The New Cold War Is Financial

Main Image Credit From left to right: 25 Canada Square (Citigroup Centre); 1 Canada Square; 8 Canada Square (HSBC Tower); and One Churchill Place (Barclays Headquarters). Courtesy of David Jones/CC-BY-2.0.

Banks and financial infrastructure are emerging as an expanding front in geopolitics.

Imagine you are Noel Quinn, recently confirmed chief executive of HSBC. Sitting high up in London’s Canary Wharf or overlooking the harbour from the bank's Hong Kong base, he must be facing a range of challenges. Many of these challenges are ‘known knowns’. Rising loan losses as the health of the global economy collapses; pressure to keep funds from coronavirus-related government support schemes flowing to beneficiaries as swiftly as possible; grappling with the HR and technology issues presented by many of the bank’s close to a quarter million staff working from home. These are all challenges that planning, diligence and experience can help a CEO and their team navigate.

But one challenge is almost impossible to manage and, while it is not unique to HSBC, the bank provides perhaps the starkest example of the reality faced by financial institutions whose operations span the globe. For Quinn, one suspects that the ‘geopolitical’ indicator on his risk dashboard is urgently blinking red; the plan for turning that light from red to green is, most likely, based primarily on one word – hope. There are measures a bank can take to address geopolitical risk, but issuing carefully worded statements of support for government actions in key markets or amputating major limbs of a business in order to withdraw from markets are major steps to take when those limbs are as substantial contributors to revenue as – in the case of HSBC – the US and China. And there is, of course, no guarantee these steps will protect you from hostile government intervention.

On the Front Line

For many years, banks have been alive to the risks posed to their business by sanctions. Turning a blind eye to the processing of transactions for sanctioned entities or those connected with pariah states such as Iran, Syria or – more recently – Venezuela has proved costly for many banks as they faced the relentless pursuit and long arm of the US authorities. Cases are often settled for hundreds of millions of dollars.

Frequently, these failings have been ones of systems, awareness and (charitably) ‘pilot error’, all failures that training, policies and procedures can eradicate. Banks had failed to invest properly in these capabilities, and it was perhaps only a matter of time before the US authorities came knocking. The fines they faced were in many cases the cost of years of underinvestment. Today – banks would argue – things are entirely different. Huge hiring drives have built compliance departments from dusty corner offices to multiple floors of analysts; investments in systems and a wide range of data sources provide these analysts with enviable insights and analytical capabilities; and senior compliance staff sit at the same level in management structures as those that generate billion-dollar revenues via trading, cash management, corporate finance and payment processing. Compliance is no longer an afterthought.

But now a new front is emerging. Not only is the use of sanctions mushrooming, multiplying the risk for financial actors, creating an increasingly complex landscape for businesses to navigate and the risk that they might inadvertently trigger an unseen violation. The financial institutions themselves are also being directly targeted. Whereas in the past, financial actors might become collateral damage as countries exchange financial sanctions, today they are themselves in the crosshairs, threatened by geopolitical rivalries, most recently between China and the US.  

Last month, US Secretary of State Mike Pompeo loudly criticised HSBC for appearing to favour account holders that are subject to US China-related sanctions, saying that the bank was ‘maintaining accounts for individuals who have been sanctioned for denying freedom for Hongkongers while shutting accounts for those seeking freedom’. UK Foreign Secretary Dominic Raab has likewise ‘been very clear’ to HSBC and all other banks that ‘the rights and the freedoms of … the people of Hong Kong should not be sacrificed on the altar of bankers’ bonuses’. More directly, Chinese conglomerate app WeChat, used for a range of financial transactions such as hotel and travel bookings and money transfers around the world, is now subject to a US presidential Executive Order (EO) that explicitly aims to address the threat posed by the company’s activities on ‘the national security, foreign policy, and economy of the United States’. How this EO – ostensibly focused on WeChat’s data collection activity – affects its financial activities remains to be seen, but we can be sure that the geopolitical warning light is flashing red for WeChat too. At the same time, HSBC and other Western companies are reportedly at risk of being added to China’s ‘Unreliable Entities’ list for their anti-China activities, bringing restrictions from the Chinese side.

Facilitators Under Siege From All Directions

For institutions like HSBC and WeChat, built to straddle the globe and facilitate payments and trade between countries regardless of their politics, life is increasingly uncomfortable as they are forced to pick sides; and for those countries looking on, the realisation is rapidly dawning that the critical financial infrastructure that underpins global trade is no longer a neutral space – it is swiftly becoming politicised, a state of affairs that may force them to choose sides soon too.

But warfare is not only about offence; defence is equally important, and the financial landscape is thus evolving. For example, China’s large banks, that power the country’s expanding global financial domination, have reportedly been preparing contingency plans in case US lawmakers take steps to freeze their access to US dollar markets and settlement systems.  

Furthermore, just as banks themselves have been disintermediated by upstart new payment companies employing advanced financial technology, so too can legacy national systems find themselves bypassed. As the financial system fragments under geopolitical pressure, there is no reason for traditional global systems such as SWIFT – the global payments messaging system – or indeed the US dollar itself to remain indispensable. Countries that have typically relied on the US dollar as their currency of choice for trade are thinking twice about ways in which to conduct trade without becoming collateral damage in the emerging financial cold war. 

Onerous to set up and less efficient to start with, perhaps, but justified by the rapid politicisation of the global financial system, alternatives to the US dollar-based payments and global messaging systems are developing. For example, likeminded countries are developing bilateral payment mechanisms that avoid using the US dollar, and advances in digital currency technology – notably central bank-issued digital currencies – hold out the prospect for a new generation of cross-border payment models.

None of this is to say that the longstanding stranglehold of the US and its dominant currency and allied financial systems will change overnight, but for CEOs like Quinn and countries whose economic survival relies on their financial relationships with China or the US, a chill is descending. This will lead to some uncomfortable financial decisions and will inevitably drive innovation that will further balkanise the global financial system. Choosing sides in the financial world will no longer be about selecting investment winners and losers; it will be about choosing with which side to ally as the brewing cold war turns financial.

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


Tom Keatinge

Director, CFCS

Centre for Financial Crime and Security Studies

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