Yves here. Not surprisingly, even though the dollar and even more so the rouble are trading at high levels, as many have warned, the aggressive financial sanctions against Russia, particularly the seizure of central bank assets and partial ban of Russian banks from the SWIFT messaging system, have led foreign users to consider how to protect themselves. The best way out is to make less use of the greenback, but that takes time.
By Anis Chowdhury, Adjunct Professor at Western Sydney University and University of New South Wales (Australia), who held senior United Nations positions in New York and Bangkok and Jomo Kwame Sundaram, a former economics professor, who was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. Originally published at Jomo Kwame Sundaram’s website
US-led sanctions are inadvertently undermining the dollar’s post-Second World War dominance. The growing number of countries threatened by US and allied actions is forcing victims and potential targets to respond pro-actively.
SWIFT Strengthened Dollar
The instant messaging system of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) informs users, both payers and payees, of payments made. Thus, it enables the smooth and rapid transfer of funds across borders.
Created in 1973, and launched in 1977, SWIFT is headquartered in Belgium. It links 11,000 banks and financial institutions (BFIs) in more than 200 countries. The system sends over 40 million messages daily, as trillions of US dollars (USD) change hands worldwide.
Co-owned by more than 2,000 BFIs, it is run by the National Bank of Belgium, together with the G-10 central banks of Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the UK and the US. Joint ownership was supposed to avoid involvement in geopolitical disputes.
Many parties use USD accounts to settle dollar-denominated transactions. Otherwise, banks of importing and exporting countries would need accounts in each other’s currencies in their respective countries in order to settle payments.
SWIFT Abuse
US and allied – including European Union (EU) – sanctions against Russia and Belarus followed their illegal invasion of Ukraine. Created during the US-Soviet Cold War, SWIFT remains firmly under Western control. It is now used to block payments for Russian energy and agriculture exports.
But besides stopping income flows, it inadvertently erodes USD dominance. As sanctions are increasingly imposed, such actions intimidate others as well. While intimidation may work, it also prompts other actions.
This includes preparing for contingencies, e.g., by joining other payments arrangements. Such alternatives may ensure not only smoother, but also more secure cross-border financial transfers.
As part of US-led sanctions against the Islamic Republic, the EU stopped SWIFT services to Iranian banks from 2012. This blocked foreign funds transfers to Iran until a compromise was struck in 2016.
US Financial Hegemony
Based in Brussels, with a data centre in the US, SWIFT is a ‘financial panopticon’ for surveillance of cross-border financial flows. About 95% of world USD payments are settled through the private New York-based Clearing House Interbank Payments System (CHIPS), involving 43 financial institutions.
About 40% of worldwide cross-border payments are in USD. CHIPS settles US$1.8 trillion in claims daily. As all CHIPS members maintain US offices, they are subject to US law regardless of headquarters location or ownership.
Hence, over nearly two decades, CHIPS members like BNP Paribas, Standard Chartered and others have paid nearly US$13 billion in fines for Iran-related sanctions violations under US law!
Exorbitant Privilege
The USD remains the currency of choice for international trade and foreign reserve holdings. Hence, the US has enjoyed an “exorbitant privilege” since World War Two after the 1944 Bretton Woods conference created the gold-based ‘dollar standard’ – set at US$35 for an ounce of gold.
With the USD remaining the international currency of choice, the US Treasury could pay low interest rates for bonds that other countries hold as reserves. It thus borrows cheaply to finance deficits and debt. Hence, it is able to spend more, e.g., on its military, while collecting less taxes.
Due to USD popularity, the US also profits from seigniorage, namely, the difference between the cost of printing dollar notes and their face value, i.e., the price one pays to obtain them.
In August 1971, President Nixon unilaterally ‘ended’ US obligations under the Bretton Woods international monetary system, e.g., to redeem gold for USD, as agreed. Soon, the fixed USD exchange rates of the old order – determining other currencies’ relative values – became flexible in the new ‘non-system’.
In the ensuing uncertainty, the US ‘persuaded’ Saudi King Feisal to ensure all oil and gas transactions are settled in USD. Thus, OPEC’s 1974 ‘petrodollar’ deal strengthened the USD following the uncertainties after the Nixon shock.
Nevertheless, countries began diversifying their reserve portfolios, especially after the euro’s launch in 1999. Thus, the USD share of foreign currency reserves worldwide declined from 71% in 1999 to 59% in 2021.
With US rhetoric more belligerent, dollar apprehension has been spreading. On 20 April 2022, Israel – a staunch US ally – decided to diversify its reserves, replacing part of its USD share with other major trading partners’ currencies, including China’s renminbi.
Sanction Reaction
The EU decision to bar Iranian banks from SWIFT prompted China to develop its Cross-border Interbank Payment System (CIPS). Operational since 2015, CIPS is administered by China’s central bank. By 2021, CIPS had 80 financial institutions as members, including 23 Russian banks.
At the end of 2021, Russia held nearly a third of world renminbi reserves. Some view the recent Russian sanctions as a turning point, as those not entrenched in the US camp now have more reason to consider using other currencies instead.
After all, before seizing about US$300 billion in Russian assets, the US had confiscated about US$9.5 billion in Afghan reserves and US$342 million of Venezuelan assets.
Threatened with exclusion from SWIFT following the 2014 Crimea crisis, Russia developed its own SPFS (Financial Message Transfer System) messaging system. Launched in 2017, SPFS uses technology similar to SWIFT’s and CIPS’s.
Both CIPS and SPFS are still developing, largely serving domestic BFIs. By April 2022, most Russian banks and 52 foreign institutions from 12 countries had access to SPFS. Ongoing developments may accelerate their progress or merger.
The National Payments Corporation of India (NPCI) has its own domestic payments systems, RuPay. It clears millions of daily transactions among domestic BFIs, and can be used for cross-border transactions.
Sanctions Cut Both Ways
Unsurprisingly, those not allied to the US want to change the system. Following the 2008-9 global financial crisis, China’s central bank head called for “an international reserve currency that is disconnected from individual nations”.
Meanwhile, China’s USD assets have declined from 79% in 2005 to 58% in 2014, presumably falling further since then. More recently, China’s central bank has been progressively expanding use of its digital yuan or renminbi, e-CNY.
With over 260 million users, its app is now ‘technically ready’ for cross-border use as no Western bank is needed to move funds across borders. Such payments for imports from China using e-CNY will bypass SWIFT, and CHIPS will not need to clear them.
Russia has long complained of US abuse of dollar hegemony. Moscow has tried to ‘de-dollarize’ by avoiding USD use in trade with other BRICS – i.e., Brazil, India, China and South Africa – and in its National Wealth Fund holdings.
Last year, Vladimir Putin warned the US is biting the hand feeding it, by undermining confidence in the US-centric system. He warned, “the US makes a huge mistake in using dollar as the sanction instrument”.
The scope of US financial payments surveillance and USD payments will decline, although not immediately. Thus, Western sanctions have unwittingly accelerated erosion of US financial hegemony.
Besides worsening stagflationary trends, such actions have prompted its targets – current and prospective – to take pre-emptive, defensive measures, with yet unknown consequences.