The Death of Money (8 page)

The results were catastrophic for the Iranian economy. Iran is a leading oil exporter
and requires access to payments systems to receive dollars for the oil it ships abroad.
It is also a major importer of refined petroleum products, food, and consumer electronics
such as Apple computers and HP printers. Suddenly it had no way to pay for its imports,
and its local currency, the rial, collapsed. Merchants sought scarce dollars on the
black market at exchange rates that made the rial worth less than half its previous
value, the equivalent of 100 percent inflation. A run on the Iranian banking system
commenced, as depositors tried to get their rials out to purchase black-market currencies
or hard assets to preserve wealth.
The government raised interest rates in an effort to stop the run on the banks. The
United States had inflicted a currency collapse, hyperinflation, and a bank run and
had caused a scarcity of food, gasoline, and consumer goods, through the expedient
of cutting Iran out of the global payments system.

Iran fought back, even before the escalation of U.S. efforts,
by dumping dollars and buying gold to prevent the United States or its allies from
freezing its dollar balances. India is a major Iranian oil importer, and the two trading
partners took steps to implement
an oil-for-gold swap, whereby India would buy gold on global markets and swap it with
Iran for oil shipments. In turn, Iran could swap the gold with Russia or China for
food or manufactured goods. In the face of extreme financial sanctions, Iran was once
again proving that gold is money, good at all times and in all places.

Turkey quickly became a leading source of gold for Iran.
Turkish exports of gold to Iran in March 2013 equaled $381 million, which was more
than double those of the previous month. However, gold is not as easy to move as digital
dollars, and gold swaps have their own risks. In January 2013
a cargo plane with 1.5 tons of gold on board was impounded by Turkish authorities
at the Istanbul airport because the gold was deemed contraband. Various reports said
the plane originated in Ghana, a major gold producer, and was heading for Dubai, a
notorious transshipment point for gold and currencies from all over the world.
Reports from the
Voice of Russia
speculated that the plane was ultimately headed for Iran. Regardless of the destination,
someone, possibly Iran, was missing 1.5 tons of gold.

Another source of gold bound for Iran is Afghanistan. In December 2012
The New York Times
reported on a healthy triangular trade among Afghanistan, Dubai, and Iran using both
legitimate transportation and illegal smuggling. The
Times
reported that “
passengers flying from Kabul to the Persian Gulf . . . would be well advised to heed
warnings about the danger of bags falling from overhead compartments. One courier . . .
carried nearly 60 pounds of gold bars, each about the size of an iPhone, aboard an
early morning flight.”

As Iran expanded its gold trading, the United States was quick to retaliate. The U.S.
Treasury announced
strict enforcement of a prohibition
on gold sales to Iran effective July 1, 2013. This enforcement was aimed at Turkey
and the UAE, which had been the principal suppliers to Iran. The United States had
already choked off Iran’s access to hard currency; now it was doing the same to gold.
It was a tacit recognition by the United States that gold is money, despite public
disparagement of gold by U.S. Federal Reserve officials and others.

Gold was not Iran’s only alternative payments strategy. The most convenient was to
accept local currency payments in local banks not subject to the embargo. Iran could
ship oil to India and receive Indian rupees deposited for its account in Indian banks.
The use of those rupees by Iran is limited to purchases in India itself, but Indian
agents can quickly adapt to import Western goods with dollars and sell them to Iranians
for rupees, at high markups to compensate for the time and trouble of reexporting
the Indian imports.

Iran also uses Chinese and Russian banks to act as front operations for illegal payments
through sanctioned channels. It arranged large hard-currency deposits in Chinese and
Russian banks before the sanctions were in place. Those banks then conducted normal
hard-currency wire transfers through SWIFT for Iran, without disclosing that Iran
was the beneficial owner, as required by SWIFT rules.

Intelligence reports indicate that the amount of hard currency on deposit by Iran
in Chinese banks alone is $27 billion. However, Iran’s ability to move these funds
is circumscribed by China’s need to avoid attracting the attention of the United States
in making the transfers. In April 2013 Iran requested that China make a “gift” to
North Korea of $4 billion as part of China’s normal humanitarian aid flows to the
Hermit Kingdom. Iran did not disclose to China that the gift was actually a payment
for shipments of nuclear weapons technology from North Korea to Iran.

In late 2012 the United States warned Russia and China about assisting Iran in such
end runs around the sanctions, but no penalties were imposed on the Russians or Chinese
and none seemed likely. SWIFT also had no appetite for enforcement because it did
not want to exclude Iran from its system in the first place; it did so only under
U.S. pressure. The United States did not come down hard on Russia or China because
she had more important agendas to pursue with both, including Syria and North Korea.

Iran also demonstrated how financial warfare and cyberwarfare could be combined in
a hybrid asymmetric attack. In May 2013
Iranian hackers had reportedly gained access to the software systems used by energy
companies to control oil and natural gas pipelines around the world. By manipulating
this software, Iran could wreak havoc not only on physical supply chains but also
on energy derivatives markets that depended on physical supply and demand for price
discovery. These probes, described by U.S. officials as reconnaissance missions, are
highly dangerous on their own. Neither the Iranian hackers nor the U.S. targets seemed
to consider that such activities might
accidentally
trigger a market panic that even the attacker did not intend.

Iran was not alone in bearing the brunt of U.S. financial warfare capabilities. U.S.
financial sanctions aimed at Syria caused the Syrian pound to lose 66 percent of its
value in the twelve months from July 2012 to July 2013. Inflation in Syria spiked
to an annual rate of 200 percent as a result.
The Syrian government was forced to conduct business in the currencies of its three
principal allies—Iranian rials, Russian rubles, and Chinese yuan—because the Syrian
pound had practically ceased to function as a medium of exchange.

By late 2013, the financial damage in Iran led to an agreement between President Obama
and Iranian president Hassan Rouhani, which eased U.S. financial attacks in exchange
for Iranian concessions on its uranium enrichment programs. Iran had suffered from
the sanctions, but it had not collapsed, and now it had met the United States at the
negotiating table. In particular, sanctions on gold purchases by Iran were removed,
enabling Iran to stockpile gold using the dollar proceeds from oil sales. President
Obama made it clear that although sanctions were eased, they could be reimposed if
Iran failed to live up to its promises to scale back its nuclear programs. Still,
for the time being, Iran had fought the United States to a standstill in its financial
war, despite enormous disruption to the Iranian economy.

The U.S.-Iranian financial war of 2012–13 illustrates how nations that could not stand
up to the United States militarily could prove a tough match when the battlefield
is financial or electronic. Just as the United States found its allies in Europe and
Turkey, Iran found hers in Russia, China, and India. Iran’s allies spoke openly about
building new
non-dollar-based banking and payments systems. Dubai had carved out a role accommodating
both sides in this war not unlike Switzerland in World War II. The United States had
wanted to drive Iran out of the dollar payments system, and it succeeded. But in a
case of “be careful what you wish for,” an alternative non-dollar-based payment system
is now taking shape in Asia, and gold has proved to be an effective financial weapon
on its own.

This cat-and-mouse game among China, Russia, Iran, the United States, and North Korea
involving cash, gold, weapons, and sanctions illustrates how financial weapons have
moved to the fore in strategic affairs.

■
The Cyberfinancial Connection

Interest in financial war is hardly confined to Andy Marshall’s office in the Pentagon.
In late September 2012 the Kingdom of Bahrain played host to a private, invitation-only
summit of international monetary experts to discuss the geopolitics of currencies
and reserves. The three-day exercise included scenarios such as the U.S. dollar’s
collapse and the rise of regional reserve currencies such as the Chinese yuan and
Russian ruble. Participants included European legislators, think-tank scholars, prominent
journalists, and capital markets experts.

On October 12, 2012, the Federation of American Scientists conducted a financial war
game in Washington, D.C., involving alternative scenarios of a shooting war between
Israel and Iran. Participants were given conventional military scenarios and then
asked to assess the financial impact and show how financial weapons might be used
as a force multiplier.

On October 25, 2012, the Boeing Corporation conducted a financial war game during
an offsite conference in Bretton Woods, New Hampshire. The conference was held at
the historic Mount Washington Hotel, famous as the site of the 1944 Bretton Woods
conference that established the international monetary system, which prevailed from
the end of the Second World War until President Nixon closed the gold window in 1971.
Although Boeing is a corporation and not a sovereign state, its interest in financial
warfare is hardly surprising. Boeing has employees in seventy
countries and customers in 150 countries, and it is one of the world’s largest exporters.
Boeing’s Defense, Space and Security division builds and operates the most sensitive,
heavily classified platforms for U.S. national security operations. Few if any companies
in the world have as large a stake as Boeing in the possibility and implications of
financial warfare.

That same month, on October 30, 2012, the National Defense University completed a
one-year virtual financial war game involving contributions of six leading experts
from academia, think tanks, and major banks. The sponsor for the exercise was the
U.S. Pacific Command, and its findings are contained in
a highly sensitive 104-page final report.

In August 2013 the Swiss Army carried out one of the most elaborate financial war
games of all, called Operation Duplex-Barbara. In this exercise,
Swiss troops defended their country against imagined French mobs and militias swarming
over their border to recover money allegedly stolen by the Swiss banks.

Even this extensive activity and analysis of financial warfare does not encompass
the full extent of the threat.
Cyberattacks on U.S. infrastructure, including banks and other financial institutions,
are growing and can take many forms. In one troubling instance on Christmas Eve 2011,
a computer file containing personal identification information on a senior U.S. government
official was hacked, and the information was downloaded. The information was then
used in an effort to deplete the official’s personal bank account.
The official was Mary Shapiro, then the chief regulator of all U.S. capital markets.

On April 23, 2013, a Twitter account maintained by the Associated Press was hacked
and used to distribute a false message that the White House had been the target of
a terror attack and that President Obama had been injured. This false message came
just days after the Boston Marathon terror bombing and the dramatic manhunt and shootouts
with the terror bombers. The Dow Jones Industrial Index immediately plunged more than
140 points, briefly wiping out $136 billion in wealth before recovering once the message
was exposed as a fake. A pro-Syrian hacker group backed by Iran called
the Syrian Electronic Army claimed credit for the attack. The hackers’ success and
the market reaction demonstrated that markets are on a hair trigger and are easily
crashed and manipulated by various means. It was an instructive episode for other
potential attackers.

These events point toward the most dangerous kind of financial attack, one that
combines
cyberattacks and financial warfare in the ultimate force multiplier scenario. In
this situation, a cyberattack is not used to disable U.S. capital markets; instead
the cyberinvaders take control of order-entry software to spoof sell orders by major
financial institutions. The intended financial collapse is similar to the rogue hedge
fund scenarios, except that no cash or capital is required. The computer is programmed
to mimic an out-of-control broker trying to unload trillions of dollars in stocks,
bonds, and derivatives.

This scenario is a larger, more targeted version of the August 1, 2012,
Knight Capital fiasco, in which a software error caused a computer to go berserk and
flood the New York Stock Exchange with phony orders. Knight accumulated $7 billion
in unwanted stock positions in a matter of minutes and suffered $440 million in losses
to unwind them. While the disaster was taking place, no one at Knight could identify
the problem’s source and no one thought to pull the kill switch. Finally the NYSE,
in self-defense, blocked Knight from its systems.

An even greater fiasco occurred on August 22, 2013, when the NASDAQ Stock Market was
paralyzed for three hours due to computer and communications problems that have never
been publicly explained. An attack from Iran’s Cyber-Defense Command has not been
ruled out. In August 2012 Iran’s cyberforces destroyed 30,000 computers of oil behemoth
Saudi Aramco with the Shamoon digital virus, and Iranian efforts at cyberfinancial
warfare are ongoing.