The weaponisation of the corporate and financial sectors in foreign policy

The unified nature and massive scope of the ongoing western sanctions against Russia in response to the invasion of Ukraine has been a revelation. A most remarkable aspect has been the co-option of the entire corporate sector into the sanctions regime. They have responded lock-step with their governments. The ejection of Russia from SWIFT is the most egregious example. This constitutes an important trend - weaponisation of the corporate and financial sectors in pursuit of political aims. 

In his latest annual letter, Larry Fink, the chairman of BlackRock, world's largest asset manager alluded to the possibility of a reversal of globalisation. On the western response to the current Russian invasion, he wrote thus,

The invasion has catalyzed nations and governments to come together to sever financial and business ties with Russia... Capital markets, financial institutions and companies have gone even further beyond government-imposed sanctions... access to capital markets is a privilege, not a right. And following Russia’s invasion, we saw how the private sector quickly terminated longstanding business and investment relationships.... Grounded in our fiduciary duty, we moved quickly to suspend the purchase of any Russian securities in our active or index portfolios. Over the past few weeks, I’ve spoken to countless stakeholders, including our clients and employees, who are all looking to understand what could be done to prevent capital from being deployed to Russia. The speed and magnitude of company actions to amplify sanctions has been incredible. Iconic American consumer brands have suspended their operations of non-essential products. And financial services companies have taken similar steps to further isolate the Russian economy from the global financial system.

These actions taken by the private sector demonstrate the power of the capital markets:how the markets can provide capital to those who constructively work within the system and how quickly they can deny it to those who operate outside of it. Russia has been essentially cut off from global capital markets, demonstrating the commitment of major companies to operate consistent with core values. This “economic war” shows what we can achieve when companies, supported by their stakeholders, come together in the face of violence and aggression... Russia’s aggression in Ukraine and its subsequent decoupling from the global economy is going to prompt companies and governments worldwide to re-evaluate their dependencies... And while dependence on Russian energy is in the spotlight, companies and governments will also be looking more broadly at their dependencies on other nations. This may lead companies to onshore or nearshore more of their operations, resulting in a faster pull back from some countries. Others – like Mexico, Brazil, the United States, or manufacturing hubs in Southeast Asia – could stand to benefit.

This is a ringing endorsement of the sanctions and illustration of the commitment of a pre-eminent leader of Wall Street and corporate America to support its government in pursuit of its geo-political objectives. In this case, there is no moral dilemma - Russia invaded another country, that's just not on in this era, and Russia deserves to be punished. 

But one can see how the moral dilemma can be more complicated on other issues. Leave aside the contentious issues on the political side, consider some examples on the economic and environmental side. When faced with strong evidence in a future date of a looming environmental catastrophe, what if one large country does not sign up to a high-profile carbon emission reduction treaty? What if one country imposes punitive actions on western corporates on an issue of its perceived national interest? What if one important country does not adhere to a global treaty on private data flows and management?

As an aside, this endorsement of sanctions and call to companies to "re-evaluate their dependencies" sounds a bit rich given its just recent actions in China,  

BlackRock has raised Rmb6.7bn ($1bn) for its first mutual fund in China, as the world’s biggest asset manager presses ahead with its expansion into the country’s lucrative savings market despite concerns over the political climate. The US company, which became the first global group to gain approval for a wholly owned Chinese mutual fund business in June, said it closed fundraising a week earlier than expected and brought in more than 110,000 investors. BlackRock’s move is part of a wider push by international finance into China’s rapidly growing $19tn asset management market, even in the face of rising geopolitical tensions with the US.

Amidst all the tumult in Chinese equity markets, BlackRock has recommended that investors triple their exposures to China,

BlackRock’s research unit has said China should no longer be considered an emerging market and recommended investors boost their exposure to the country by as much as three times... “China is under-represented in global investors’ portfolios but also, in our view, in global benchmarks,” Wei Li, chief investment strategist at the BlackRock Investment Institute (BII), said in an interview. “It has the second-largest equity market, the second-largest bond market. It should be represented more in portfolios.”

"Re-evaluate dependencies"??? 

BlackRock's leadership in marching on into China at a time when the country's internal and external belligerence has been rising alarmingly and relations between China and US is worsening, prompted a strong rebuke from George Soros,

Pouring billions of dollars into China now is a tragic mistake. It is likely to lose money for BlackRock’s clients and, more important, will damage the national security interests of the U.S. and other democracies... The leaders of Western asset-management firms, such as Stephen Schwarzman, co-founder of investment firm Blackstone, and former Goldman Sachs President John L. Thornton, have long been interested in the Chinese consumer market—and in the prospect of business opportunities dangled by Mr. Xi. 

BlackRock is only the latest company trying to engage with China. Earlier efforts could have been morally justified by claims that they were building bridges to bring the countries closer, but the situation now is totally different. Today, the U.S. and China are engaged in a life and death conflict between two systems of governance: repressive and democratic. The BlackRock initiative imperils the national security interests of the U.S. and other democracies because the money invested in China will help prop up President Xi’s regime, which is repressive at home and aggressive abroad. Congress should pass legislation empowering the Securities and Exchange Commission to limit the flow of funds to China. 

Adam Tooze calls out the hypocrisy of Fink's letter on the end of globalisation,

Russia’s actions may be outrageous. But its economic weight is limited. As Fink is only too happy to remind his shareholders, BlackRock has very little money at stake there. From the global point of view, how much is really at stake in an economic war against Russia? Meanwhile, talking about Putin spares Fink the embarrassment of having to talk about the real faultline in the global economy: between China and the US. And if you are, in fact, interested in maintaining your business in China, as BlackRock surely is, the less said about that antagonism, the better... George Soros may insist that BlackRock is making a strategic mistake in continuing its investment in China, but the asset manager has shown no sign of backing down. Perhaps, then, the talk of the end of globalisation in the wake of Ukraine is smoke and mirrors... Imagine Fink championing an economic war against China! When that no longer seems “non-planetary”, we will know that we are really in a new world.

The most powerful and immediately acting form of sanctions are perhaps the financial market sanctions of the kind that has been deployed against Russia. The sanctions have squeezed Russia and its central bank out of the global financial system and frozen all its foreign assets. I blogged about it earlier here. Suddenly dollar denominated foreign currency reserves, the primary objective of which is as a hedge against uncertainty, appear a far less secure hedge. 

This is a good summary of the actions in perspective,

Analysts point out that previous examples of financial warfare have mostly related to blocking money for terrorism or deployed in specific cases such as Iran’s nuclear programme. Targeting a country of Russia’s size and power is unprecedented, and for better or worse it could become a blueprint for the future

FT has a two-part long series on it here and here. The first talks about the long-drawn planning for several months which enabled the quick imposition of financial market sanctions on Russia. Interestingly, it appears that the Europeans took the leadership in invoking the sanctions immediately after the invasion. 

The second article looks at the prospects for the emergence of an alternative to the dollar (or dollar/euro) reserve system. Since 2008, commentators have consistently argued about the beginning of the end of the dollar reserve system and America's "exorbitant privilege". However, they have been consistently wrong.

The dollar and other western bloc currencies form nearly 95% of the total foreign currency reserves and also the basis for international trade. The role of renminbi remains marginal and look most likely to remain so given the country's limited currency convertibility. 

The article points to the impossible dilemma that policy makers in Beijing face in this regard

In the decade since it first started trying to internationalise the renminbi, the Chinese Communist party has come to realise it can have a global currency that might one day rival the dollar or it can retain tight control over its domestic financial system, but it cannot have both.

More importantly, there is the poor reputation and lack of credibility of the Chinese government among potential renminbi reserve holders. How can any country trust its rainy day funds with a country whose government can wake up one day and whimsically decide it wants to freeze or expropriate those funds (as so many of its actions over the past couple of years highlight)? No matter how big China grows (and there are serious questions about its longer term prospects), it will require more than a generation and transformational change in Beijing's domestic and foreign policies for it to reassure foreign governments.

Katie Martin has a nice summary of the problems facing countries searching for reserve currencies,

Russia cannot shift to euros, sterling or yen given that payment sanctions extend to those as well. It could eschew them all, but then its funds for buying essentials or defending the rouble would all be in currencies with limited international use. In addition, opting for the renminbi to avoid politically motivated freezes seems rather naive.