Economic Warfare: The New Battlefield of Power

---

• Global markets are splitting into parallel sanctioned and non-sanctioned systems
• Banks now act as sanctions enforcers, facing massive fines for violations
• Sanctioned nations find new ways around restrictions within 18 months

Ready to rethink your business strategy for an era where economic sanctions hit harder than military action? Traditional models that once thrived in a globalized world are now vulnerable to financial warfare, and companies that don't adapt could find themselves trapped in geopolitical crossfire.

"Tools like sanctions, export controls, and tariffs have tremendous potential to advance American interests," says Edward Fishman, Senior Research Scholar at the Center on Global Energy Policy and an Adjunct Professor of International and Public Affairs at Columbia University. "We're really just scratching the surface in terms of their capability."

In his book “Chokepoints: American Power in the Age of Economic Warfare”, Edward explores how the U.S. leverages financial sanctions, trade restrictions, and technology bans to reshape global markets, making economic conflict the primary battleground for power struggles. The implications are far-reaching: What happens when your suppliers are suddenly sanctioned? When your financial transactions are restricted? When technology access is cut off? These questions are no longer theoretical but represent real risks in today's business environment.

The rise of economic weapons

In the early 2000s, the U.S. discovered a more potent approach to economic warfare: weaponizing the financial system. This shift came through the creation of a new role - the Under Secretary for Terrorism and Financial Intelligence, with Stuart Levey as its first appointee.

"Because of this hyper globalization we saw in the 1990s and the creation of the choke points, coupled with the extensive reach of the American regulatory state, we now have a situation where an official in OFAC can effectively sign a document in Washington DC and employ sanctions more powerful than ones historically using naval blockades and UN mandates," Edward explains. This transformation marked a fundamental change in how economic pressure could be applied globally.

Levey's approach centered on banks' risk-based decision-making. Instead of relying on diplomatic channels, he went directly to financial institutions worldwide. "He comes bearing these dossiers of declassified intelligence that shows exactly how Iran is using the international financial system to evade sanctions and also primarily to fund its nuclear weapons program, as well as its support for terrorist proxies like Hamas and Hezbollah," Edward notes.

The choice for banks was stark: comply with U.S. sanctions or lose access to the American financial system. By 2014, the strategy's effectiveness was clear, demonstrated by unprecedented penalties, including an $8.9 billion fine against BNP Paribas. This marked a decisive shift: sanctions violations could no longer be treated as a mere cost of doing business. Through this approach, economic warfare evolved from a supplementary tool into a primary instrument of U.S. foreign policy.

Inside the modern arsenal

Through decades of globalization, the U.S. has gained unprecedented control over key economic chokepoints - areas of such vast importance that economies struggle to operate when access is cut off. These range from critical infrastructure and supply chains to the essential systems that power international commerce.

While the U.S. dollar dominates global finance, other crucial chokepoints have emerged in areas like semiconductor technology and the services underpinning global oil trade. "To maintain control over valuable choke points, we need U.S. companies to stay at the frontier of innovation," Edward warns.

The semiconductor industry exemplifies this power. Under the Foreign Direct Product Rule (FDPR), companies like TSMC (Taiwan Semiconductor Manufacturing Company) must choose between serving sanctioned entities like Huawei or maintaining their vital access to U.S. technology. Through such mechanisms, control over advanced technology has become one of America's most potent economic weapons.

When economic weapons strike

Sanctions and trade restrictions may seem like bureaucratic maneuvers, but their impact on targeted economies is immediate and often devastating. Two cases—Iran’s oil sanctions and Russia’s price cap—demonstrate how economic warfare can cripple financial systems, disrupt industries, and reshape global markets.

The power of frozen assets

In the early 2010s, the U.S. escalated sanctions on Iran by targeting its most valuable resource—oil. Instead of banning sales outright, officials devised a more sophisticated strategy: escrow accounts.

The idea was to allow Iran to continue to sell oil and earn money from it, but prevent them from actually using the money, and, according to Edward, “I think this is the most, successful sanction we've seen in modern times.”

Oil payments had to be deposited into special accounts in the buyer's country, with Iran only allowed to use them for bilateral trade in non-sanctioned goods. Within 18 months, an estimated $100 billion in oil revenue was locked in foreign banks, cutting off critical funds. When nuclear negotiations began, the U.S. used these frozen assets as leverage.

A new model for sanctions

Following Russia’s 2022 invasion of Ukraine, the U.S. and its allies sought to cut Moscow’s energy revenues without triggering a global oil crisis. Throughout 2022, Russia’s economy struggled under sanctions and export controls, yet the war continued. Recognizing the need to address Russian oil, the U.S. and its allies introduced a price cap.

"You can continue buying Russian oil. If you're a Chinese or Indian refinery, you can import Russian oil, but if you use services from companies based in the G7, for instance, Greek shipping or British insurance, you can only buy that Russian oil for a price below $60 a barrel,” Edward explains.

The U.S. and its allies forced Russia to sell oil at a discount by controlling these essential services. While initially effective, Moscow later adapted by building alternative trade networks. While sanctions can be powerful, targeted nations eventually find ways to work around them.

When sanctions fall short

However, economic warfare isn't foolproof. "I'm often asked whether sanctions work, and I find that a strange question — no one asks if military force works. Sanctions, like economic warfare tools, are part of statecraft. Sometimes they succeed, sometimes they don't," says Edward. Historical examples, from ancient Athens to modern conflicts, show that determined nations often find ways to adapt and survive sanctions. The case of Megara in ancient Greece demonstrates how economic pressure can sometimes backfire, potentially escalating conflicts rather than resolving them.

Similarly, when sanctions were imposed on Japan in the 1940s, aiming to curb its expansionist policies,  the oil embargo became one factor in Japan's decision to attack Pearl Harbor.

The battlefield of the future

The impact of economic warfare extends beyond immediate conflicts, fundamentally reshaping global commerce. "Sanctions have become less a tool of behavior change and more a tool of remaking the global economy." Parallel financial systems and alternative trade networks are emerging as nations seek to reduce their vulnerability to economic pressure.

Companies must prepare for a fragmented future where economic security trumps efficiency. As Kevin Coldiron mentioned, "Trust once lost is not easily regained, and the scramble for economic security is underway." Success in this new environment requires adaptability, diversified operations, and recognition that economic warfare has become the new normal. Businesses must develop sophisticated risk management strategies that account for the possibility of sudden market access restrictions or supply chain disruptions.

Companies that fail to adapt to this new reality risk finding themselves caught in the crossfire of economic warfare, with potentially devastating consequences for their operations and survival.

---

This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.