Bucking the Buck: US Financial Sanctions and the International Backlash against the Dollar

by Daniel McDowell

The US dollar is the world's indispensable currency. The dollar's preeminent status gives the United States enormous coercive powers which it flexes in the form of financial sanctions to punish its adversaries. Over the last twenty years, Washington has relied on financial sanctions with greater and greater frequency. Bucking the Buck argues that the more the United States wields the dollar as a weapon of foreign policy, the more its adversaries will move their international economic activities into other currencies to avoid Washington's coercive reach. Through a combination of case studies and statistical analysis, the book establishes a relationship between US financial sanctions and the rise of "anti-dollar" policies, which are designed to reduce an economy's reliance on the US currency. Though some anti-dollar policies fail to achieve this goal, McDowell's analysis indicates that in many cases they are successful. Patterns of "de-dollarization" following sanctions are clear.
In some cases, the anticipation of future sanctions may provoke similar policy measures.

Though McDowell does not conclude that sanctions threaten the dollar's status as the world's key currency, the potential consequences of sanctions overuse remain important. Most notably, the use of sanctions may, over time, weaken their effectiveness as US adversaries develop systems and methods to minimize costs associated with such measures. If the United States wishes to preserve the potency of financial sanctions and protect the dollar's dominant position in the world economy, Bucking the Buck argues that Washington's approach to sanctions use should become more discerning.

Genres: Economics, Politics, Finance, Nonfiction, International Relations

256 pages, Hardcover

First published March 28, 2023

About the author

Daniel McDowell is the Maxwell Advisory Board Associate Professor of International Politics at the ​Maxwell School of Citizenship and Public Affairs at Syracuse University, a 2022-23 Wilson China Fellow, and a Nonresident Senior Fellow at the Atlantic Council's GeoEconomics Center. McDowell's research focuses on the international politics of money and finance, with an emphasis on the US and China in these arenas.

​McDowell's second book, Bucking the Buck: US Financial Sanctions and the International Backlash Against the Dollar is now out. ​

Reviews

[Juliana · Rating 2 out of 5]

I will be honest, this book frustrated me quite a bit. McDowell has done some regressions to try to prove the point he is making, but if you actually look at the data in the appendix you will see that much of it, especially most of the data regarding “sanctions risk” and its effects, is just not statistically significant. Maybe my math minor has made me too cocky but I am just going to come out and say it: so many of his models just look so overfitted. Table E.2 has an r-squared value of 0.98-0.99 in all 4 of the columns. I mean come on, really? You’re saying that almost 100% of the variance in the data can be explained by your model (which uses multiple variables that just are totally not significant whatsoever??)???? I don’t know, man. Maybe I would have been more convinced if it just had case studies and not the regressions that fail to show (in a statistically significant manner) the point he is trying to make, but if I’m being honest I was pretty skeptical of the whole thing before that. I think a lot of what he talks about can just be attributed to declining US relations with whatever country he is talking about and not necessarily the threat of sanctions in particular.

[Frank Stein · Rating 4 out of 5]

This book came out earlier this year at what turned out to be precisely the right moment. The financial sanctions against Russia for its February 2022 invasion of Ukraine were unprecedented in their size and scope, but, as this book points out, financial sanctions had become an increasingly common tool of the U.S. government, one which both relied on the dominance of the U.S. dollar in the international economy and that at the same time threatened that dominance. Everyone from John Kerry to Jack Lew recognized that financial sanctions, although necessary at times, could erode the dollar's position, and, as the author points out, in some cases their concerns were justified.

The author is not a dollar doomsayer, as many writers on the subject are, but he does point out some notable instances in which the threat of financial sanctions causes countries to move away from the dollar. The number of sanctions-related executive orders has gone from 22 in 2000 to 94 in 2020, and the number of states targeted under an Office of Foreign Assets Control program went from 4 to 21. The 2011 freezing of $37 billion in Libyan assets during the civil war there was a pivot point and made many countries aware that the U.S. could becloud their finances at the stroke of a pin. Starting in 2017 Turkey increased its holdings of tons of gold by 300% and it dropped most of its holdings of U.S. Treasuries. Although Russia began moving some of its reserves out of the US after the 2014 sanctions against it's Crimean invasion, it was really after a new round of sanctions in 2018 that they built up domestic gold holdings and shifted to the Euro. (Although, admittedly, when the Europeans sanctioned Russia in 2022, that did not help it.) And while 30% of its reserves were still in dollar holdings before the war, just 10% of those were in the US itself, which allowed Russia to move money around more.

The author shows that, beyond reserves, countries under sanctions or threat of sanctions have had some success moving invoicing and exports and imports out of dollars (especially Russia with its increased invoicing in Euros) mostly the dollar has continued to dominate trade, even among sanctioned countries. On the whole, the author shows that while countries respond to the threat of sanctions, the power of the dollar is so strong that if anything it has increased its global dominance during the rise of financial sanctions. This book is an important reminder of the importance of that fact, and also that it is not inevitable.

[Bchara · Rating 3 out of 5]

The hypothesis defended by the author can rely more on good sense and general observation. However the author relies on quantitative methods to prove it: not only are these statistical methods complex and hard to understand by the non-initiated reader, their results - by the admission of the author - are never conclusive as such. I'm not saying that to minimise the importance of the book, the reader will end up knowing more on the future of the dollar, of the functioning of the system, of the alternatives being established by Russia or China, in a very simplified and clear way. The conclusions of the author are reasoned and unlike James Rickards, he is no doomsday prophet. Yet, half of the book is about the statistics and how they were made. One more thing: the notes' system is very unpractical: the author and date are not inserted directly in the text, but as endnotes, so in order to find the reference, the reader has to do two steps. Was it to give the book a 30 pages + width?

[Arjun]

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