will they be effective? Russia’s official cash rate has already doubled to 20%, and forecasters are predicting a big negative impact on Russian GDP. However, in some ways, Russia is well positioned to weather these shocks – it is a huge country with relatively limited imports, it produces many key commodities itself, and its Soviet history of World War and Cold War isolation have left a legacy of self-sufficiency. It has a history of autocratic control – it has already imposed financial restrictions on its own citizens. And these sanctions did not come as a complete surprise; over the last year, Russia has been moving its assets away from US dollars and from US institutions, in preparation. Many personal and corporate Russian assets abroad have been hidden under blind arrangements.

Given Russia’s massive arms industry, the sanctions are unlikely to cause short term military shortages there. There will be a revival of local production. In addition, Russia may end up in control of Ukrainian assets (most importantly nuclear energy, gas pipelines, and certain valuable minerals). It will also enlarge its economic relationships with China and India. In particular, China is keen to see Russia switch some transactions to Renminbi currency, transacted through the Chinese CIPS payment system.

The sanctions will undoubtedly hit the lifestyles and travel of Russian oligarchs (as can be seen by the current flight of super yachts and corporate jets to neutral territories). More generally, Russia’s growing middle class will be deprived of its access to international brands, holders of overseas funds in US dollars will not be able to access them and holders of funds in roubles have already suffered a huge decline in value. For more typical Russian workers and households, the effects will be longer term and more indirect (and hence difficult to attribute to the sanctions):  layoffs, shortages and price pressures. The economy is likely to be in recession for years.

We are now experiencing the biggest imposition of economic sanctions that has ever taken place in the history of the world. This will undoubtedly hit the Russian economy very hard. But it may have limited or even inverse effects on Russian politics. More speculatively, this weaponisation of money may change the way countries think about aggression and warfare in the future.

Latest Releases
Join the conversation

Phox Duong 16 March 2022

absolutely true that the military escalation between Russia and Ukraine right now has been affecting our economics situation. The price of many products have been increasing without any records before. The financial cooperation among many countries has been changed. I care so much about news in the world like this and I get updated information from apps on Apkfun and today, I have known more source of reading many professional analysis about many cases in the world from here.

Roman Colman 15 March 2022

When Russia began its invasion of Ukraine it was soon clear that there would be widespread condemnation by other countries, but little military assistance. What has eventuated is the biggest declaration of economic warfare since World War II.