(Bloomberg) — The U.S. is grappling with how to exert financial pressure on the Taliban to ensure Afghanistan doesn’t return to its role as a safe harbor for international terrorist groups, but a dearth of formal banking channels is complicating efforts.
The Taliban have long craved international recognition, and now that it has regained control of Afghanistan, status on the world stage will become key to the nation’s economic survival. The U.S. could bring the Taliban to the negotiating table to offer relief from economic sanctions in exchange for protecting the rights of minorities and women, and blocking terrorist groups like al-Qaeda from rebuilding a base in the Afghanistan or revamping terrorist financing efforts.
But the U.S. Treasury Department’s key method of applying those restrictions is the global financial system, and Afghanistan remains outside of that. Instead it relies on physical U.S. dollars and a trust-based system called hawala.
“The banking system is fragile,” said Alex Zerden, who was a Treasury attache in Kabul in 2018 and 2019. He now runs Capitol Peak Strategies, a Washington financial technology and digital asset advisory firm.
“The formal financial system is a very small part of the economy,” he said, adding that the hawala industry is both politically and economically important to the country, but the impact from sanctions can be limited.
Zerden said he is concerned that the U.S.’s gains in the past 20 years to regulate the hawala industry will be reversed. “This could have serious consequences for terrorism financing and money laundering in the country and wider region,” he said.
Frozen Assets
For now, President Joe Biden’s administration has taken efforts to halt money from flowing into Taliban hands. The U.S. has frozen roughly $9 billion in assets belonging to Da Afghan Bank, or DAB, the nation’s central bank. Roughly $7 billion of that is with the Federal Reserve Bank of New York, according to DAB’s top official, Ajmal Ahmady.
The Biden administration has also stopped shipments of cash. The Taliban remain on Treasury’s sanctions designation list.
Despite U.S. efforts over 20 years to boost Afghanistan’s economy and banking sector, it is largely in a primitive state. Nearly 74% of the country’s population lives in rural areas, while a majority of its banks are in the three major cities, according to World Bank data.
Its currency, the afghani, isn’t accepted for cross-border trade, thus the economy’s reliance on U.S. dollars and the hawala industry. The centuries-old trust-based system of moving cash underpinned international trade throughout the Middle East and South Asia before the advent of modern banking. It continues to be a central part of the financial system in many of those countries, particularly in Afghanistan.
U.S. authorities have targeted some hawala networks for helping terrorists move funds.
The Taliban are asking DAB staff where the nation’s assets are, according to Ahmady. In a tweet early Wednesday, he said the funds are held in “safe, liquid assets such as Treasuries and gold.”
He wrote that “in no way were Afghanistan’s international reserves ever compromised” or “stolen.” Ahmady, who fled the country earlier this week, is a Harvard graduate who briefly worked at the U.S. Treasury Department as an economist.
The Taliban have vowed to build an inclusive government, protect the rights of women “within the bounds of Shariah law,” and prevent Afghan territory from being used to target any other country after sweeping aside the Western-backed government to end two decades of war.
Many are deeply skeptical that the Taliban charm offensive represents a shift in its fundamentalist rule. Reports have already emerged of forced marriages, discrimination against female employees and orders for men to grow beards. Thousands of residents have fled to neighboring countries in an attempt to escape life under the insurgents.
Convincing the international community that it intends to be true to its word will be key if the Taliban’s leadership hope to gain at least tacit recognition from the U.S. and its allies as the new rulers of Afghanistan.
U.S. Secretary of State Antony Blinken may already be pressuring other nations not to recognize the group. He spoke with counterparts in both China and Russia on Monday following reports that the two nations were open to working with the Taliban.
Just last month, Chinese foreign minister Wang Yi called the Taliban “a pivotal military and political force,” according to the New York Times.
The Treasury Department declined to comment on any efforts to encourage China not to provide assistance to the Taliban.
Between sanctions and failure to get international recognition, the group’s options to access cash will dwindle, and perhaps pave the way for negotiations with the U.S. and others on how to build a new government.
About 75% of public spending is financed by international aid, according to World Bank data. An illicit economy mainly made up of opium production and smuggling make up the rest. One way the international community can squeeze the Taliban is to slow or stop donor money from reaching the regime.
The U.S. Treasury Department is considering intervening at the International Monetary Fund to prevent a Taliban-led Afghanistan from be able to use around $450 million in reserves, according to one person familiar with the matter. DAB was expecting about $340 million of that next week, according to Ahmady.
The use of those funds would require the IMF to recognize the Taliban. While the U.S. is the IMF’s biggest shareholder, the international community needs consensus to make such decisions. The Treasury and IMF declined to comment.
With international aid drying up, “There’s an enormous risk to the Afghan people right now,” said Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center. He said currency devaluation is likely to boost food prices, further squeezing the impoverished nation.
Afghanistan’s currency ended a four-day losing streak where it had dropped to a record low versus the dollar. The Afghani gained as much as 4.2% to 82.5813 per U.S. dollar as of 8:47 a.m. in New York.
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