Bestseller: How new Cold War is fought in hard cash
A controversial American bestseller claims that Washington is using so-called 'smart' sanctions against its enemies, choking them off from the international financial system. Is Russia just the latest victim?
President George W Bush signed the Patriot Act on October 26, 2001 – just 45 days after the 9/11 terrorist attacks left more than 3,000 people dead in New York and Washington.
The Patriot Act was a sweeping piece of legislation that gave the US authorities draconian powers to fight the war against terror. Among these new powers – tacked on to the Patriot Act almost as an afterthought – the US Treasury was given the power to name and shame banks and bar them from the American financial markets. The Patriot Act also gave the US Treasury the power to target companies and individuals.
Before the attacks, the US Treasury presided over law enforcement agencies including the Secret Service, the Customs Service and Bureau of Alcohol Tobacco and Firearms, which between them accounted for 40pc of all federal law enforcement activity.
The Patriot Act stripped the US Treasury of virtually all of these law enforcement functions, transferring them to the new Department of Homeland Security.
However, it quickly became apparent that the US Treasury still possessed formidable powers – powers that had in fact been strengthened by the Patriot Act. Whether it is Iran seeking to surreptitiously import parts for its nuclear programme or North Korea purchasing foreign luxury goods, even international outcasts need access to the global financial system, and it is this need that is the bad guys' Achilles heel.
While, stripped of its law enforcement functions, it may appear to be just another finance ministry, the US Treasury is of course much more than that. Bankers and financiers everywhere know that one messes with the US Treasury at one's peril.
With its existing powers massively increased by the Patriot Act, the US Treasury began targeting America's enemies.
While all of the usual suspects had sanctions slapped on them, what was new was the way in which banks, companies and individuals who the US Treasury believed were facilitating financial transactions by rogue states, terrorist groups or criminals, were also targeted. Just for good measure, the Patriot Act also gave the US Treasury the power to ban bad banks from using the American financial system.
Although only a handful of small banks were named and shamed or banned by the US Treasury, the knowledge that it possessed – effectively the power of life and death over any bank – was generally sufficient to bring even the biggest banks to heel. Applied to Iran, the country's oil exports shrank and its currency collapsed, leading to massive price rises.
The resulting unrest forced the country back to the negotiating table on its nuclear programme.
Now, Juan Zarate – who as assistant treasury secretary and later as deputy national security advisor, headed the US Treasury unit responsible for "smart" sanctions – has lifted the lid on this new form of financial warfare.
In his book Treasury's War he gives us a glimpse of the financial weapons that America is using.
ECB president Mario Draghi revealed earlier this month that $220bn (€160bn) had been pulled out of Russia since the Ukraine crisis erupted. Will Barack Obama press the – financial – nuclear button and cut off gas company Gazprom and oil company Rosneft, upon whom Russia relies for most of its tax revenues, from the international financial system? Among those targeted was Igor Sechin, chairman of Rosneft, and the second most powerful man in Russia.
Russian companies have foreign debts of $714bn (€525bn). Analysts reckon that at least $10bn (€7.4bn) of this falls due for repayment every month. And they have been effectively "locked out" of the international financial markets.
If this drags on for much longer, many Russian companies will need government support to repay maturing foreign debts.
The sanctions against Mr Sechin point to the possible direction which the next round of sanctions might take.
By targeting Mr Sechin but not Rosneft –which pays the Russian government $75bn (€55bn) in taxes every year – the US Treasury was firing a warning shot across President Vladimir Putin's bows.
If Rosneft and the giant gas company Gazprom were subjected to sanctions they would find it difficult to sell to foreign buyers.
Was it this fear that motivated this month's announcement from the Kremlin that it was pulling its troops back from the border with Ukraine?
Faced with the prospect of financial weapons of mass destruction did President Putin blink first?
'TREASURY'S FINANCIAL WAR' BY JUAN ZARATE IS PUBLISHED BY PUBLIC AFFAIRS