The world watches in shock as Russian troops make inroads into Ukrainian soil. While Ukrainians are fighting an existential war, the world leaders discuss ways to deter President Putin without drawing the entire continent into war.
A slew of sanctions has been imposed on Russian institutions, businesses, and oligarchs. The aim is to cripple the Russian financial system and restrict its access to technology. Russia's largest financial institutions have come under severe penalties. As yet, world leaders remain divided on cutting Russia off from SWIFT, much to the dismay of those who believe it will be a "nuclear" strike on the Russian economy.
Dmytro Kuleba, Ukraine's Minister of Foreign Affairs, said in a Thursday tweet, "I will not be diplomatic on this. Everyone who now doubts whether Russia should be banned from SWIFT has to understand that the blood of innocent Ukrainian men, women, and children will be on their hands too. BAN RUSSIA FROM SWIFT."
The Society for Worldwide Interbank Financial Telecommunication, or SWIFT, in short, is the modern-day, secure messaging service that in effect smoothes the working of the global economy. More than 11,000 financial institutions and companies in over 200 countries and territories use the service to transfer funds, pay for trade and carry out currency exchanges.
The successor to the telex system of yore, the global financial service, was started in 1973 and is based in Belgium. SWIFT is not a bank that holds money. It is a service that intimates banks and financial institutions that a transaction is about to occur. It is estimated that an average of 42 million such messages were sent in a day last year. Subject to EU laws, the entity is governed by a board consisting of 25 people, including the chairman of the management board at Russia's Central Counterparty Clearing Centre, and must comply with EU regulations.
The size of its economy and the scale of Russian international trade means restricting access to SWIFT will affect global economies on an unprecedented scale. It was estimated at the time of the Crimean annexation that denying access to SWIFT would shrink Russia's GDP by 5 percent. In retaliation, Russia could withhold oil, gas, and metal exports on which the EU relies heavily.
Since 2014, Russia has put in a parallel system to facilitate its financial firms to maintain communications with their global counterparts. The SPFS, the Russian system, has not yet gained the popularity or patronage of the SWIFT. China, too has developed an alternative, the Chinese Cross-Border Interbank Payment System. Crypto-currencies, digital currencies, and decentralized block-chain payment systems could also utilize the crisis to become more mainstream.
Such alternatives, it is feared, would slowly but surely wean the world economy from the U.S. dollar. Most international transactions, including SWIFT transactions, are conducted in U.S. dollars. The American dollar's status as the global reserve currency presents a tremendous advantage for the U.S. government and American businesses on the global platform. Most financial and political experts feel that the threat to the U.S. dollar is minimal and that the global economy will rely on the American dollar for decades to come.
Meanwhile, analysts point out that cutting Russia out of SWIFT will have repercussions for others as well. Such a move could "trigger currency volatility and cause massive capital outflows," according to Maria Shagina, a visiting fellow at the Finnish Institute of International Affairs. Foreign banks' exposure to Russia is estimated at $30 billion, with European leaders holding the most significant chunk.
Most leaders are refraining from moving swiftly on SWIFT even as all avenues for deterrence are being explored. A consensus among various governments will not be easy to find as each weighs their energy security and economic disruptions against thwarting President Putin's wild scheme of restoring 17th century Russia.
"It is always an option, but right now that's not the position that the rest of Europe wishes to take," Biden told reporters after announcing the new sanctions Thursday.
You can't have your cake and eat it too. Europe's actions have not matched its words. It wants to depend on gas and oil from Russia. It lacks the political will to implement SWIFT quickly. All of this timidity comes at a cost, inviting more aggression. It is yet another blunder like initially cozying up with Russia on Nord Stream 2.
The first round of sanctions did not deter Putin from continuing his heinous and barbaric campaign in Ukraine. When will the Western leaders wake up?
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