Scarlet letters: US tool that usurps sanctions?

America has a tool to wreak economic havoc. A simple, old-fashioned letterhead with a suitable blunt message is all it takes. But is it foolproof?

It isn’t secret, but it is a weapon of stealth. It doesn’t arrive by drone; rather it drops in through the regular mail. The “scarlet letter” was devised under Section 311 of the US Patriot Act in the wake of 9/11. The aim is simple – it is a way of ensuring that your friend is actually your friend, and a means to convince your foe's service providers to rethink their affiliations, too.

Clearly if you have a branch in the USA, the last thing you want is a horde of federal agents roaming across your brand, looking for evidence of suspicious financial activity throughout the open office cubicles, or, worse still, the C-suite offices. Thus America has a simple tool, a piece of correspondence which looks akin to a standard bulk mailshot from the 1980's but is much, much more likely to elicit a response from the recipient than an offer to subscribe to Reader’s Digest. Essentially those who provide business services, as well as banks and insurers, are a perfect target. Service providers can be accused of money laundering, or the difficult to define concept of underwriting terrorist offenses and thus be inflicted with a toxic stain of reputational damage, not to mention a lengthy court process and likely restitution.

Such processes recently captured the Clearstream business of Germany’s stock exchange. Clearstream had not broken European sanctions to Iran but by dint of having an office in the US, federal officials extracted a $152 million fine. Criminal investigations are ongoing.

When faced with large fines and, worse still, a spell in an orange jumpsuit, even the most focussed of client organizations are keen to mouth the mantra that “central government (not the client) is always right.”

Thus in the short term, the scarlet letter process could wreak havoc by targeting those who deal with Russia. Then again, previous successes have all been relatively minor affairs. China capitulated to scarlet letters in 2005, but that concerned a tiny bank in Macau – hardly an institution which was at the epicenter of Chinese finance, dealing with North Korea. In a world where Visa and MasterCard barely disappeared for hours before the systems were switched on again in Moscow, can the US realistically wield such exhaustive power against Russia?

Initially, scarlet letters clearly scare off anybody with offices in the USA and perhaps those who don’t concentrate on US dealings but are worried about Western brand damage. However, given that Russia remains a lucrative source of high yield debt, is it impossible to conceive that no other nations will want to have some investment interaction? After all, current refunding worries in Russia can only lead to a desire to borrow money at higher rates and those higher rates will benefit savers...will bond buying be bolstered by Russian citizens, perhaps? Or will it fall to traditionally non-aligned states or those less sympathetic to the US, to channel funds towards the rich opportunity of Russian debt and equity markets?

Scarlet letters have a remarkable deterrent value for the home US constituency and may even prove a better way to whip the EU into America’s desire for harsher sanctions than simply choosing names from the Kremlin area telephone directory, as appears to be the current vogue. In the modern world, payment systems are diverging from Anglo-American analogue era legacy systems to state of the art decentralized digital blockchains competing in cyberspace…Who can tell who is providing investment funds, if, for instance Russia just opts to ignore the old Western money markets and seeks debt issues in anonymized bitcoin instead?

Scarlet letters are clearly a powerful deterrent but they are not a panacea. In the brave new world of digital technology, pieces of paper have some remarkable legacy uses but they are unlikely to be able to outperform the power of a vast multinational network. In the single superpower model, America had a huge advantage with the Scarlet letter. In a world where many increasingly question the competence of Messrs Obama, Biden, and Kerry et al to manage US affairs coherently, it is not unreasonable to assume a widespread letter writing campaign may initially draw blood but soon the natural impact of higher returns will attract cash from within Russia, or the Middle East, or perhaps elsewhere amongst the BRICS…Markets abhor a vacuum.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.