Economics and Security are Converging: Is the West Ready?

The use and abuse of economic sanctions as a foreign policy tool, from Russia to North Korea to Iran, has been a subject of perennial debate. In particular, some have questioned whether Washington’s overreliance on economic coercion will erode the dollar’s status as the international financial system’s main reserve currency. In this context, it is no surprise some have sought to reduce reliance on the dollar, including the so-called BRICS bank’s lending to developing economies in local currencies and efforts by China in recent years to settle its oil trade with Saudi Arabia in renminbi.

These issues are worthy of analysis and debate. Yet well beyond the actions of the US Treasury and finance ministries worldwide, a broader constellation of economically focused governmental actors and corporations are playing a more prominent role. In democracies, authoritarian states and hybrid regimes, these actors are coalescing around the fault lines of great power competition and emerging technologies, most notably AI, to become integral parts of economic statecraft. Given increased attention on strategic competition with China and Russia, Western technology, security and trade policies are increasingly multifaceted and interdependent, but often lack a cohesive strategic framework. 

Central Banks in the Spotlight

As an Atlantic Council paper has demonstrated, central banks have become critical in wartime. The Central Bank of Russia (CBR) has increased defence spending to fuel growth, while targeting inflation and shoring up the local banking system in the face of US and international economic sanctions. The Bank of Israel issued more than five billion dollars’ worth of bonds to finance the latest round of Israel’s seemingly interminable war against Hamas, effectively managing the foreign reserves it had built up since the previous round of fighting in 2014. 

Given these high stakes, central banks have also been the target of politicisation. In China, the government has placed the People’s Bank of China under new party-led oversight and investigated it for corruption. In Turkey, monetary policy has oscillated between those sympathetic to President Recep Tayyip Erdoğan’s economic agenda and a more orthodox approach that many observers agree is necessary to tame inflation.

States have also militarised central banks, inserting security officials into senior roles. For example, a senior military officer has served as CBR deputy governor since April 2023, overseeing the almost 90 field offices that channel state funding to combat troops and bypassing the commercial banking sector. Central Bank of Iran (CBI) officials – including the former governor – and, ultimately, the CBI itself have been designated for providing material support to the Islamic Revolutionary Guard Corps’ Qods Force, demonstrating the role some central banks have played in sanctions evasion and financing destabilising activity. Finally, foreign reserves management – a vital element of sound monetary policy – has also become an object of financial warfare. Following their summit in Italy in mid-June, G7 leaders agreed to loan Ukraine $50 billion using the CBR’s frozen reserves, as debates persist over the status of sovereign assets in wartime.

Disruptive Technology Dominance

Beyond central banks, an array of governmental actors focused on trade, strategic technologies, and innovation are playing an active role in national security. This dynamic is perhaps best illustrated by the US–China AI arms race. The US Commerce Department has been spearheading Washington’s efforts to enforce more rigorous export controls against sensitive technology, such as the semiconductors that form the backbone of sophisticated AI software. Through the CHIPS Act and other industrial policies, Washington has allocated billions of dollars to industry leaders, such as Intel, to increase supply chain security by reshoring manufacturing of semiconductors to the US. This move is aimed at reducing the disproportionate global share of semiconductors (90%) currently manufactured in Taiwan, given the elevated risk to supply that could result from a hot conflict with China over the disputed island. For its part, Beijing has also taken steps to reduce its reliance on US and Western technology. China has accelerated the substitution of Western chips with domestic ones in government systems, a move some observers assess will soon be repeated in the telecommunications and finance sectors, as Beijing has vowed to centralise technology development under the Communist Party. 

Against the backdrop of this acute competition, Western powers are also addressing the imperative to modernise their own defence establishments. Through the US Defense Department (DoD)’s Office of Strategic Capital and Defense Innovation Unit, greater emphasis is being placed on expediting acquisitions and integrating emerging technologies into byzantine bureaucracies. US allies are also taking similar steps. In March, NATO ­­doubled the size of DIANA, its transatlantic defence innovation network of technology accelerators and test sites. 

These steps are a good start. However, as former NATO supreme allied commander Admiral James Stavridis wrote recently, China and Russia are leveraging multilateral bodies like the Shanghai Cooperation Organization to rival NATO and peel states like Turkey and Saudi Arabia away from the US-led order. At a moment when differing approaches to the Ukraine war and the Indo-Pacific pivot threaten to expose transatlantic fault lines, it is more important than ever that NATO countries not only militarily prepare to counter China and those in its orbit, but also form cohesive economic frameworks that can attract the world’s best talent, technology and investment to maintain their competitive edge. 

Battlefield Proving Grounds

Some Western companies are not only helping prepare for future military contests with the Beijing–Moscow axis, but also actively shaping them now. Earlier this year, TIME dubbed Russia’s war against Ukraine ‘the world’s first AI war’, with tech startups and incumbents alike using the country as a laboratory in which to test their products and services. For example, more than half a dozen Ukrainian ministries are now using Palantir. The company’s software uses AI to analyse satellite imagery, open-source data, drone footage, and ground truth reports to present commanders with military options, and is responsible for most of the targeting in Ukraine. Similarly, the DoD’s dependence on Starlink for satellite coverage in Ukraine – but not in Crimea – concretely demonstrates how leading tech companies can offer military advantage. In spite of this ad hoc material support to counter Russia, to say nothing of the West’s economic warfare against Russia in the form of comprehensive sanctions and robust export controls, Russia is still showing it can manage its wartime economy. Its ability to increase trade with China and successfully source critical materiel, such as ballistic missiles and UAVs from North Korea and Iran, respectively, suggests that a more coordinated Western strategy might be in order.

Companies in the Crosshairs

Beyond the sanctions onslaught against Russia, Iran and North Korea, economic warfare between competing blocs is also taking place in the shadows. Given how much cutting-edge research with national security implications is taking place at frontier AI companies and elsewhere in the tech sector, it is no surprise that this broader attack surface has spurred companies like Google, OpenAI, and Sequoia Capital to tighten their staff vetting to protect sensitive intellectual property and data amid warnings of Chinese espionage. In October 2023, the FBI hosted the Five Eyes summit, held symbolically in Silicon Valley. At the event, leaders of the Five Eyes intelligence partnership stressed to business leaders and entrepreneurs the importance of defending Western innovation and high technology against state-backed economic espionage. Leaders from opposing blocs have simultaneously met to reduce tensions. At two meetings in 2023, US AI companies have held back-channel talks in Geneva with Chinese counterparts to establish norms and lanes in the road. The meetings were arranged with the knowledge of the White House, suggesting that governments are leveraging companies to amplify policy priorities, such as responsible innovation in AI.

In diverse ways, the private sector is rapidly becoming inextricably interwoven into geopolitics, with trade in today’s highly interconnected global economy accounting for 74% of global GDP. Questions surrounding supply chains, research and development, and where to place physical assets and workforces are therefore no longer purely commercial, as geopolitics has become integral to balance sheets. Several large investment banks, most notably Lazard and Goldman Sachs, have stood up geopolitical advisory units focused on helping bankers and their clients make sense of the world. 

Western investors are increasingly deploying capital with geopolitics in mind. Exemplifying this phenomenon, in 2022, leading venture capital (VC) firm a16z launched its $500 million American Dynamism fund, which is predicated on investing in companies that promote the US national interest. At the same time, some VCs have come under fire from lawmakers for funding investments in Chinese military-linked AI and semiconductor firms. In April, Emirati AI powerhouse G42 signed a $1.5 billion partnership with Microsoft after months of discreet efforts by US national security officials to persuade the company to divest from China and preserve access to US technology, including Nvidia chips. More recently, an investment vehicle overseen by the Emirati National Security Adviser took control of G42’s China focused fund – which has stakes in Chinese tech companies ByteDance and JD.com – and in May, Saudi Aramco’s venture arm joined a $400 million financing round for Zhipu AI, the largest Chinese generative AI startup that intends to rival OpenAI. These investments demonstrate how decision-makers in major middle powers no longer view close ties with the West and its main strategic competitors as mutually exclusive.

Adjusting to the New Normal

Competing, and occasionally conflicting, interests between private companies and governments are likely to exacerbate already complex geopolitical tensions. Industrial policies with longer time horizons, such as export controls and supply chain corrections, are likely to be complicated further by the vicissitudes of electoral and coalition politics in key regions, such as the US, the EU and Japan. On the other hand, the broadening playing field will offer more avenues through which companies can influence governments (and vice-versa) and gain insight into their plans and intentions. 

The battlefield of strategic competition has become as economic as it is military. Policymaking that treats national security and economic issues as wholly unrelated disciplines is thus deeply flawed; economic security is national security and vice-versa. Consequently, decision-makers across government and industry in the West should pursue several complementary goals:

• Bureaucrats should build more connectivity not only between government and industry, but also across governments themselves, between security focused elements and economically focused ones. As with the deep study of Sovietology throughout the Cold War and the increased emphasis on violent Islamist extremism in the post-9/11 era, diplomats, spies and policymakers would do well to develop literacy in the vocabulary of economics, trade and technology.
• Diplomats should proactively identify and manage critical trade-offs when policy aims in one arena undermine those in others. For example, in freezing and using Russia’s foreign reserves to send a message to Vladimir Putin, the West could inadvertently be contributing to de-dollarisation by spooking countries holding US Treasuries (e.g. Saudi Arabia) that it is trying to win over in the battle for AI dominance. 
• Corporations should embrace their influential role as key players on the international stage. Playing a role traditionally reserved for government officials, OpenAI CEO Sam Altman recently called for ‘a US-led global coalition’ to ensure democratic principles, not authoritarian ones, shape AI’s global adoption and implementation. At the same time, corporations should also check assumptions. The Ukraine and Gaza wars, both of which have brought about massive economic retaliation, illustrate the fallacy of assuming that actors will not pursue policies that jeopardise their economic interests (such as invading Ukraine in the case of Russia, or carrying out a mass-casualty attack in the case of Hamas). As the threat of a crisis in the Taiwan Strait looms large, multinational corporations would do well to heed the lessons of these two ongoing conflicts, especially given the presence of a deeply ideological leader in Xi Jinping.

Some US officials have advocated new doctrines for the US to operationalise economic statecraft and maintain technological superiority vis-à-vis China and its allies. Others have called attention to the need not only to manage strategic competition, but to win it outright. While these are laudable goals for the US, they should be dramatically expanded upon to create a grand strategy for ‘NATO Plus’ (NATO and Australia, New Zealand, Japan, South Korea and Israel) that meets the moment by integrating economics, technology and hard security. The West has taken some steps to balance national security imperatives against economic interests. But it has not yet, as a bloc, developed its own comprehensive economic-security-technological strategy comparable to the containment strategy articulated by George Kennan at the dawn of the Cold War. With the rise of global populism, the international order fragmenting into competing blocs, and the breakneck speed of technological innovation, the absence of such a strategy raises the risk that the 2030s could start to resemble the 1930s. 

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

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