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A Response from Michael B. Greenwald

Since the late 2000s, sanctions have become the preferred American policy choice in the Middle East, operating at significantly lower political and financial costs than direct military intervention. In contrast to the former blunt sanctioning approach—best characterized by the Iraq embargo in the 1990s, which led to dramatic humanitarian costs—sanctions have become more targeted, focusing on the economic foundations of a regime while exempting trade in vital supplies like food and medicine. These new smart sanctions include asset freezes, travel bans, arms embargoes, sectoral sanctions, and financial sanctions, which can be deployed sequentially to escalate pressure on a specific state.

In the Middle East, financial sanctions under Section 311 of the Patriot Act authorize the prohibition of correspondent banking. Correspondent banking enables entities to access financial services in different jurisdictions, which is necessary to engage in cross-border transactions.

Due to the dollar’s disproportionate share of both global trade generally and the oil trade specifically, correspondent banking services are vital to operate normal trading networks, making the withdrawal of access a powerful tool. Like the Iraq sanctions of yore, however, the potential costs of targeting correspondent banking are often too high to justify constant deployment. To address this vulnerability and broader economic developments in the Middle East, it is vital for Washington to embrace a renewed, holistic financial statecraft strategy.

In the new era of great power competition, the United States is far from the sole economic power in the Gulf, North Africa, and the Levant. Last year, Chinese firms invested more than $28 billion in the Middle East, second only to Europe. With the United Arab Emirates (UAE) and Egypt as top recipients since the Belt and Road Initiative’s start, China’s presence at the core junctures of Middle Eastern commerce is a direct outgrowth of its overarching investment in European, African, and Asian infrastructure. At the same time, Russia has leveraged its role in energy markets—albeit with modest economic resources—engaging with Riyadh as a key player in OPEC+ talks and financing Turkey’s first nuclear power plant. Further, Moscow’s diplomatic flirtations with Libya’s Haftar add to its economic and political clout, tying itself to an oil producer with a direct Mediterranean border.

Foreign investment is not the only changing variable in the region, as energy exporters pursue renewed commitments to economic diversification from hydrocarbons. Now used throughout the Gulf, these plans—most notably Saudi Arabia’s Vision 2030—have provided renewed importance to sovereign wealth funds (SWFs), which are investment funds financed by government oil revenues. SWFs have invested disproportionately in Western markets throughout their history, but they have recently branched into more exotic investments, especially in venture capital for Saudi Arabia’s Public Investment Fund (PIF) and Abu Dhabi’s Mubadala Investment Company. These investments are motivated not only by capital gains but also by Riyadh’s and Abu Dhabi’s desires to attract global start-ups into their markets to cultivate, over time, innovation economies similar to those present in the developed world.

Katerra, a start-up focused on real estate development, received $865 million from a financing round last year led by Softbank’s Vision Fund—a $98 billion venture capital fund, of which PIF has committed $45 billion. In late October, Katerra reached a tentative deal to build 50,000 units of housing for Riyadh, as well as a separate memorandum of understanding to build as many as eight factories in the country. With development of the mortgage market and an expansion of the housing supply as key pillars of the Vision 2030 reforms, the Katerra deal is a model for what Riyadh is aspiring to in many of these deals. In spite of the clear benefits of greater funding for innovators in Silicon Valley, the case for tighter scrutiny of SWF investment is tied intrinsically to great power competition.

As Moscow has expanded its economic footprint in the region, the Gulf SWFs have flocked to Russian investments. Mubadala acquired a private equity firm, Verno Capital, last year; PIF has invested in Arctic natural gas projects; and the Qatar Investment Authority is the third-largest shareholder in Rosneft. Such deals undercut the spirit of existing Western sanctions passed in the aftermath of Crimea’s annexation, an event whose impact was not limited to the European theater. Since 2015, the acquisition of Crimea has enabled Russia to reconstruct its Black Sea fleet, establishing itself as a dominant player in the Black Sea, threatening the security of the Eastern Mediterranean, Southeastern Europe, and North Africa. To tighten the spigot on these deals, Washington should take a hard line on the Gulf’s continued access to Silicon Valley’s best and brightest. One potential option is to use the Committee on Foreign Investment in the United States and other mechanisms it has employed to police Chinese investment.

Similarly, with the expanding Chinese footprint in the region, concerns about Beijing’s strategy that have been highlighted elsewhere have emerged in a Middle Eastern context, most notably in Pakistan. By connecting landlocked Xinjiang to the Bay of Bengal via the Port of Gwadar, the China Pakistan Economic Corridor (CPEC) is Beijing’s largest commitment in the region, worth $62 billion. At the same time, rising oil prices and strong demand for imports has triggered a balance of payments crisis, with foreign exchange reserves falling to just $8.9 billion, barely enough to cover two months of imports. In May, Pakistan signed a $6 billion bailout with the International Monetary Fund (IMF) after receiving $7.2 billion in bilateral loans from Saudi Arabia, the UAE, and China. Though CPEC was not the primary driver of the crisis, the IMF’s bailout requires conditions, including deficit reductions and depreciation of the rupee, as well as disclosure of private terms on many of China’s opaque deals in the country. In future instances, the IMF can lend itself as a key asset in assisting countries that are victims of unsustainable Chinese lending. Further, by limiting the ability of affected countries to use bailout funds to pay off unsustainable projects, the IMF can encourage China’s state-owned banks to practice more sustainable lending in the developing world.

“Though sanctions have been the centerpiece of financial statecraft, it is long overdue for Washington to exploit its financial resources in a more creative manner.”

In both presented cases, the end goal is not a maximalist stance of prohibiting all investment channels with rival great powers, but rather leveraging the financial resources in America’s tool kit to foster a minimum standard of best practices. Though sanctions have been the centerpiece of financial statecraft, it is long overdue for Washington to exploit its financial resources in a more creative manner. The recent unilateral Iran sanctions demonstrate that, even when met with compliance, the incentives for evasion can be high. In spite of the dollar’s central role in international finance, loopholes like shell companies can enable hostile foreign actors to evade sanctions while operating within the dollar’s ecosystem. It is long past time that, in tandem with its policy outreach, Washington address these flaws in its sanctions framework as well.

Financial statecraft itself should not be the sole policy option exercised by Washington, lest its effectiveness wane. Narrow, realistic policy goals should be coordinated with multilateral partners, both globally and locally. These tools must also be buttressed by efforts elsewhere, including engaged diplomacy, strategic deterrence, and, if necessary, targeted hard power to ensure a continued American edge in the region. The Middle East’s strategic value is clear. It is Washington’s obligation to not ignore this vital battleground in an era of great power competition.

"The Future of Conservative Internationalism," which is a collection of essays from the Reagan Institute Strategy Group, convened in Beaver Creek, Colorado, in July 2019.