Sanctions and the Risk to the Dollar

CAMBRIDGE – How can the US respond to cyber attacks by foreign powers or their proxies? It is an issue that has faced President Barack Obama in the wake of reports of Russian hacking during the United States’ recent election cycle. But it’s not just about Russia or Obama. President-elect Donald Trump will face the same problem. And he won’t have very good options, either.

“Naming and shaming” is pretty unsatisfying, because hackers rarely feel any actual shame. Similarly, criminal indictments – a measure previously taken against Chinese hackers – probably won’t bring anyone to trial. US Vice President Joseph Biden has put counterattacks against Russian computer networks on the table, but that could trigger an escalation, while ceding the moral high ground.

Economic sanctions may seem like a simple and inexpensive way to register disapproval for foreign hacking; in Russia’s case, existing sanctions against its largest banks and Russian President Vladimir Putin’s closest associates could be tightened. But resorting to sanctions too frequently can have far-reaching consequences that eventually diminish the US’s role in the global economy.

Two-thirds of all global reserves are in dollars, and 88% of all foreign-exchange transactions worldwide include dollars. So, America’s most powerful sanctions instrument is its ability to block a criminal or rogue bank from making US-dollar transactions. But every time the US unilaterally tightens sanctions against another country, it risks undermining the dollar’s status as the world’s principal reserve currency, which could also make future sanctions less effective.