Following Russia’s troop movement into two breakaway regions of eastern Ukraine, the United States and its Western allies are targeting the invading country with a set of sanctions unlike any other in terms of the scope of targeted trade and the size of the sanctioned economy.
Are measures they include a complete blockade of two major Russian financial institutions that provide key services crucial to financing the Kremlin and the Russian military, and that elites and their families will no longer be able to trade their debt with US markets; The United Kingdom and Europe have also joined this rule.
A few days ago, the German Foreign Minister, Annalena Baerbock, stated: “We in Germany are prepared to pay a high economic price, that is why everything is on the table.”
And, likewise, at the Munich Security Conference over the weekend, Vice President Kamala Harris said: “These are some of the strongest, if not the strongest, sanctions that we have ever issued.” She also added: “It is aimed at institutions, in particular, financial institutions, and individuals, and it will do absolute harm to the Russian economy.”
However, despite all the aggressive posturing, the US coalition has apparently backed down on SWIFT, deciding not to block Russian access to the international payment communication system, reports Protocol.
The authorities have even referred to the SWIFT sanctions as “the nuclear option”. But some policy experts say this characterization is greatly exaggerated, arguing instead that SWIFT sanctions would not be as effective as those directly targeting Russian banks.
So why are sanctions against Russian banks still on the table, while cutting off access to SWIFT has been seen as too much? The answer is simple: Removing Russian access would constitute an economic shock that US politicians and corporations would rather not instigate.
However, there is a more complicated and consequential explanation that has to do with anxiety over the US dollar’s status as a global reserve currency. Rather than being a “nuclear option” that hinders Russia, the SWIFT sanctions could be the cause of a sequence of events that strengthen alternative digital payment systems backed by China and Russia.
Such sanctions could also, in the long run, steer emerging markets towards Blockchain-based systems that would reduce global dependence on the US-centric international monetary system. So the SWIFT sanctions together could prompt the de-dollarization of the world economy.
The SWIFT system was thrown out in 1977 by a coalition of banks and is based in Belgium, probably in part to convey the “strict neutrality” it purports to uphold. More than 11,000 financial institutions in more than 200 countries use SWIFT to communicate payments and value transfers. But the vast majority of SWIFT transactions are settled in US dollars, helping to solidify the currency’s status as a global reserve currency.
This gives the United States tremendous influence over the world economy, allowing the federal government to borrow at discount rates, rack up a national debt now in excess of $30 billion, and exert influence over foreign nations through of a sanctioning monetary policy.
Despite SWIFT’s purported neutrality, the United States used its influence to kick Iran out of the service twice. In both cases, the sanctions had the intended consequence of crippling the Iranian economy by limiting international trade.
But even America’s allies have an uneasy relationship with SWIFT: They know their banks trust it, but would prefer to turn to less US-centric alternatives, something like a European version of SWIFT. And in the case of Russia and China, the need to develop SWIFT alternatives is more urgent.
If the US doesn’t block Russia from SWIFT this time, the threat may even be used as leverage in future clashes. Russia can focus on the example of Iran to see that oil exports would likely suffer if access to SWIFT were cut off. Losing access would reduce Russia’s GDP by 5 percent, according to estimates by the Carnegie Moscow Center. Some Russian parliamentarians have said that SWIFT sanctions would be the equivalent of a declaration of war.
As for China, its economy is too big and too important to be sensibly wrested from SWIFT. But if China ever wants to seriously challenge the US as a global hegemon, it will need to develop a viable alternative to SWIFT that will help it outperform the US dollar global financial system. Until now, China has struggled to promote its official CNY currency on SWIFT, as it only accounts for about 2 percent of deals.
The truth is that there are already SWIFT alternatives. The European Union, Russia and China have created their own systems. Blockchain-based alternatives are also emerging, such as Ripple, which aims to usurp SWIFT through technological prowess rather than political influence. The hard part, however, is not creating a new system, but gaining enough adoption to make the network useful to member banks.
The US therefore risks pushing its luck too far by pulling Russia out of SWIFT, as it could prompt a coalition of disgruntled nations to adopt alternatives. Russia and China have already offered to help the EU improve its INSTEX system, which is currently limited to facilitating humanitarian trade payments allowed under US sanctions.
In the long term, US policy around SWIFT should, in theory, be guided by the perceived threat of de-dollarization. But in the end, it all depends on how the conflict between Ukraine and Russia develops.
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