EU sanctions Belarus and threatens Turkey, U.S.-China tech war reaches chipmakers, Germany’s aloofness, OFAC ransomware advisory, CBDC anonymity
This week there is almost no talk of stablecoins. Instead I talk Turkey. Sorry not sorry. On the show this week:
- EU sanctions Belarus officials, issues threat to Turkey
- France is taking Turkey seriously while Germany looks the other way
- Germany pretends to be tough on Russia
- SMIC pounded in US-China tech war
- OFAC ransomware advisory, CBDC anonymity, and more
EU sanctions Belarus officials, issues threat to Turkey
After blocking sanctions on Belarus for weeks, and damaging the EU’s foreign policy credibility, Cyprus relented after the bloc issued a statement warning Turkey to stop its energy exploration in the Eastern Mediterranean. The EU also agreed to review Turkey’s behavior in December and impose sanctions if its “provocations” have not stopped.
The Belarus sanctions, which will target around 40 people allegedly responsible for repressing protests and for election fraud, were originally promised in August but were held up by a Cypriot demand that the EU toughen its response to Turkey’s energy work off its coast.
(Belarus President Alexander Lukashenko ins’t included in the sanctions.)
Germany and EU officials have been arguing that the bloc needed space to rebuild trust with Ankara. France, Greece and Cyprus have been urging the bloc to exert more pressure on President Recep Tayyip Erdogan.
“In case of renewed unilateral actions or provocations in breach of international law, the EU will use all the instruments and the options at its disposal…in order to defend its interests and those of its member states,” they said in a statement.
The U.S. also imposed sanctions, having waited this long to accommodate the EU.
The United States has held off on joining Britain and Canada in imposing sanctions on Belarus in hopes the European Union can overcome an internal dispute, paving the way to coordinated U.S. and EU sanctions, four sources said on Wednesday.
Six sources told Reuters last week that Britain, Canada and the United States planned to impose sanctions on individual Belarusians in a coordinated move. Only London and Ottawa followed suit on Tuesday.
Speaking on condition of anonymity, three sources on Wednesday said Washington refrained because it believed the EU might achieve consensus at this week’s European Council meeting.
(Seems strange the U.S. didn’t join the Anglophone camp sooner.)
What’s interesting to me about this episode is how successful Cyprus and Greece have been in turning the spotlight on Turkey. It helps that France has a justifiable bee in its bonnet about the Turks. Here’s more on the threat…
"We want a positive and constructive relationship with Turkey, and this would also be very much in Ankara's interest," European Commission Chief Ursula von der Leyen said after a meeting of the EU leaders.
"But it will only work if the provocations and pressures stop. We, therefore, expect that Turkey from now on abstains from unilateral actions," von der Leyen said.
"In case of such renewed actions by Ankara, the EU will use all its instruments and options available. We have a toolbox that we can apply immediately."
The problem is that the EU’s weakness has been exposed. Will Turkey take the threat seriously when it knows any one of 27 countries (including Germany) can essentially veto any EU sanctions?
But “if the EU applies sanctions this will not deter us. On the contrary this would increase our resolve and would be a negative stance on the part of the European Union,” [an anonymous Turkish Foreign Ministry official] said.
“We will continue our offshore program as we have been doing. Sanctions are not the right way (and) will not deter us to protect our rights to our continental shelf and also the rights of the Turkish Cypriots,” the official added.
France is taking Turkey seriously while Germany looks the other way
With the U.S. largely excusing itself from Eurasian affairs these days, it’s not surprising that Turkey is starting to reassert itself as a regional power with aspirations to maybe be a world power again. It’s not just the Cyprus provocations. Here’s a good list of grievances:
Turkey has troops in Syria and Iraq, and has also intervened in Libya and, most recently, Azerbaijan. Troublingly, Turkey’s new modus operandi is to use Syrian proxies, many of whom are veterans of the Islamic State or Al Qaeda affiliates. In effect, Turkey now uses its Syrian militiamen the way that Iran utilizes Lebanese Hezbollah or its parallel Afghan and Pakistani militias. That Turkey is so rapidly inserting its Syrian proxies into various conflicts signals Turkey’s simultaneous desire to broaden its interventions overseas and its efforts to maintain plausible deniability.
On Thursday, Turkish President Recep Tayyip Erdoğan suggested that Jerusalem belongs to Turkey. 👀
“In this city that we had to leave in tears during the First World War, it is still possible to come across traces of the Ottoman resistance. So Jerusalem is our city, a city from us,” he told Turkish lawmakers during a major policy speech in Ankara. “Our first qibla [direction of prayer in Islam] al-Aqsa and the Dome of the Rock in Jerusalem are the symbolic mosques of our faith. In addition, this city is home to the holy places of Christianity and Judaism.”
France seems to be the only power taking the Turkish threat seriously. In last week’s missive I highlighted former President Hollande’s indictment of Turkish actions. This week Macron got in on the action:
French President Emmanuel Macron on Friday demanded that Turkey explain what he said was the arrival of jihadist fighters in Azerbaijan — and urged NATO to face up to its ally's actions.
"A red line has been crossed, which is unacceptable," Macron said. "I urge all NATO partners to face up to the behaviour of a NATO member.
"France's response is to ask Turkey for an explanation on this point," he said.
He alleged that intelligence reports had established that 300 Syrian fighters drawn from "jihadist groups" from the Syrian city of Aleppo had passed through the Turkish city of Gaziantep en route for Azerbaijan.
"These fighters are known, tracked and identified," he alleged, adding that he would call Turkey's President Recep Tayyip Erdogan "in the coming days."
I have no doubt in coming weeks we’ll return to the reignited Nagorno-Karabakh conflict between Armenia and Azerbaijan, which is shaping up to be a proxy war between Turkey and Russia. In the meantime, I just wanted to point out France’s stance on Turkey and contrast it to Germany’s. This is from the National Interest article above seems spot on:
The major problem Europe—and by extension the United States—faces is Germany. Angela Merkel is reluctant to apply meaningful sanctions against Turkey because her country fears three things. Diplomats say privately that Merkel’s bigger fears are that Turkey might utilize refugees as cover to precipitate violence inside Germany, or that Erdoğan might incite Germany’s large ethnic Turkish population. ...
Turkey has essentially become like Iraq in early 1990: Erdoğan, like Saddam, sees his economy collapsing and recognizes that he will not be able to deflect blame from his own mismanagement and choices. Like Saddam, he sees neighbors possessing valuable resources and believes the international community to be paper tigers.
Germany pretends to be tough on Russia
Speaking of German accommodation, it’s been able to kick the can down the road on the question of sanctions on Russia over the poisoning of Alexei Navalny.
"We will get back to this topic in two weeks during the European Council," Merkel said after the conclusion of a two-day summit in Brussels.
Merkel said she welcomed the EU leaders' condemnation of Navalny's poisoning.
"The use of chemical weapons constitutes a serious breach of international law," the EU leaders said in a joint statement.
The EU is awaiting the conclusion of an investigation by the Organisation for the Prohibition of Chemical Weapons (OPCW), and if it confirms the finding of German, French, and Swedish labs (that Navalny was poisoned with Novichok), then the Germans see sanctions as unavoidable. What’s interesting is how the German government is framing its position as a tough one—as giving the EU an ultimatum—while diverting attention from Nord Stream 2.
Germany on Saturday put the European Union under fresh pressure to impose sanctions on Russia over the poisoning of Kremlin critic Alexei Navalny.
"I am convinced that there will be no longer any way around sanctions," German Foreign Minister Heiko Maas told news portal t-online.
"Sanctions must always be targeted and proportionate. But such a grave violation of the International Chemical Weapons Convention cannot be left unanswered. On this, we're united in Europe," he added.
Asked if European sanctions against Russia should include Nord Stream 2, Maas said there were more than 100 European companies involved in the project, half of them in Germany.
“So many European workers would suffer from a construction freeze,” Maas said.
Nord Stream 2 is led by Russia’s state gas giant Gazprom, with half of the funding provided by Germany’s Uniper and BASF’s Wintershall unit, Anglo-Dutch company Shell, Austria’s OMV and France’s Engie.
Germany reminds me of Bruce Banner. They are trying everything they can to appease and remain aloof lest they find they have to turn into the Hulk. Like Banner, though, I think it’s out of their control.
SMIC pounded in US-China tech war
The U.S.’s not-yet-official sanctions on SMIC continue to pound the company.
SMIC, China's biggest chipmaker, has warned investors that new US restrictions could cut it off from key technology and have "material adverse effects" on its business.
Semiconductor Manufacturing International Corporation said in a filing to the Hong Kong Stock Exchange on Sunday that its American suppliers have been issued letters from the US Commerce Department about rules for working with the chipmaker.
Sunday's news sent shares in SMIC tumbling nearly 5% in Hong Kong on Monday. The company's stock is down nearly 60% from a July peak of 41.95 Hong Kong dollars ($5.40). SMIC also trades in Shanghai, but markets in mainland China are closed this week for a public holiday.
The tech war is also putting pressure on TSMC. Here’s a good piece (worth reading in full) from the NYT:
[Taiwan chipmakers] are forced to heed the dictates of American tech policy. Yet they can scarcely ignore the fact that so many of their customers and their customers’ customers are in China, where the Communist government is also threatening Taiwan with ever bolder displays of military force. China has for decades claimed the self-governing democracy as part of its territory.
In the high-stakes tech fight, TSMC had been playing Finland: a sometime friend to both feuding giants. But that is not the way the tech world works anymore.
American officials have taken a great interest in TSMC, whose advanced chips are used in fighter jets and other hardware critical to America’s military edge. The company said this year that it would build a new factory in Arizona, responding to American concerns about overreliance on offshore production.
A full-blown clampdown on sales to SMIC could increase the risk of Chinese retaliation “really significantly,” said Mr. Ferragu of New Street Research. Countermeasures that Beijing might once have considered too self-defeating — such as choking off Qualcomm’s or Apple’s sales in China, effectively depriving Chinese citizens of most high-end smartphones — could start to seem more acceptable.
It’s not just Taiwan that’s turning into a battlefield for the U.S.-China tech war. Last week brought an interesting vignette from Portugal of all places. Last Saturday, U.S. ambassador George Glass said in a newspaper interview that Portugal “has to choose between its allies and the Chinese,” and that Portuguese companies like builder Mota-Engil could face U.S. sanctions after it agreed to sell a 30 per cent stake to China Communications Construction Company. This prompted Portuguese President Marcelo Rebelo de Sousa to respond on Monday.
“It’s an obvious question of principle that in Portugal it is the representatives chosen by the Portuguese – and they alone – who decide on their destiny, respecting the Constitution and the rights it gives them, like international law,” Rebelo de Sousa told Portuguese media.
Glass described Portugal as part of a “battlefield” between the US and China, and said that if the US did not have reliable partners in Portuguese telecoms networks it would change the way it interacted with Lisbon on security and defence.
Also worth reading in full is this review of how China managed to completely alienate Czech elites and public opinion:
How could relations between the Czech Republic and China have soured so rapidly? The answer lies, in part, in promises of lavish Chinese investment which never materialised and clumsy attempts to build influence in national politics, which ended up backfiring. The saga sheds light on the chummy relationship between the Chinese state and favoured businesses – and demonstrates the limits of outsourcing foreign policy to private companies.
It’s a case study of how China is screwing up its attempts to project soft power via its Belt and Road initiative.
Dollar death watch
In this section I usually highlight bad takes claiming the imminent fall of the dollar, or good takes pointing out the lack of any alternative. Well, here is a very good take that’s balanced, from CIBC’s Bipan Rai.
Rai and the CIBC team say the idea of what makes for a suitable “sole reserve currency” is a subjective one that can vary from investor to investor, and corporate to corporate, but that there are at least three essential ingredients from their standpoint. These are first and foremost global trust in a country’s economy and its institutions. That country should ideally be a political hegemon too. Deep and liquid financial markets are another prerequisite, which is something that the EU and China both lack.
“There are several problems with the yuan. The most prominent amongst these is the lack of a domestic sovereign bond market that’s liquid enough and an elevated amount of capital controls that hampers mobility,” Rai says. “But whether the USD can remain the sole reserve currency is another question.”
The third and final necessary ingredient is a high degree of mobility for financial capital and traded goods. With the Fed’s policy response aside, this is the area where the Dollar’s appeal has sustained the most damage in recent years, and not least of all because of the trade war with China and an increasing preference for using the Dollar’s position as the sole reserve currency as a tool for the extraterritorial imposition of American foreign policy priorities on others.
“It’s absolutely worth asking whether there’s room for other currencies to join the USD in international importance and for global markets to enter a stage where multiple reserve currencies are used. In our view, this is the most likely scenario to consider over the long-term when we consider what the next regime will look like,” Rai writes, among other things, in a briefing for CIBC clients. "Additionally, we’d highlight that a decentralized system is consistent with the theme of ‘de-globalization’. Indeed, there’s evidence that during periods where the market environment was less ‘global’, the monetary reserve system was decentralized and there were multiple reserve currencies. For instance, the pound sterling, French franc and German mark shared that honour before WWI. Between WWI and WWII, both the pound and the USD were both considered reserve currencies (even if the former was in the process of losing its status)."
Crypto roundup: French jihadis, OFAC ransomware advisory
Tuesday’s arrests targeted a financing network that has been active since 2019. It was based mainly on the purchase in France of cryptocurrency coupons whose details were transferred by secure messaging to jihadis in Syria, who could then retrieve the money through cryptocurrency platforms,
The prosecutor’s office said that dozens of people in France constantly and anonymously bought cryptocurrency coupons worth 10 to 150 euros ($11 to $165). The coupons were credited to accounts opened abroad by jihadis who then converted them into cryptocurrency. Cryptocurrencies can be sold for cash on online exchanges.
Hundreds of thousands of euros are thought to have been supplied via the network, benefiting members of al-Qaida still hiding out in northwest Syria, but also jihadis of the Islamic State group, which has been on the run since its leader Abu Bakr al-Baghdadi, died during a raid by U.S. forces in October 2019.
What this article doesn’t explain (and I didn’t see explained elsewhere) is how the recipients turned the cryptocurrency into money they could use. Presumably the cryptocurrency wasn’t sent straight into Syria, where presumably there are no exchanges or merchants that take crypto. Instead I imagine it was sent to neighboring countries where it was exchanged and the money walked over the border. If you have any details, I’d love to know.
And something that should probably be getting more attention than it has: OFAC has issued an advisory explaining that if you pay or help pay a ransomware ransom, either as a victim or on behalf of one, you could be committing a sanctions violation.
Companies that facilitate ransomware payments to cyber actors on behalf of victims, including financial institutions, cyber insurance firms, and companies involved in digital forensics and incident response, not only encourage future ransomware payment demands but also may risk violating OFAC regulations.
Facilitating a ransomware payment that is demanded as a result of malicious cyber activities may enable criminals and adversaries with a sanctions nexus to profit and advance their illicit aims. For example, ransomware payments made to sanctioned persons or to comprehensively sanctioned jurisdictions could be used to fund activities adverse to the national security and foreign policy objectives of the United States.
As a general matter, OFAC encourages financial institutions and other companies to implement a risk-based compliance program to mitigate exposure to sanctions-related violations. This also applies to companies that engage with victims of ransomware attacks, such as those involved in providing cyber insurance, digital forensics and incident response, and financial services that may involve processing ransom payments (including depository institutions and money services businesses). In particular, the sanctions compliance programs of these companies should account for the risk that a ransomware payment may involve an SDN or blocked person, or a comprehensively embargoed jurisdiction. Companies involved in facilitating ransomware payments on behalf of victims should also consider whether they have regulatory obligations under Financial Crimes Enforcement Network (FinCEN) regulations.
Last week I highlighted how the OCC’s guidance on stablecoins pointedly excluded self-hosted wallets, implicitly pointing out to banks that the they have no idea where the dollar coins they are backing are moving. Now another arm of Treasury is pointing out to financial institutions (including exchanges, which have often ) that sending cryptocurrency on behalf of customers to unknown addresses is potentially an OFAC violation. It may only be a matter of time before cryptocurrency firms begin to limit withdrawals to unknown wallets, and do so “voluntarily” without the need for any new regulation.
Various and Sundry
J.P. Koning takes a ride on my hobby horse, pointing out the ECB’s new central bank digital currency report is wrong (like almost every other central bank paper) to say that regulations don’t allow it to make a digital euro anonymous.
But I’m pretty sure the report is wrong on this. EU regulations doallow for anonymity in electronic payments. The Fifth EU Anti-Money Laundering Directive (AML5) exempts issuers of e-money/prepaid cards from collecting customer information as long as long as fixed monetary thresholds aren’t exceeded.
As J.P. notes, even if the payments law applied to a digital euro, there are exemptions for small amounts. Indeed, it is the ECB itself that has been at the forefront of developing the thinking on how anonymity could be achieved for small payments but not large ones!
And finally, always fun to see what Iran and Venezuela are cooking up together…
Following years of mismanagement and operational neglect, national oil company Petroleos de Venezuela SA is unable to supply the country with gasoline, idling not only millions of cars and buses but also emergency vehicles and trucks delivering food from farms to cities.
On Sunday, General Yahya Rahim-Safavi, a military adviser to Supreme Leader Ayatollah Ali Khamenei, said Iran had received gold bars from Venezuela by plane as payment for gasoline shipments, the semi-official Mehr news agency reported.
“We gave Venezuela gasoline and received gold bars, and we took the gold to Iran on a plane so that nothing could happen to it along the way,” the general said, according to Mehr.