Thursday, December 9th, 2021
A “declaration of war” for the Kremlin
SWIFT exclusion is the sharpest weapon against Russia
By Birgit Haas, Capital
In the event of an invasion of Ukraine, the US is threatening the Kremlin with drastic sanctions. The sharpest sword in the West would be to exclude Russia from the SWIFT global payments system. However, this “nuclear option” could also have undesirable side effects.
The situation on the border between Ukraine and Russia threatens to escalate once again. For the second time this year the command has come from the command center of the Russian head of state Vladimir Putin to deploy heavy artillery on the border with Ukraine. The Russians fear that things will soon become serious when the neighboring country joins NATO. Ukraine set this as a goal in its constitution back in 2018. Then NATO could position weapons and military there in close proximity to Russia. For the Kremlin, this is apparently reason enough to flex its muscles at the border from time to time – garnished with the demand for security guarantees that prevent Ukraine from joining NATO and Kiev’s efforts to recapture Crimea.
US President Joe Biden seems to be losing patience. If the US was unwilling to de-escalate, it threatened to use the heaviest sanctioning instrument the West had at its disposal: Russia’s decoupling from the international SWIFT payment system. The EU Parliament had already approved this punitive measure at the end of April if the Russian military should invade Ukraine again. It would be a radical step that could reignite the division of the world into East and West.
In the event of an escalation, not only the military would threaten each other with their arsenals. It could split the world economically: on one side there would be the West, on the other side Russia and, in the worst case, China – if the Asian giant dares to stand by the side of the Russians.
For Moscow it is synonymous with a declaration of war
The exclusion from the Belgium-based “Society for Worldwide Interbank Financial Telecommunication”, as the long-form SWIFT established in 1973 is called, is also known as the “nuclear option” and is synonymous with a declaration of war. At least that is what the then incumbent Russian Prime Minister Dmitry Medvedev called it in 2014. His finance ministry calculated at the time that exclusion from the system, which is used by more than 11,000 banks worldwide, would shrink Russian economic output by five percent.
In 2014, the Russians were also afraid of Ukraine joining NATO – although the country had not even applied for membership at the time. In addition, the former US President Barack Obama and the outgoing Chancellor Angela Merkel appeased at the time. Not entirely altruistic: The USA and Germany currently benefit most from Russia’s use of SWIFT, as the banks there communicate most frequently with those in Russia.
As a lesson from the debate at the time, however, Russia has begun to build an alternative system. The Russians have the example of Iran in mind. After decoupling from the SWIFT system, the country in the Middle East has lost almost half of its oil export revenues and 30 percent of its foreign trade. In addition to gas and oil, Russia also exports copper. A Swift exclusion would have devastating short-term effects and result in a massive outflow of capital.
Russia’s counter-strategy includes the “Mir” payment card system, which is replacing Visa and Mastercard. It is controlled by the Russian central bank and processes card transactions domestically. The “Mir” cards are issued in Russia through companies. 73 million of them are in circulation, almost a quarter of all card payments are processed through it.
Russian alternative just a tiny bit
In addition, the Russian central bank has developed the SPFS system as a SWIFT alternative, but with 400 mainly Russian banks it is still a tiny thing. 20 percent of domestic transfers are processed through it, but due to limited technical capacities, more poorly than right.
However, Russia would have other options after a SWIFT exclusion. For example, by turning to China. The Chinese also maintain a small Swift alternative with CIPS. Participation in it would have the advantage for Moscow that foreign trade with China would not collapse. In addition, the detour of the ruble via the renminbi has the advantage that, given China’s economic strength, it has the potential to attack the US dollar as a reserve currency. While it’s an unlikely scenario, it is possible. At present, China is still preventing the international use of the renminbi through capital controls.
Digital currencies could change this. China is already working on the introduction of the e-yuan, Russia plans to test the e-ruble soon. Both states want to regain control over the currency flows. And both have an interest in connecting business partners to the digital systems, even if they come from the West.
In the run-up to the 2022 Winter Olympics in Beijing, there was a debacle because the Chinese organizer wanted to oblige sponsors such as Visa and Nike to use the e-yuan. Central banks have so far considered it unlikely that China could break away from its western economic partners in order to use the e-yuan to attack the US dollar as the key and reserve currency. The interdependencies are too close, and China is too focused on itself. But with the exclusion of Russia from the SWIFT community, the Eurasian economic area would possibly be strengthened and – from the perspective of the West – steered in an unfavorable direction.
The text is at first Capital appeared.