The Backfires of the Use of Financial Instruments for International Political Purposes: the Case of the United States

Shlyundt Nadezhda Yuryevna ORCID: 0000-0001-6269-1247 PhD in Law Associate Professor; Department of Legal Disciplines; Nevinnomyssk State Humanitarian and Technical Institute 357108, Russia, Stavropol Territory, Nevinnomyssk, blvd. Mira, 17 nshlundt@yandex.ru Other publications by this author     Nefedov Sergei Aleksandrovich ORCID: 0000-0003-2468-9298 Doctor of Politics Leading Researcher; Department of Coordination of Research and Innovation and Project Activities in the Specialty, Master's and Postgraduate Studies; Pyatigorsk State University 357532, Russia, Stavropol Territory, Pyatigorsk, Kalinin Ave., 9 offiziell@yandex.ru

Botasheva Asiyat Kazievna Doctor of Politics Professor; Department of Journalism, Media Communications and Public Relations; Pyatigorsk State University 357532, Russia, Stavropol Territory, Pyatigorsk, Kalinin Ave., 9 ab-ww@mail.ru

Introduction and relevance

Western countries, led by the United States, widely use financial instruments in their foreign policy, including on a large scale against Russia. By successfully countering external financial pressure, Russia is contributing to the formation of a new reality in which the damage is felt by countries that decide to use such tools. In such conditions, it is not only economic issues that become relevant. ^{[1] [2] [3]}, but also political science studies concerning the effectiveness and reverse effects of the use of financial instruments of international political influence, studies that systematize existing knowledge in this field.

Effectiveness of financial instruments of foreign policy: historical projection

In the period from the 1960s to the 1990s, inclusive, there was a discussion among scientists involved in the study of financial instruments of foreign policy about the political effectiveness of such instruments. Most researchers of that time agreed that only those instruments can be called politically effective that lead to an adjustment of the political course of the target state (the "victim" of financial pressure) or to maintaining its course if it meets the interests of the subject state (the initiator of financial pressure). At the same time, some scientists argued that financial instruments cannot produce any noticeable political results, cannot initiate the required political changes, since they are based on a "vicious" logic ^[10]. Other scientists, defending the opposite point of view, defended financial instruments, arguing that many empirical data indicate that they can be quite successful ^[12].

In the 2000s and 2010s, research attention shifted to the differentiation of motives in assessing the effectiveness of financial instruments of pressure ^{[13, p. 8-14] [7, p. 214-218]}. A State using financial instruments may be motivated not only by the desire to change the political course of the target State, but also by the desire to transmit some kind of message to third States through them. Thus, the United States often tries to assert its leadership in the world through sanctions. States guided by this motive decide to impose sanctions even with a minimal probability of their success, i.e., they do not seriously expect a change in the behavior of the target States. In these cases, States resort to sanctions because the costs of inaction, in terms of loss of faith in their capabilities and will, are regarded by them as higher than the costs of their application.

The subject State can use financial instruments to push third countries to act against the target state or demonstrate support to allies ^{[20, p. 108]}. Thus, at one time, the United States imposed sanctions against Argentina during the Falklands War to show support for Great Britain, rather than receive any concessions from Buenos Aires ^{[4, p. 323]}.

Moreover, a state that turns to financial instruments may be motivated by a desire to solve its own domestic political problems. For example, they help governments gain the support of their own populations by appealing to patriotic feelings or, conversely, to the thirst for retribution. Thus, the United States has repeatedly tried to justify the need for aggressive actions abroad through sanctions, preparing its own population for the upcoming war ^{[11, p. 6]}.

Modern discourse on financial instruments

The actions of the United States over the past decade have generated a wave of research that finally took shape in the early 2020s, in which the focus is on the negative consequences of using financial instruments for the entity state itself. The modern discourse mainly consists of topics such as positive financial instruments, backfire and backlash of financial coercion.

T. Peterson is trying to answer the question of why encouraging financial instruments, despite the widespread opinion that "honey catches more flies than vinegar," receive much less attention than coercive instruments. At the same time, he emphasizes that negative and positive instruments of pressure are in many ways similar: both suggest that the subject state forces the target state to choose between maintaining its preferred political course and an external demand. However, positive instruments based on rewards or incentive incentives for the required behavior give the subject state more room for maneuver, while reducing the risk of a backlash from the target state, which may disrupt its larger-scale foreign policy plans ^{[17, p. 396]}.

As A. Demare proves in his book, American politicians continue to consider financial instruments as a cheap means of achieving foreign policy goals, but practice shows more and more that they are not productive and, more importantly, have side effects that harm the interests of the United States. The use of such tools, as A. Demare writes, not only stimulates various states to seek means to counteract them, but also pushes them to cooperate with each other, in other words, transforms geopolitics and the global economy, and also reduces the international influence of the United States ^{[6, pp. ix-xii]}.

D. McDowell argues that the more the United States uses the dollar as an instrument of its foreign policy, the more its opponents transfer their economic activity to other currencies in an effort to protect themselves from possible coercive influence from Washington ^{[14, p. 1-10]}. In other words, there is an obvious correlation between the intensification of the use of coercive US financial instruments and the anti-dollar policies of other countries designed to reduce dependence on the US currency. D. McDowell notes, among other things, that US abuse of financial instruments reduces their effectiveness, as Washington's opponents develop various methods and systems to minimize potential sanctions costs, for example, increase gold reserves ^{[16, pp. 141-142]}.

Political and economic consequences of using financial instruments

The use of US financial instruments entails the intensification of international transactions with gold (its repatriation, purchase and sale) and the abandonment of the dollar as a reserve and means of payment by other countries.

Gold is not as liquid and convenient as the dollar, but its inherent properties make it a good protection against financial pressure from the United States, which many countries already use. Apart from a military invasion, the United States cannot seize gold held in vaults in the territories of states beyond its control. Gold can be moved around the world without the mediation of digital financial networks, which makes it difficult to track such transactions. In difficult circumstances, states can sell gold for foreign currency on the black market.

Currently, the volume of transactions in national currencies is increasing worldwide, which challenges the dominance of the dollar in the global currency space. The dollar's position in the global monetary space is explained by its leading role as a medium of exchange and a reserve asset. According to data for March 2024, the dollar's share in global payments was 47% (21% is retained for the euro) ^{[19, p. 3]}. At the end of 2023, the dollar's share in world foreign exchange reserves was 58% (the euro's share was 19%) ^[5].

At the same time, the financial and political dominance of the United States is facilitated by maintaining control over the institutions through which the cross-border movement of dollars takes place. Considering economic interdependence as a kind of weapon, G. Farrell and A. Newman prove that states controlling hubs in global networks have significant opportunities for coercion. By restricting access to the hub, such privileged states can cut off their opponents from the entire network. In other words, using the advantage of the "key location" and the advantage of the "panopticon" ^{[8, p. 55-56] [9]}, they can cause serious damage to many states, thereby putting them in a certain dependence.

The United States controls two main hubs of the modern global financial system, which are formally independent, private organizations: the network of the Society for Worldwide Interbank Financial Telecommunications, OVMFT (La Hulpe, Belgium, 1973; Society for Worldwide Interbank Financial Telecommunication, SWIFT) and the Clearing House Interbank Payment System (New York, USA, 1970; Clearing House Interbank Payments System, CHIPS), created by the Clearing House Payments Company. States striving for multipolarity are increasingly setting the task of finding alternatives to these hubs.

By controlling the hubs of the modern global financial system, the United States is using all political means to expand and maintain the popularity of the dollar in the world, as this gives them a number of advantages. First, additional funds to cover huge military expenditures and implement large-scale foreign policy strategies. Secondly, it strengthens ties with many allies who have already adapted dollar-based policies. Thirdly, it provides additional levers of pressure on countries in need of economic assistance. Private agreements between the United States and partner countries, such as Germany, are among the means of expanding and maintaining the attractiveness of the dollar.

However, at the moment, the political "help" of the global popularity of the dollar has turned into a serious problem for the United States ^{[15, p. 635]}. An increasing number of states that are dissatisfied with or resisting US dominance are realizing that, on the one hand, the popularity of the dollar carries potential costs, since the US can use it as a tool of pressure (a political risk dimension of the problem), and that, on the other hand, undermining such popularity can cause direct damage to the United States (the political and instrumental dimension of the problem). Indeed, the purchase of dollars by foreign countries increases the ability of the United States to exert sanctions pressure and facilitates the financing of its armed forces and military campaigns.

At the same time, the conclusions of a number of studies have shown that if the threat of using financial instruments of pressure has not been transformed into actions, and actions have not produced the planned results, then the likelihood of resistance from potential target States increases. Given the specifics of financial instruments, which decrease their effectiveness over time, their use often leads to significant reputational damage to the subject state ^{[18, p. 672]}.

Back in the 1960s, works appeared that proved the existence of symbolic goals in the use of forced financial instruments by the United States. By choosing compulsory financial instruments against another State that violates its key norms, the State informs the world community about the existence of such norms and their high degree of value. When analyzing the political consequences of sanctions, in particular the completeness of achieving the planned results, less rational goals, according to J. Galtung, are often ignored. However, the State may find itself in a situation where, for one reason or another, it is impossible to change the course of events either with the help of military force or with the help of other tools. In this case, financial instruments remain a means of expressing one's own commitment to certain principles, a means of signaling to everyone about the reprehensible behavior of the target State. As J. Galtung summarized, if sanctions do not serve the instrumental purposes of the subject state, then they perform expressive functions for it ^{[10, p. 411-412]}.

By now, it has become obvious that the use of coercive financial instruments by the United States, which do not produce the desired political results, leads not so much to the strengthening of symbolic images beneficial to them, as to the symbolic degradation of the United States itself.

Conclusion

The United States, having decided to use financial instruments to solve its foreign policy tasks and faced with adequate resistance to this, finds itself facing the backlash from its actions. In other words, they are suffering damage due to miscalculations, which, according to the plan, should be borne by the target States. The main negative effects include increased attention to gold, the abandonment of the dollar in international settlements, and the intensification of the search for alternatives to the hubs of the global financial system. However, by not succeeding in converting economic costs into political dividends, they harm their international political reputation. Therefore, one of the urgent tasks of Russia today against this background is to use the new opportunities created by the financial and political miscalculations of the United States to strengthen multipolarity and its role in the new world order.