It is no secret that one of the main pillars of United States influence in the world is the strength and dominance of its financial system over all international trade operations, payment chains and financial credit. Since the Bretton Woods Conference, held at the end of World War II, it has been agreed that the dollar will be considered a gold equivalent    currency as monetary cover, but it was cancelled in 1971 when former US President Richard Nixon announced that the dollar would be delinked to gold and floated by leaving it to the trading market to determine its value based on supply, demand and durability of the US economy.

The Jamaica Accords signed in 1976 ratified the "Nixon Shock" thus recognizing the end of the Bretton Woods financial system. But at the same time, the dollar did not lose its weight in international financial exchanges. Three years before that, oil trade was linked exclusively to the dollar, giving the US currency a strategic market support. The year 1973 also witnessed the establishment of the SWIFT organization, which is an acronym for “The Society for Worldwide Interbank Financial Telecommunications" which is considered as the basic infrastructure for financial services in the world. The United States dominates this organization, as 80% of the financial operations in the world are conducted by the dollar.

The US fiscal weight in the global economy allows politicians in Washington to separate or threaten to separate their political opponents from the global financial system or limit their ability to move through its space. Several press reports have recently dealt with unconfirmed information about Western efforts  to separate Russia from SWIFT, after the US President, Joe Biden, took office in January, which was accompanied by a rise in political tension with Moscow against the backdrop of the return of security instability to eastern Ukraine, and the Russian authorities' imprisonment of dissident Alexei Navalny, who spreads the values of "Western democracy" in Russian society, although the broader framework of the picture is the cohesion of the Sino-Russian strategic alliance and their growing geopolitical influence in the world.

This is not the first time Moscow has been removed from the most widespread global financial system, with the UK waving its exclusion from SWIFT between 2014 and 2015 against the backdrop of its involvement in the Ukrainian crisis and the annexation of Crimea. However, these threats needed primarily European consensus followed by an American blessing, which was not available to a country like the United Kingdom that was about to enter the Brexit tunnel, therefore the European position was inconsistent and unreceptive to the London proposal.

The negative effects on the Russian economy from the imposition of economic sanctions in 2014 — most notably capital flight of more than $317 billion between 2014 and 2018 — could be described  as a preliminary and simple picture of what would happen if Russia were to be separated from  swift.

At the time of the British threats, former Russian Minister of Finance Alexei Kudrin said such a move could reduce Russia's GDP by 5%. The then Russian Prime Minister, Dmitry Medvedev, also described the implementation of the move as a "declaration of war".

Russia's defense plan, or apocalypse scenario?

In the latest edition of the Petersburg International Economic Forum (SPIEF), held between June 2-5, 2021, Russia's permanent representative to the European Union,  Vladimir Chizhov, downplayed the possibility  that there would be catastrophic effects on the Russian economy after desconnecting his country from  SWIFT, and ruled out that the news that the West could make the move was based on factual data. This confidence of Chizhov is supported by the statements of the Director of the Department of Economic Cooperation of the Russian Foreign Ministry, Dmitry Bereshevsky, to Novosti News Agency last May, in which he spoke of Russia's readiness for this scenario.

It can be said that Moscow has observed very carefully what is happening in Iran as a result of its separation from the global financial system, the resulting dramatic collapse of economic indicators, the collapse of the national currency and the lack of equipment to start or complete many production processes. This is what made the Russians prepare for what is to come, especially that Iran has suffered more as a country that, relies heavily on oil exports to supplement the treasury, which is the case for Russia, as, for example, Russian oil export revenues between 2011-2013, during the period of high global oil prices, amounted to 394$ billion, and the share of oil revenues in Russian GDP was 10% in 2018.

It should be noted that this readiness was supported by the experience of the Russian economy for some of these scenes, as a number of Russian banks were blacklisted in April 2014, followed by the suspension of services provided by Visa and Master Card payment systems and thus about 500 thousand credit cards went out of service. The move was among economic sanctions targeting Russian companies and institutions that led to the collapse of the ruble, which intersected with the collapse of oil prices at the end of 2014.

The concerned Russian authorities realized that the scenario of isolating their monetary and banking system had to be prepared for, so they began to develop the SPFS (System for Transfer of Financial Messages), which had been in operation since 2014 to enter service at the end of 2017 and to be equivalent to SWIFT. This was accompanied by the launch of Mir, a wholly owned subsidiary of the Central Bank of Russia, which aims to establish a credit card payment system as an alternative to Visa and Master Card. However, these systems continue to suffer from many technical problems; for example, SPFS operates only at official enterprises' opening hours, and the cost of operating it is higher for banks, compared to   SWIFT, which operates 24/7. The Mir card is only used in Russia, parts of Belarus, Georgia, Abkhazia and Turkey, and this type of bank card has been frozen in Venezuela after the crisis there in 2019.

The technical problems in Russia's attempts to create its own financial system pose a major challenge to the conduct of the Russian economy under financial sanctions, but at the same time warn that there is an ability to find an alternative. If Russia is separated from SWIFT, it will be able to raise the level its economic cooperation with China and access economic outlets across China's financial system CIPS (Cross-border Interbank Payment System), established in 2015, which make financial settlements in yuan but has a memorandum of understanding with SWIFT. However, it is reported that China and Russia removed the dollar from their trade exchanges in 2019.

Positive view of sanctions policy

The development of political systems, socially and economically, and the consequent growth in influence and competition with the United States in the context of a conflict of interest manifested in the lack of agreement on the dollar as a global currency has prompted international actors in Europe, Asia and other regions of the world to find alternatives, especially after the presidential term of the US ex-president Donald Trump showed the ease of dragging the entire American political system into a state of instability, which has a negative impact on the whole world in view of the historical extension of the US economy globally.

In other words, no one is safe from US reactions that may be difficult to predict in the medium term, even for European allies who are considering reducing the correlation and dependence of their economies on the US dollar. This was revealed by the European Commission on January 19, 2021, with the aim of protecting European companies if the United States imposes sanctions on companies with business ties with Europe.   European officials are seeking not to repeat the failed scenario of INSTEX (Instrument in Support of Trade Exchanges), a financial tool devised by France, Britain and Germany along with Iran to facilitate trade after the Trump administration launched a campaign of extreme pressure on Tehran after the unilateral U.S. withdrawal from the Iran nuclear deal in 2018.

This European enthusiasm for financial independence from the United States is underpinned by two important factors. The first is the growing volume of global payments using the euro in the SWIFT system. In November 2020 these payments reached 37.8% against 37.6% in favor of the dollar, which is the first time since 2014, according to political analyst Andrei Kadomtsev in his report published in February 2021 in the "Modern Diplomacy" magazine, in which he indicates (and this can be considered a second factor) that Europeans are seeking to find a place for their currency in light of the escalating Sino-American conflict, even with the Biden administration, which pursues the same Trump policy towards China, but, unlike previous one, does so in a more or less soft tone.

Based on the foregoing, and returning to the possibility of separating Russia from the SWIFT system, this is theoretically possible, of course, but it is unlikely that the United States would do it at the present time for more than one consideration: 

1. The unwillingness to destabilize Washington’s allies and opponents' position toward the global position of the dollar, and the fear of a sudden decline in this confidence, as evidenced by attempts to break its dominance. 

2. The Biden administration, and the Trump administration before it, sought to create a rift in the Sino-Russian strategic relations, through the American side’s attempt to lure the Kremlin on some issues. The summit held between Biden and Putin in the Swiss capital, Geneva, on June 16, 2021, can be read in the context of this American endeavor.

3. Russia ranked second as a source of oil and petroleum materials for the United States, according to statistics from the Energy Information Administration of the US Department of Energy, with US oil imports from Russia reaching 538,000 barrels per day in 2020.

The US fiscal sanctions policy using SWIFT, the growing economic capabilities of European countries, China, Russia, and others, and the associated competition in all technological and military fields in addition to the race for space — this complexity in the fields of human development no longer allows the United States to continue to dominate the global monetary system unilaterally, controlling the fate of entire societies and nations. Thus, in the medium term (3-5 years), we are likely to see the development of international payment systems in Europe, China, Russia, possibly India, Venezuela and Turkey independently of SWIFT, including bolder steps in issuing real-asset-based cryptocurrencies at the central banks concerned, at which time the global financial infrastructure will change once and for all.

Author: STRATEGIECS Team Policy Analysis Team