The global power of the dollar 

This is an audio transcript of the Rachman Review podcast episode: ‘The global power of the dollar’

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Gideon Rachman
Hello and welcome to the Rachman Review. I’m Gideon Rachman, chief foreign affairs commentator of the Financial Times. This week’s podcast is about America’s use of economic and financial sanctions in Gaza, Ukraine and around the world. My guest is Wally Adeyemo, the deputy US Treasury secretary. So do financial sanctions work or are they a tool that will eventually backfire on the United States?

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Gaza cloaked in black smoke for yet another day as Israel’s air strikes and ground invasion show no signs of slowing. Tanks line the border.

Gideon Rachman
Events in Gaza and Israel have dominated the news for the last three weeks. They’ve also swamped the agendas of policymakers all over the world. It’s not just the diplomats and national security specialists who are getting involved. It’s also finance ministries and economists. That’s because these days, international conflicts are also about financial flows and economic sanctions.

The dollar is the world’s most used currency, and that gives the US Treasury Department unique power when it comes to economic statecraft and sanctions. When Russia attacked Ukraine in 2022, the US and its allies swiftly rolled out sweeping economic sanctions and also froze Russian state assets in the west.

Now America is also trying to co-ordinate the economic isolation of Hamas. There are critics, however, who believe that America is overusing financial sanctions and that it will eventually undermine faith in the dollar. I discussed that issue with Wally Adeyemo, as well as the efforts to keep money flowing to Ukraine and to tighten the isolation of Russia. But we began our conversation by talking about Hamas. What is America and the US Treasury department trying to accomplish?

Wally Adeyemo
The truth is that over the last several decades, the United States, working closely with our allies and partners around the world — namely the UK, the European Union and a number of countries in the region — have put in place a set of financial sanctions against terrorist groups, more than a thousand today just in the United States. That’s why I’m here in the UK to talk to my counterparts about what we can do together around stepping up the number of sanctions and restrictive measures we put up against an organisation like Hamas, building an international coalition to make sure that Hamas has nowhere to hide its funds around the world.

And then finally, working very closely with financial institutions and also digital asset providers to both restrict Hamas’s ability to get access to funds, but also to permit humanitarian assistance, namely financial assistance, to be able to get to the people in Gaza. One of the things we have to always remember is that Hamas is not the Palestinian people. In many ways, they’ve held the Palestinian people hostage for many years and we need to make sure they’re able to get access to the humanitarian assistance they need. And that’s part of the message that we’re talking about while we’re here in Europe over the next few days.

Gideon Rachman
How easy or difficult is it to make that distinction, though, because Hamas control that territory and the Israelis and that’s why they’re blocking the aid, because they say it will all go into the hands of Hamas.

Wally Adeyemo
So in the same way that Hamas is using the Palestinian people and the civilians there as human shields, they also use, often times, charitable organisations as ways to try and funnel money. But we found that you can do both. You can both restrict Hamas’s ability to get access to funds at the same time allowing legitimate humanitarian assistance to get through. It takes work. It takes co-ordination. It takes a degree of precision. But we’ve been able to do it over the years and we think we can continue to do it. We’ve made it clear that it’s important that as Israel considers what they do in Gaza, they learn from the lessons that we learned from 9/11. And since 9/11, we’ve been using these financial sanctions as a means to go after terrorists, but also others who try to abuse the financial system. And we found ways to do that while also allowing legitimate humanitarian assistance to flow.

Gideon Rachman
I mean, isn’t this a bit late? Hamas has obviously somehow built up enormous resources to spend on rockets, to spend on tunnels. Did the west take its eye off the ball?

Wally Adeyemo
No. As I mentioned, we have more than a thousand sanctions against Hamas. And what we know about Hamas and all of these terrorist groups is that as we take actions against them, they evolve and we have to evolve as well. And the thing about war, the thing about these types of fights is that they cost a great deal of money. And our goal has to be to cut off the money that Hamas has or that they’re attempting to raise so they can’t pay their fighters, they can’t buy the materials they need to conduct the war.

What we saw immediately after their heinous attack against the state of Israel was Hamas went on a fundraising campaign to try and get those who support them internationally to provide them with resources to support what they hope will be a long struggle. What we’re doing now is cutting off their ability to access those funds and access the funds they may have stored up. And in many ways, they’re using the same tools the Kremlin has tried to use to try and get access to the resources they’re using to fight their war in Ukraine. And we’re going to use the same efforts to go after Hamas that we’ve been using to go after the Kremlin’s resources globally as well.

Gideon Rachman
Yeah. I want to talk about the Russia bit in a second, but just a last question on the Middle East. We’re sitting in the middle of London. There’s a big pro-Palestinian demonstration taking place just down the road. Are you finding when you speak to Europeans, I know you’re going to Brussels next, that they’re of one mind with the Americans, or are they saying, well, hang on, you know, we’re not entirely comfortable with this single-minded focus on Hamas because we have other concerns. Our politics is in a different place.

Wally Adeyemo
In my conversations with my counterparts in the United Kingdom, my counterparts in Europe today, what we’ve found is that we’re very well aligned. We all believe that Hamas needs to be cut off from the financial resources that they’re using to promote terrorism. We know that terrorism is not only a threat for Israel, but it’s a global threat for all of our countries. But we’re also unified in the idea that humanitarian assistance needs to be able to flow to the Palestinian people in Gaza, that in many ways, like the hostages that Hamas took from Israel, the Palestinian people who live in Gaza have been held hostage by Hamas and need to have access to humanitarian assistance.

That’s why the United States, working with Israel and Egypt, are pushing for humanitarian assistance to be able to get into Gaza. That’s why while we talk about financial restrictions against Hamas, we’re also very focused on working with financial institutions to make sure that financial assistance that goes towards legitimate humanitarian assistance continues to flow. We have to be able to do both — be able to cut off terrorists from the funding that they use to terrorise our communities and our people while also allowing humanitarian assistance to flow to people who have been captured by these terrorists and held hostage by them.

Gideon Rachman
On the broader question of the Treasury’s role in geopolitics, how much does the Treasury now play a geopolitical role?

Wally Adeyemo
The Treasury department has played a geopolitical role probably since the founding of our nation, but I’ve been now at the Treasury department for the better part of a decade. And our role since the terrorist attacks of 9/11 on the United States is on the increase because ultimately what we know is that the terrorists, cybercriminals or others often need money. Financing is at the core of what they need so we use our tools to be able to cut them off, but also to be able to think through how we can use economic incentives to support countries and I know you want to get to Ukraine, but when you think about what we’re doing there, Treasury is working closely with our allies and partners to provide Ukraine with the financial resources they need to make sure that they don’t run out of money before they run out of bullets.

But at the same time, we’re using restrictive measures, namely sanctions and export controls, to slow down Russia’s ability to be able to build the weapons they want to fight the war that they need. So in many ways, the Treasury secretary, myself, we sit as part of the team of people who are thinking through the national security challenges and how we can use both our tools, be they financial resources, but also some of our restrictive tools, and when it comes to the national security challenges that we face in the United States.

Gideon Rachman
You mentioned restrictive tools. I mean, obviously when Russia invaded, an enormous package of sanctions, probably unprecedented, was rolled out very fast. And a lot of people thought at the time that it would have a pretty devastating impact on the Russian economy. Have they weathered them rather better than you thought they would or hope they would?

Wally Adeyemo
I think the Russian economy has weathered the sanctions that we’ve put in place far differently than I think people expected. I think part of this has been that what Russia has done now is they have turned their economy into a war economy where all the tools of their economy are focused on producing the weapons they can to fight the war they want in Ukraine. And they borrowed in lots of ways from their future to finance their present.

You look at what’s happened with their sovereign wealth fund, which has decreased significantly. You look at how they’ve thought about supporting their domestic economy using reserves and where they are today is that Russia’s economy continues to grow, but at the cost of its future ability to produce things for its people. And they’ve seen a significant brain drain that has left them in a position where over time Russia’s economy is going to be less flexible, less adaptable, and they’re going to be more disconnected from the world.

Gideon Rachman
But I guess one thing that people did think might happen was when they were cut off from Swift, that they would really be cut off from the global financial system. And that turned out not to be true, yeah?

Wally Adeyemo
I think the reality is that Russia wasn’t cut off from Swift. Some Russian financial institutions were. And it’s important for people to realise that the pieces of the strategy that we were implementing at the Treasury were against two key objectives. One was to reduce the revenues the Kremlin had to fight its war of aggression. Two was to make it harder for Russia to build up a military-industrialised complex that it could use to fight the war in Ukraine.

Judging against those two objectives, we think we’ve seen a great deal of success. And part of the reason we think that we’ve seen a great deal of success is Russian officials have said we have. You look at the statements that the finance minister and the central bank governor have made. They have talked about how our restrictions have put pressure on the economy. We also know that the Kremlin has ordered their security services to look for ways to get around our export controls and sanctions when it comes to building up their military-industrialised complex.

So I think a key thing for us is you need objectives when you are dealing with these tools and ours have been around two things: reducing the revenues, which we’ve done a great deal, both using tools like the price cap, which reduced the revenues there and from energy, but also using tools like export controls which have made it harder for them to get access to the microelectronics and some of the other things they need to build weapons in Russia.

Gideon Rachman
And so the only way around it, as you say, for them, has been to go to a war economy, but also to build up their relations with the areas we call the global south. And how much does that provide an alternative network for them, really?

Wally Adeyemo
Yeah, and I think we should define what you mean by the global south. That isn’t as if they’re getting this from a number of countries in Africa or Latin America — Russia’s trading partners now where they’re trying to get these tools — or places like North Korea and Iran. These economies are economies that have been heavily sanctioned, they’re limited economies. And Russia’s also getting a number of things from China as well. And I think what we’ve done is we’ve spoken to officials in China who we’ve made very clear that and they’ve made very clear that they don’t want to provide Russia with things that will further their ability to attack Ukraine. And we’re continuing to take steps to make sure that we’re limiting more and more Russia’s ability to get those materials going forward. But they have very limited avenues to get the things that they need for their economy at large, let alone their war economy.

Gideon Rachman
But in terms of revenue, I mean, the fact that, for example, India remains a big buyer of Russian oil, that’s really important to them, yeah?

Wally Adeyemo
It is very important. Oil is the biggest revenue source for the Russian economy. And over the course of the last year, United States and our allies and partners implemented a price cap on Russian oil that use G7 services. The price cap reduced Russia’s revenues over that time period by somewhere between 40 and 50 per cent.

And what Russia did was they decided they’re going to build their own ecosystem outside of the G7. They were gonna buy tankers. They were gonna build an ecosystem for trading. And this cost them money. They are spending money on tankers rather than on tanks, to be frank, and by one outside estimate, the cost of having to get outside of G7 services to find new buyers was up to $35 per barrel of oil.

So as we go into the second phase to think about what we can do to reduce the amount of money the Kremlin has, we’re focused on what we can do to increase cost for Russia in terms of shipping oil. How can we increase the cost of buying ships? How can we increase the cost of providing insurance and financing for Russia outside of the G7 in order to make sure that Russia ultimately is getting less profits from its oil that the Kremlin can use to fight its war of aggression in Ukraine?

Gideon Rachman
Yeah. I mean, you also mentioned earlier the other side of the equation, which is getting money to Ukraine. And, you know, it’s no secret there’s debate in Congress about whether that will go through. And as people think about that, there’s also increasing debate about possibly using some of those Russian assets that were frozen at the beginning of the war and just handing them over to Ukraine. I know the Canadians seem to be quite positive about that. What’s current US thinking on it?

Wally Adeyemo
So I think I’ll speak to both of the things you raised. And I think the president’s made clear and I think a majority of members of Congress have made clear that the United States plans to continue to support Ukraine. And we have supported them over the last few years in a bipartisan way to provide them with the resources they need to make sure that they don’t run out of money before they run out of weapons. But we’ve also provided them with weapons that they’ve used to defend themselves, and we expect to continue to do that going forward.

G7 leaders have made very clear that Russia’s not getting access to its sovereign assets until it pays for the damage it’s caused in Ukraine. Ultimately, the damage in Ukraine that has been done has been so great that it’s going to likely cost more than even the sovereign assets that are currently frozen by the G7 and our allies and partners. What we need to do and what we are doing is making sure that we identify where those assets are, which is being done by the Repo task force, and that we know how we could access them in order to ensure that they are placed in a position where ultimately they will not get to Russia until Ukraine has the resources they need to rebuild themselves.

Gideon Rachman
This may be a stupid question, but surely to freeze them you have to know where they were in the first place.

Wally Adeyemo
So one of the things we did was when we put out the order to do this, oftentimes Russian assets may have been in central banks, but they could have been in private institutions as well. So major part of what we’ve been doing over the last year is identifying exactly where within our countries these assets have been to ensure that we know exactly where they are. We knew going in that they had about $300bn of assets outside of Russia, but exactly in what financial institutions and what systems they are located in was a question that we didn’t have full transparency within the G7 too. We have more of that transparency today than we did at that point.

Gideon Rachman
Right. I mean, you make the point that at some point, it may have to be used for the rebuilding of Ukraine, but the Ukrainians need money now. And there are people saying, look, can you just hand the money up to the Ukrainians now? Is that a possibility? Is that something that’s even being debated now actively in government?

Wally Adeyemo
So I think you are right. The Ukrainians need financing now. And I think what we’re committed to doing is providing them with the financing they need now. That’s part of the request the president put up in a supplemental bill that covers both Ukraine, Israel and Taiwan. But in addition to needing money now, Ukraine needs to rebuild its economy. It needs to rebuild its country in order to make sure that it remains not just a democracy but a vibrant economy as well.

So we’re focused on both things, thinking through how we provide them with the resources they need right now. And we’re looking to Congress to work with us to do that in the United States. But the global community is also doing that, working with the IMF, but also thinking through what the long-term rebuilding of Ukraine looks like. We’ve made clear that those assets that have been frozen by these countries will not be available to Russia until it compensates Ukraine for the damage that it’s done.

Gideon Rachman
Yeah. And what’s your assessment of Ukraine’s finances? Because obviously people are concerned now that there’s a presidential election a year away. If there were a change in direction in US-western policy, they’re cooked, really, aren’t they? I mean, they’re very, very reliant on western financing.

Wally Adeyemo
I think it’s important to remember that the west is broader than just the United States. We’ve clearly played a leadership role, but you have to recognise that the European Union has played a big role as well. They’ve approved $50bn that will help support Ukraine’s budget over the long term. But the reason that we’re doing this is not only because it’s in our self-interest, but because we know that standing up for Ukraine means that we’re standing up for our values.

And my sense now is that we have a commitment across the G7 and broader to continue that support for Ukraine. And our goal now has to be what can we do to help Ukraine win in this moment? And in order to do that, we’ve got to do the two things that we’ve been doing to date, which is providing them resources for not only budget support but also for their military in order to make sure that their military has the weapons they need to defend themselves. And we’re doing that in the United States. We’re doing it across the G7. And I expect us to continue doing that over the course of the next year.

Gideon Rachman
There’s always been some concern that if you keep doing this, sanctioning Russia, sanctioning Iran, doing not financial sanctions on China, but other forms, that at some point the world’s gonna get worried about using the dollar or about buying US Treasuries because they’ll say, well, you know, what if we upset the Americans, could they maybe freeze our assets? Is that something you have to bear in mind, or do you just take it for granted that the US will remain the safe haven currency?

Wally Adeyemo
I don’t think we take anything for granted in the United States. I think that when the president was elected, one of the things that he was focused on was how do we make a set of investments in the United States that would keep the American economy competitive, but also attract foreign direct investment? So I think we are very focused on the issues of how does the American economy remain dynamic and one in which countries want to invest. And that I think is the key to ensuring that the dollar remains dominant.

But we do also know that we want to be able to use these restrictive tools in a way that is efficient, effective and also reasonable. And when we came into office, Secretary Yellen asked me to conduct a review of sanctions policy since the attacks of 9/11 till 2021, so a 20-year review. And in that review, I spoke with all of my counterparts throughout not only the G7 but in Asia and in Latin America and Africa, and talked to a number of experts. And we took that information and used it to think about how we use sanctions going forward. And that review was very helpful to us as we thought about what we would do with regard to Russia.

What you’ve seen here is you’ve seen us build a multilateral coalition at the president’s urging, but also because of what we learned in the sanctions review: that when you act in a multilateral way, that has a greater economic effect, but it also sends a broader political signal, it also means that it’s not just the dollar acting. In Russia’s case, you’ve seen the countries that control the world’s largest reserve currencies take an action against them, leaving Russia with nowhere to go. That’s exactly what we want to do to Hamas and other actors. So acting multilaterally is one way for us to make sure that what we’re doing curtails an actor, but also demonstrates a degree of reasonableness. We wanna make sure that any sanctions we put in place are as tactical and strategic as possible. And this includes making sure that we create humanitarian exceptions. We drove an effort at the UN to create a humanitarian exception to UN sanctions that we also implemented within our sanctions regime as well.

And then finally, we wanna make sure that any action we take is backed by rigorous economic analysis to make sure that we’re thinking through the collateral damage and minimising that as much as possible for not only the United States but our allies and partners. You look at what we’ve done with regard to Russia-Ukraine. We always create an exception for energy and for agriculture because we didn’t want countries in Latin America or Africa to feel additional pain due to the sanctions we’re putting in place. What actually happened was that Russia’s attacking of grain in Ukraine and their weaponising of energy led to higher prices. But we tried as hard as possible to make sure that our sanctions were curtailed in a way that didn’t cause those types of issues.

Gideon Rachman
Yeah. And it’s now become a very explicit goal of both Russian and Chinese policy to reduce the role of the dollar in the global system. How are they doing?

Wally Adeyemo
You tell me, but not well. And I think part of the reason that they’re not doing well is because you have to look at the alternatives. And the countries that hold the world’s convertible currencies today have joined us in many of the actions that we’ve taken. Remember that the actions we’ve taken against Russia were not only done by the G7. More than 30 countries took actions against Russia, representing more than 50 per cent of the global economy.

While China’s economy is big, China did not allow their currency to be convertible, and Russia’s economy is getting smaller by the day and less flexible by the day. Fundamentally, our view is that the reason that people continue to use the dollar is because of the investments we make in the US economy, like the Inflation Reduction Act, like the investments we’ve made in infrastructure, like the Chips and Science Act. As long as we continue to take actions that help to grow the US economy and to make it a destination for foreign direct investment, we feel confident in the idea that people are going to continue to want to invest in our country and use the dollar.

Gideon Rachman
Although there are those who say that long-term, America’s on an unsustainable path. And I was at a conference in Riyadh last week and saw your former colleague from BlackRock, Larry Fink, and he came up with a very startling statistic. He said in 2000 the US total debt was $8tn and it’s now well over $30tn, I think 33 or 34. Is that sustainable?

Wally Adeyemo
So I do think that you have to ask questions about what we’re doing with the money that we borrow and how are we investing it. And ultimately, are those investments leading to increased productivity, making the US economy more competitive? And I’d say my argument would be that the things that we’ve done over the last two years have done that. And that’s why today, when I travel in Europe or in any part of the world, when I talk to CEOs or I talk to sovereign wealth funds, the question they’re asking is how do I get more access to the US economy?

But I do think that we need to think about fiscal sustainability in the medium term. That’s why the president has focused on this idea of talking about the need for us to increase revenues by $3tn over the next 10 years. We are focused on the idea that we can do both in terms of make strategic targeted investments in the US economy while also putting ourselves on a more sustainable fiscal path, which is important. But I think the thing that I would point out, and I think the thing that Larry would agree with, is the US has the capacity to do this. We have the capacity to raise enough revenues, to reduce costs enough to make sure that our fiscal path is sustainable. The president’s announced a plan. He has a policy approach to doing this. The hope is that on the other side, he will have partners who are interested in engaging in this discussion.

But today, what you’ve seen is that instead of plans on the other side that look at fiscal sustainability over time that includes what we do on the revenue side, they’ve looked to simply do cuts that speak to a very small sliver of our overall budget. So the key question now is really, when do we take some of the steps the president has outlined? He’s ready to have that discussion, ready to implement that. And I expect that as he puts out his budget for next year it’ll include a number of these policies that would put us on a path to fiscal sustainability over time. But it’s important to remember that the investments we’re making are making the US economy more competitive in the near term.

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Gideon Rachman
That was Wally Adeyemo, the deputy US Treasury secretary, ending this edition of the Rachman Review. Please join me again next week when I’m pretty sure we’ll be returning to the subject of Gaza and the Middle East and looking at the fighting, the suffering and the wider regional context.