As the global economy continues to become more interconnected, communication networks and financial marketplaces present compelling battlefields for competition between states. State-driven financial market manipulation is not a new concept or practice in terms of pure economic interest as well as in terms of national security. China has long been accused of manipulating the value of its Yuan currency, much to the detriment of its trading partners.[1] China artificially decreased the value of its currency through “persistent one-sided intervention in the foreign exchange market,” essentially weakening the relative purchasing power of the Yuan by using it to buy and hold foreign currency reserves.[2] Although it manipulated its own currency, China’s actions have incentivized the amount of relatively cheap Chinese goods that its trading partners import. In turn, it also weakened the demand for the relatively more expensive goods produced by the competing domestic industries within those importing countries. In response, the United States Treasury has gone as far as formally labelling China as a Currency Manipulator and pursued remedies and relief through the International Monetary Fund.[3]
Financial markets present unique and evolving risks as states compete through the economic and information instruments of power.
States also have shown the capacity to influence commodity prices in global markets. While heavily dependent on oil exports, Saudi Arabia did not act to counter falling oil prices in 2016.[4] Rather than cutting back its production, decreasing the supply of oil, and pushing the market price back up, Saudi Arabia simply continued to produce oil at a consistent level. As “[t]he countries most negatively affected by low prices are Saudi Arabia’s enemies and competitors…Russia and Iran, which depend heavily on revenue from oil exports,” Saudi Arabia used its market influence to pursue its own interests at the expense of its rivals.[5] While it may first appear that this was inaction on Saudi Arabia’s part, it was a conscious and strategic decision. Saudi Arabia may have suffered economically in the short run by maintaining its oil production and keeping oil prices low, but it also bolstered its national security by diminishing the revenue of its enemies.
Financial markets present unique and evolving risks as states compete through the economic and information instruments of power. States have proven their ability and interest in manipulating both financial and political markets, and amplified through social media. While there are limited military options for response to these challenges, financial and economic markets present an unusual battlefield as states attempt to gain influence on the geopolitical stage.
Social Media Influence on Political and Financial Markets
Although social media is a powerful tool for communication, states have shown the capacity and intent to use it to pursue their own ambitions on the world stage. The Russian Federation has embraced social media platforms as avenues for influencing foreign populations. Russia or its proxies have “created fake social media accounts…posting misinformation and vitriol aimed at sowing confusion among the electorate.”[6] Targets of Russian social media influence campaigns include the 2016 United Kingdom European Union membership referendum, the 2016 United States presidential election, the 2017 German federal election, the 2018 Italian parliamentary election, and the 2020 United States presidential election.[7] Whether Russia achieved its strategic aims or not, it has shown its interest in social media manipulation campaigns, its intent to repeat the techniques, and it is likely to use them for future political objectives.
Unlike GameStop and AMC, trading in cryptocurrencies is not halted, leaving the markets open for further manipulation and disruption.
Dogecoin, 19 May 2021. (Executium via Unsplash)
Financial markets have proven to be susceptible to influence by social media trends as well. Individual traders reading the widely publicized “Wall Street Bets” forum on the message board website Reddit have influenced the prices of traditional publicly traded equities such as shares of companies like GameStop and AMC Theaters.[8] Large investment managers who had taken short positions on these equities suffered significant losses and even called for regulatory intervention citing manipulation of markets.[9] Market halts on trading did ultimately come into effect for shares of both companies due to excessive volatility. Similarly, the prices of nontraditional assets like the Dogecoin cryptocurrency have fluctuated based on social media-driven speculation.[10] Operating in a decentralized finance environment, cryptocurrencies do not have regulatory oversight by design. Unlike GameStop and AMC, trading in cryptocurrencies is not halted, leaving the markets open for further manipulation and disruption. Spurred by the social media conversation, investors flocked to these financial markets and drove up the prices of the assets.
Targets and Capabilities
The intersection of these examples of market manipulation poses several challenging issues for the economic and security communities. If the prices of equities are susceptible to the influence of social media-based trading, currency prices are likely vulnerable as well. With this in mind, states have the potential to redirect their social media influence campaigns to target financial markets as they seek to expand their strategic influence. Accordingly, it is vital for economic and security professionals to understand which states have the capabilities to carry out these influence operations and who their potential targets could be.
Aggressor states employing social media-driven financial warfare would tailor their actions for states fitting a specific profile. States that are heavily reliant on either imports or exports would be the most vulnerable to and feel the greatest impact from fluctuations in their currencies. If a belligerent actor drove up the value of a target state’s currency, it would effectively make the target’s exports more expensive. Consumers would then turn to producers with a more favorable exchange rate to buy the goods for a cheaper price, effectively reducing the exports from and revenue to the target country. Similarly, if a country is heavily reliant on imports, devaluing its currency would make those imports relatively more expensive. Each unit of the importer’s currency would buy less foreign currency required to purchase imports.[11]
In terms of social media influence, a state must have the technological and financial capacity to support sizable social media influence operations.
States with small economies and whose currency has a small trading base or is not widely issued would be the most vulnerable to this type of manipulation. If a currency does not have a high volume in circulation, it would not take as many purchases or sales of the currency to start to have a significant effect. On the contrary, states with larger economies or which peg their exchange rate to a more stable currency would enjoy a greater level of protection from this type of manipulation. With a larger trade volume and volume of currency to manipulate, the manipulator would be required to influence a greater number of trades and a much higher total price to achieve the same proportional effect.
With these limitations in mind it becomes clear that not every state can wield this type of influence. In terms of social media influence, a state must have the technological and financial capacity to support sizable social media influence operations. Returning to the Russia example, Russia reportedly employed over 600 people in its Internet Research Agency “troll farms” as recently as 2018.[12] The cost of employing the resources required to manipulate a market may prove prohibitive for small states to pursue this strategy. Meanwhile, a state would likely need to jumpstart trading in a currency to influence either a rally to drive currency prices up or a selloff to drive currency prices down. While these trades would need to take place through cutouts or entities that appear to be third parties, the state would ultimately incur the expense of purchasing a foreign currency and would lose access to those funds as long as they are held in reserve and not traded.
Defending Social Media Influence Operations
Mitigation of these risks falls largely outside the realm of military power and instead lies with the regulatory state, private companies, and international non-governmental organizations. In terms of social media, companies largely police their content themselves. Unless a state enacts legislation that limits the uses of social media, it is forced to rely on the third-party social media network companies to monitor and moderate their own platforms.[13] When dealing with currency manipulation that is directly carried out by a foreign government, participating states must work through organizations like the International Monetary Fund and World Trade Organization.[14] Otherwise, they may face potential sanctions or economic penalties themselves for violating trade agreements or other international financial regulatory regimes.
Defensive cyberwarfare would likely appear in the form of counter-messaging, or even monitoring or blocking foreign content from reaching social networks in the first place…
However, militaries have a potential role in what could be a last resort for states looking to combat foreign social media influence. Though doctrinally limited, in a U.S. context, by the “unique legal considerations” of each engagement, both offensive and defensive cyber warfare operations could be used to counter the effects of social media-based influence operations.[15] Offensive cyber warfare operations could target the technological resources of a belligerent state conducting a social media campaign. This is certainly the most decisive action since offensive cyber operations would “involve deliberate intrusions into opponent networks or systems with the intention of causing disruption, damage or destruction” to degrade or eliminate a foreign actor’s ability to use social media to influence a financial market.[16] As with other offensive military actions, the Law of Armed Conflict, the United Nations Charter, and the tenets of just war theory constrain the use of offensive cyber operations.[17]
As states pursue competitive advantages in all possible arenas, financial markets present fertile ground for manipulation and conflict.
Defensive responses face their own structural constraints as social media influence operations take place in publicly accessible systems run by corporations. Defensive cyberwarfare would likely appear in the form of counter-messaging, or even monitoring or blocking foreign content from reaching social networks in the first place, as long as the action is permissible in the legal context of the defending state.[18] Any military response would likely be limited, however, unless such cyber warfare was part of a broader conflict. When actions are ostensibly taken by third parties in open markets, direct military action may be difficult to justify. While Russian and Chinese hackers have repeatedly struck foreign governments and corporations, states have shown significant military restraint in response to cyberattacks lest military responses be considered acts of aggression strong enough to trigger conventional war.[19]
Conclusion
As states pursue competitive advantages in all possible arenas, financial markets present fertile ground for manipulation and conflict. Examples abound of states using their influence to manipulate prices in financial markets, including currencies and commodities. Manipulation does not remain limited to financial markets, however, and has stretched into elections and political systems through the use of social media information operations. Financial markets have proven to be susceptible to influence by social media trends, presenting a challenging risk environment. While there are limited military responses to this emerging threat, states must consider their whole of government options to defend against financial threats away from the battlefield. Although difficult to navigate, financial markets present a unique strategic vulnerability and demand attention as a potential avenue for future conflict.
David Day is an officer in the U.S. Air Force Reserve and a Vice President of Asset Management at a leading manager of commercial real estate lending and investment vehicles. He holds a Master of Science in International Economics from Baylor University’s Hankamer School of Business and a Master of Public Management from the University of Maryland School of Public Policy. The views expressed in this article are those of the author and do not reflect the official policy or position of his employer, the United States Air Force, Department of Defense, or the U.S. Government.
The Strategy Bridge is read, respected, and referenced across the worldwide national security community—in conversation, education, and professional and academic discourse.
Thank you for being a part of the The Strategy Bridge community. Together, we can #BuildTheBridge.
Header Image: Stock and Crypto Market Values, January 29, 2021 (Maxim Hopman).
Notes:
[1] Robert E. Scott, “Currency Manipulation—History Shows That Sanctions Are Needed,” Economic Policy Institute, Policy Memorandum #164 (April 28, 2010): 1, https://files.epi.org/page/-/pm164/pm164.pdf.
[2] U.S. Department of the Treasury Office of International Affairs, “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States,” Report to Congress (May 2019): 38.
[3] U.S. Department of the Treasury, “Treasury Designates China as a Currency Manipulator,” U.S. Department of the Treasury, August 5, 2019, https://home.treasury.gov/news/press-releases/sm751.
[4] Andrew Manners, “3 reasons why Saudi Arabia will keep oil prices low,” Global Risk Insights, February 27, 2016, https://globalriskinsights.com/2016/02/3-reasons-why-saudi-arabia-will-keep-oil-prices-low/.
[5] Chas W. Freeman, Jr., “Saudi Arabia and the Oil Price Collapse,” Remarks to a Panel at the Center for the National Interest, Middle East Policy Council, https://mepc.org/speeches/saudi-arabia-and-oil-price-collapse.
[6] Maggie Tennis, “Russia Ramps up Global Elections Interference: Lessons for the United States,” CSIS Strategic Technologies Blog, July 20, 2020, https://www.csis.org/blogs/technology-policy-blog/russia-ramps-global-elections-interference-lessons-united-states.
[7] Ibid.
[8] Paul R. LaMonica, “How AMC and GameStop became Reddit faves,” CNN Business, June 10, 2021, https://www.cnn.com/2021/06/10/investing/reddit-stocks-amc-gamestop/index.html.
[9] Sophie Baker and James Comtois, “GameStop, other short squeezes expected to face regulatory scrutiny,” Pensions & Investments, February 5, 2021, https://www.pionline.com/markets/gamestop-other-short-squeezes-expected-face-regulatory-scrutiny.
[10] Tanzeel Akhtar, “WallStreetBets Fever Hits Dogecoin, Price Soars 142%,” CoinDesk, January 28, 2021, https://www.coindesk.com/markets/2021/01/28/wallstreetbets-fever-hits-dogecoin-price-soars-142/.
[11] Cathy L. Jabara, “How Do Exchange Rates Affect Import Prices? Recent Economic
Literature and Data Analysis,” U.S. International Trade Commission, Office of Industries Working Paper no. ID-21 (May 2009): 4, https://www.usitc.gov/publications/332/ID-21.pdf.
[12] J.J. Green, “Tale of a Troll: Inside the ‘Internet Research Agency’ in Russia,” WTOP, September 17, 2018, https://wtop.com/j-j-green-national/2018/09/tale-of-a-troll-inside-the-internet-research-agency-in-russia/.
[13] Michael A. Cusumano, Annabelle Gawer, and David B. Yoffie, “Social Media Companies Should Self-Regulate. Now.,” Harvard Business Review, January 15, 2021, https://hbr.org/2021/01/social-media-companies-should-self-regulate-now.
[14] Jonathan E. Sanford, Currency Manipulation: The IMF and WTO,” Congressional Research Service, CRS Report for Congress, RS22658, (January 28, 2011): 3, https://sgp.fas.org/crs/misc/RS22658.pdf.
[15] Joint Chiefs of Staff, Doctrine for the Armed Forces of the United States, JP 3-12 (Washington, DC: Joint Chiefs of Staff, 2018), xiv, https://www.jcs.mil/Portals/36/Documents/Doctrine/pubs/jp3_12.pdf.
[16] James A. Lewis, “The Role of Offensive Cyber Operations in NATO’s Collective Defense,” NATO Cooperative Cyber Defence Centre of Excellence, Tallin Paper No. 8 (2015): 2, https://www.ccdcoe.org/uploads/2018/10/TP_08_2015_0.pdf.
[17] Herbert S. Lin, “Offensive Cyber Operations and the Use of Force,” Journal of National Security Law & Policy 4, no. 1 (August 2010): 71.
[18] Drew Herrick, “The Social Side of ‘Cyber Power’? Social Media and Cyber Operations,” NATO Cooperative Cyber Defence Centre of Excellence, 2016 8th International Conference on Cyber Conflict (2016): 108, https://www.ccdcoe.org/uploads/2018/10/Art-07-The-Social-Side-of-Cyber-Power.-Social-Media-and-Cyber-Operations.pdf.
[19] David Alexander, “Hagel, ahead of China trip, urges military restraint in cyberspace,” Reuters, March28, 2014, https://www.reuters.com/article/us-usa-defense-cybersecurity/hagel-ahead-of-china-trip-urges-military-restraint-in-cyberspace-idUSBREA2R1ZH20140328.