A Very Preliminary Look at the Partial Suspension of Russia’s Access to SWIFT

Some prophylactic remarks. First, even banking plumbing experts are in fog of war mode about what the announcement over the weekend, that some Russian banks, including Russia’s central bank, were to be blocked from SWIFT…but workarounds would be made so that the West could still buy oil and gas from Russia. As our Clive, who has been trying to puzzle out what this means (recall Clive is an IT specialist for a UK TBTF and his brief has him involved in operational and regulatory matters), said,

Russia excluded from SWIFT is the headline…


… but “selected Russian banks” allows plenty of wriggle room…. the reporting is unforgivably vague so it’s difficult to parse as to what’s mooted here in this particular measure….

I think even the “professionals” are doing nothing more than amateur musings right now, to be honest ?

Second, the McCarthyite escalation is resulting in anyone who fails to fall in with a simple “Putin/Russia are the new Satan” line as being depicted as a Russia apologist. That utterly impedes taking a clinical look, as best as one can, at the positions of two parties and what their interests and moves might be.

For those who have been around this site for a while, you may recall that during the 2015 Greece bailout negotiations, we concluded very early on that Greece would not prevail, based on its limited options, such as its need for continued bailouts, it having signed an agreement in February 2015 that committed it to implement the IMF “memorandum,” aka “reforms,” aka hairshirt, and the practical impossibility + huge downside of trying to launch its own currency, that it would have to submit to the Troika’s program. Far too many readers took that as siding with the financiers rather than the plucky Greeks, as opposed to a clinical assessment. The vitriol got so bad that we had to turn off comments for a while.

And not only were we proven right, but the Troika made the terms harsher because prime minister Alex Tsipras held a referendum that violated Greek law for how one was to be conducted1…..and on a moot issue, on a bailout that had already expired and procedurally could not be brought back from the dead.

We have far more risk of being wrong here than in 2015 because there are vastly more moving parts plus emotions in the West plus as Clive intimated, we are in a fog of poor quality information.

On top of that, the Mighty Wurlitzer is stoking emotions to a fever pitch. This is dangerous because it will limit flexibility and tend to, in fact is arguably designed to, produce overreactions. It is also depressing to see such outrage in the US over Russians killing Ukrainians, when we’ve seen virtually none over our nation-breaking in the Middle East and our support of the Saudis in their campaign against Yemen. The Chinese pointed out that those who live in geopolitical glass houses should not be throwing stones.

As Frederick Douglass said,

I shall feel myself discharging the duty of a true patriot; for he is a lover of his country who rebukes and does not excuse its sins. It is righteousness that exalteth a nation while sin is a reproach to any people.

Back to SWIFT.

Clive has quite a few concrete ideas about how this could work operationally and what this might imply regarding intent. But let’s look at this from a 50,000 foot level.

Commentators contend that one aim in freezing Russia’s central bank out of SWIFT is to make it unable to use its dollar reserves to defend Russia’s currency. Related to that, one way for Russia’s central bank to provide dollars to Russian banks who might need them to settle at the end of the trading day would be to swap roubles for dollars or need dollars to pay off net short term dollar debt exposures if they can’t roll the debt.

Yet the press reports all state that the West intends to have carveouts so that Western concerns can still buy oil and gas from Russia.

I don’t understand why Russia should go along with this. If I understand the economic proposition here, the West wants Russia to continue to take dollars for energy…which it won’t let it spend. Why not just give Russia a bag of feathers for its valuable oil? They’d be just as useful.

Clive independently came to a similar conclusion:

It’s not, I don’t think, intended to stop Russia selling exports. Certain exports, such as some natural gas, will be allowed, well, because Germany, at least in the short-term. It’s more to stop Russia from buying imports. Almost immediately, no-one will trust they’ll get their money if they sell to Russia, they’ll want cash up-front. So that creates a fairly instant working capital crunch — importing businesses in a Russia will need to send the funds for their purchases first and then, and only if their transaction goes through, will the overseas exporter even think about shipping the goods, doubly so if the seller wants US$s. Not a problem for cash-rich Russian businesses but a big, possibly fatal, problem for wobbly ones, unless their bank is willing to extend them a line of credit. But that line of credit will be, in effect, a US$ (or other ForEx) line of credit, Russia won’t want to waste scarce US$ liquidity on basket-case domestic business who are at risk of default.

And there’s a not small chance that, as the bank of the company buying goods to import into Russia will need to get its hands on ForEx to remit overseas to the seller, it’ll potentially need US$ clearing.

Now right now, Russia really has its hands full, by design, and may not be able to make sober calculations. The rouble was down roughly 30% versus the dollar at opening but according to Reuters, but stabilizing after a massive hike of interest rates, from 6.5% top 20%, plus central bank intervention:

The Russian rouble slid more than 15% against the dollar and euro at market opening in Moscow on Monday but central bank intervention arrested its fall, after it tumbled to a record low in Asian trade as harsh new sanctions were slapped on Russia.

At 0800 GMT the rouble was trading at 95.48 to the U.S. dollar , down 15% from Friday’s close, and at 107.3550 per euro , 15.4% lower, with central bank selling of foreign currency set to limit its losses in Moscow trade. It had earlier touched a record low of 120 to the dollar on electronic currency trading platform EBS.

It is over my head as to how the Russian central bank can be intervening to prop up the rouble v. the dollar if its dollar reserves are frozen, as some press reports claimed, and it can’t access SWIFT, which one would think it needs to settle its trades. Those who are expert in payments systems plumbing can no doubt clarify, but either the SWIFT interdiction hasn’t been fully implement and Russia’s central bank is getting in under that wire, or there is a meaningful gap between media accounts and what is actually happening.2

Now that isn’t to say that things are calm in Russia. Clive sent this and warned that the source (NBC) meant it had to be taken with a fistful of salt. But he said it was entirely plausible that Visa and Mastercard would be worried about their exposure, particularly given the lack of detail.

Per Clive:

Even if CC payments aren’t technically blocked from Russian card-issuing banks, overseas (outside Russia) merchants probably won’t want to take a chance, now. The scheme’s authorisation code is normally a copper-bottomed guarantee of merchant settlement. But there’s exceptions in the scheme rules where this claim on the issuing bank can be overturned (short version is, you can’t assume you can get blood out of turnip).

Or, as here, Russian merchants similarly won’t want to risk card payment settlements not being routable.

There are also reports of long lines at ATMs in Russia. As a result of the 1998 banking crisis, many Russians prefer the “bank of the mattress” to the regulated kind. But I had also been told by expats who had lived in Russia (admittedly more than a decade ago) that Russian banks offered dual currency accounts (roubles and dollars). If so, anyone with an operating brain cell would be pulling out their dollars out of fear of them being frozen and/or force converted to roubles at a lousy rate. Small businesses would be highly motivated to cash out any dollar holdings. Recall that when the Greek banking system was effectively shut down by the European Central Bank, importers were driving euros across the border to buy inventories, and in one well-publicized case, a Greek importer even flew euros to London.

Having said, keeps some other facts in mind:

Russia is indeed a long way to being a autarky. It’s hard to find data reported consistently across sources, but Russia’s import/export sector looks to be roughly half as big in GDP terms as that of the US (anyone with some decent data and any corrections, please pipe up in comments). China is its #1 source of imports. More detail from OEC:

The top imports of Russia are Cars ($11B), Packaged Medicaments ($10.2B), Vehicle Parts ($8.21B), Broadcasting Equipment ($6.75B), and Planes, Helicopters, and/or Spacecraft ($4.81B), importing mostly from China ($47.1B), Germany ($30B), Belarus ($13.4B), United States ($9.21B), and Italy ($8.79B).

So assuming the SWIFT kick in the head sticks, Russia could presumably devise work arounds for China and Belarus. India depends on Russian fertilizer and there are already worldwide shortages:

And along the same lines, from the Economic Times:

India is exploring ways to set up a rupee payment mechanism for trade with Russia to soften the blow on New Delhi of Western sanctions imposed on Russia after its invasion of Ukraine, government and banking sources said.

Indian officials are concerned that vital supplies of fertilizer from Russia could be disrupted as sanctions intensify, threatening India’s vast farm sector.

But let’s go back to the point made early on: why should Russia sell its very valuable oil and take dollars when the West won’t let most/all of Russia use dollars for much of anything (at least if we are to believe the press)?

The simplest play would be for Russia to refuse to sell energy under these terms. You either trade with us or you don’t. Embargoes on sensitive items are understandable, but not de facto shutdowns with only the stuff you really need to buy carved out.

Another route is to default:

It also led to the sale of Bankers Trust to Deutsche. Bankers Trust owned a lot of Russian debt.

Without going into details, despite Russia being in a lot of trouble domestically, it had adequate FX reserves, so the default caught the market by surprise. And as the writeup in Wikipedia suggests, Russia pulled out of that crisis quickly due to high oil prices back then. So as much as the 1998 experience may have scared citizens about trusting banks (hence the stories of large scale withdrawals sound credible), from the official perspective, the results weren’t too bad and in these circumstances, a rinse and repeat might be in order.

As most readers know, Russia and China have been working on systems outside SWIFT. The short answer is they are far enough along to soften the blow a bit but not enough to serve as substitutes. From the Carnegie Moscow Center:

In the medium term, SWIFT could be replaced for domestic purposes with the Russian equivalent System for Transfer of Financial Messages (SPFS), which was set up by the central bank in 2014 and which aims to replicate the functions of the Brussels-based interbank transfer system.

In 2020, SPFS traffic doubled to almost 13 million messages, but the system still pales in comparison with SWIFT. More than 400 financial institutions have joined the Russian alternative, most of which are Russian banks, but key banks operating in Russia such as the foreign UniCredit, Deutsche Bank, and Raiffeisen Bank, and the domestic Tinkoff and Vostochny banks have yet to join…

Internationally, the Russian analogue has had a hard time picking up foreign members to compete with SWIFT’s network of more than 11,000 members, despite Russian officials’ efforts.

Due to the constraints of the Russian SPFS, the Chinese Cross-Border Interbank Payment System (CIPS) has often been suggested as a more realistic alternative for Russian banks in the event of disconnection. The presumption is that due to China’s economic clout, the renminbi has more potential than the ruble to become a rival currency to the dollar internationally.

There is still a long way to go, however, before CIPS could serve as a substitute for SWIFT. The share of the renminbi in international financial markets is marginal: less than 2 percent of global payments, compared with the whopping 40 percent share the U.S. dollar holds, and far behind the euro, the British pound, and the Japanese yen. As a result, the CIPS payment system remains very small: about 0.3 percent of the size of SWIFT. The internationalization of the renminbi is handicapped by the strict capital controls imposed by Beijing out of concern over financial volatility.

Nevertheless, CIPS could become a regional alternative to SWIFT: in Eurasia, for example. The fundamental question is whether Chinese CIPS and Russian SPFS will collaborate on a joint solution, or whether the Chinese messaging system will make the Russian analogue fully redundant. Twenty-three Russian banks have joined CIPS, while just one Chinese bank—Bank of China—is currently connected to SPFS.

As I indicated, the “just say no” to SWIFT entirely is Russia’s cleanest play. The West has effectively admitted it can’t (either practically or politically) take the hit of going cold turkey on Russian energy.

But its leadership may very well not see it due to being caught up with running a war, trying to gin up negotiations, and being up to its eyeballs in financial fire fights.

Update 6:40 AM EST: Clive suggests that the exclusion from SWIFT, even when implemented (which it appears not to have been as of the time of the Russian central bank foreign exchange intervention) may be plenty leaky:

SDN update apparently still being finalised (publicly available summary here https://sanctionsnews.bakermckenzie.com/eu-uk-us-and-canada-announce-further-restrictive-measures-against-russia/)

The whole “block access to SWIFT” is an inaccurate misnomer and really should itself be banned. If the US disconnects Russia from SWIFT (stops routing SWIFT transactions from inside Russia) but does not “blacklist” (put nulls into entries corresponding to the banks in scope on the SDN list) this would enable Russia to find workarounds, such as sock-puppet entities in the rest of the world.


1 The biggie was that the time between the announcement of the referendum and the vote was much shorter than required. I would have to check my archives but my recollection is that this was not the only deviation from Greek law.

2 Some have speculated that the Russian central bank sold gold. That does not fit the available facts. Reuters reported a central bank intervention that was all done by 0800 GMT, meaning within two hours of market opening in Moscow. For the central bank to intervene buy selling gold, it would have to buy dollars…but it’s supposed to be frozen from SWIFT, so how does that work?

Plus the Western press would love to report the Russian central bank selling gold, since that looks mighty desperate.

Another readers suggested an off market gold trade. That seems unlikely because you’d either need one ginormous buyer, or a bunch of not so big ones, and that would seem hard to line up and execute first thing in the morning, before London was even open.

And as important, an off market sale of gold would not look like central bank intervention. The sale would be invisible (at least until Russia updated its accounting for its gold reserves). But the buying would be. It would look like speculators buying rouble because they thought it was oversold.

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  1. PlutoniumKun

    Thanks for going deep into the plumbing on this. As so often, NC is well ahead of all the other media on this.

    I think one area where the Russians have miscalculated is that they thought the confusion of the Wests response while they were building up would be matched or enhanced after an invasion. But I think it has concentrated minds, so I suspect the response will be more united and coherent than seemed likely 2 weeks ago. In particular, the Germans seem to be willing to take a hit on this (no doubt encouraged by the passing of the peak energy season). However, there are still unreconcilable needs among the western country and it remains to be seen whether this will allow enough loopholes for Russia to exploit.

    One additional aspect that hasn’t really been covered I think is tourism. It will be almost impossible now for Russians to travel abroad this year unless they have private stocks of foreign currency. Countries like Turkey and Vietnam will be hit very hard by this (at least regionally) at a time when they were hoping for recovery. Of course, Russians not travelling abroad and spending will take pressure off the demand for foreign currency.

    1. Yves Smith Post author

      Appreciate your point re tourism. There will be a lot of knock-on effects if this SWIFT blockage lives up to its billing.

      Re detail, this is still pretty broad brush. I had a lot about technical and coding issues from Clive that got left on the cutting room floor due to length of the post plus the fact that we’ll presumably know a lot more about that in the next 24 hours as banks get technical details.

      1. PlutoniumKun

        I just looked it up. I’m very surprised to see that after Turkey, Finland is the no.2 recipient of Russian tourists. Total Russian tourist expenditure abroad seems around $35billion per annum, which isn’t chickenfeed. I can’t find a figure for net flows, but I’d imagine it would be a significant form of outflow from the Russian economy.

        1. The Rev Kev

          If Finland joins NATO, I think that they can kiss all those Russian tourist goodbye. As it is, it will not be long before there is a ban on Russian tourists if some people have their way.

          1. PlutoniumKun

            Well, Turkey is a member of NATO and it is no.1.

            I assume it is related to ease of access and that Finland is not part of Schengen.

            1. Polar Socialist

              Finland joined Schengen area in 2001. It’s the ease of access and the fact that for many people from Northern Russia (like Saint Petersburg) Finland kinda looks and feels like home but is still different.

    2. FD

      Is it possible that the Ukranians hanging on as long as they have, gave enough news cycles to coalesce anti-Putin resolve much greater than Putin calculated? Putin had to believe (as did his oppostiion) he would slice through Ukraine in 24-36 hours, kill Zelensky, install his puppet, and start working his way out, except for those chunks of Ukraine he wants to keep to nibble back on creating a land and people buffer.

      Moving that fast wouldn’t have allowed any ramping of successive and ever increasing reactive Anti-Russian moves . While hostilities are going on, I think there is a marked difference in the ability to motivate collective (and stronger) action than exists after the shooting stops. Anti-Russian interests expected Putin to roll through and were probably considering the next move, post-Zelensk, which didn’t include the most recent actions. The thinking was: he’s going to take it quickly; we aren’t going to commit any tangible, impactful resources to stop him; so let’s think about our next steps after he owns eastern Ukraine again.

      For Putin, it’s hard to believe he thought this weekend’s moves, as vague as they are, would come to pass. Raising the nuclear alert level because of banking sanctions is his reaction? That feels a bit like he’s feels he is getting pushed toward a corner. He’s gotten himself back on center stage. Unfortunately, that will make the exit much more difficult.

      Be careful what you wish for is the motto, but that works on both sides now, as things have escalated into uncharted territory and, given the rapid escalation, there is less understanding of risks and impact in the near- and long-term.

      1. Yves Smith Post author

        I don’t know where this “install his puppet” meme comes from.

        Zelensky was elected to improve relations with Russia. He was voted in with something like 75% of the votes.

        The US presumably got to Zelensky.

        I doubt Putin would have a problem with Zelensky if he were to stick to his campaign promises. But I doubt the US would allow it. Zelensky agreed to negotiate about 2 days ago and reversed, again presumably due to US pressure.

        Putin wants the Minsk Protocol and Ukraine demilitarized. He wants neutrality. Minsk also calls for a more federal system, as in more regional autonomy and a weaker central state.

        In other words, Putin knows the optics and the practicalities of a lighter touch approach are better. But per the US pushing around of Zelensky, that may not be in the cards.

        1. ChrisRUEcon

          > In other words, Putin knows the optics and the practicalities of a lighter touch approach are better

          Ian Welsh was reminding the #TwitterSphere of this last night … Russia is not going all blitzkrieg here, and there is a method to that perceived (by the real warmonger class) madness.

        2. FD

          Zelensky shockingly didn’t uphold his campaign promises, but I’m more cynical about Putin’s intentions than most here. My view is that Putin’s true definition of “neutrality” leans more towards subservient than neutral. Puppet and annexation represents one extreme; neutering but not disposing of Zelensky the other.

          That said, has the calculus changed for Zelensky who in the MSM is a “global jewish hero”? Not the time for polling the average Ukranian, but does he take the blame for helping to force the crisis (the Ukranian people hold him to his promise) or is he a hero for taking a negotiating stand that didn’t include rolling over to Putin’s demands.

          Which is another general comment about the consensus here, just because Putin demands something or draws a redline doesn’t necessarily justify an invasion; regardless if he was consistent in his signaling or NATO’s bad precedents were, well, there first.

          1. Yves Smith Post author

            As I indicated and others have said, Putin would accept assurance of Ukrainian neutrality. But given how furious the West is with his invasion, they are gonna try to meddle with any new regime. So that means to protect Russian security, the government will probably have to be Russian-aligned, since the US would work overtime to move any new regime into its corner.

            In other words, the game board the West is presenting makes having a merely neutral Ukraine not a stable situation for Russia. This is where the game is likely to come out, as opposed to that being a Putin preference/desire.

            As Gilbert Doctorow points out, Russia unlike the US has some appreciation that you don’t just need to win wars but also win the peace.


            A “puppet regime” works against that so all other things being equal, a bona fide neutral state would be better for Russian security (Putin made that clear in his pre-invasion speech, that the intent was not to have Russia control Ukraine, but to have more self-determination, which on a regional level w/in Ukraine, would equal more regions not on a hostile footing to Russia).

            But Russia probably has to assure that a friendly regime in in place given extreme US/NATO hostility to the invasion and any successful regime change or mere “regime reorientation”.

            Another solution is a rump Ukraine in the West that has been demilitarized, with the eastern parts using the Kosovo device of having elections. They have substantial ethnic Russian populations, so unless Russia is perceived to have really messed them up in the invasion, they would be likely to vote in Russia-friendly leaders. Of course we’d denounce these results as phony even if the mix of the population suggests that the outcome was pretty certain to be Russia-favorable.

    3. Grumpy Engineer

      The Germans seem to be willing to take a hit on this (no doubt encouraged by the passing of the peak energy season).

      Yeah, I had the same thought. If the Russians had wanted maximum leverage over Europe (and Germany in particular), they should have invaded in November. But now that the weather is starting to warm, the need for Russian gas to keep furnaces, boilers, and gas turbines running is starting to fall. And it will continue to do so for the next several months, which is when Russia will need leverage the most.

      1. Marlin

        But next year will be another winter. I don’t think this is ‘over’ soon. What do pro-sanction people think will happen in the longer term?
        So far Europe shot itself already mightily in the foot. Revocation of air space usage for Aeroflot is less problematic (Air India can still fly Moscow – London) than no air space access for EU airlines. Frankfurt Tokyo direct flights all go over Russia. EU people fly more and Russia is big.

    4. amused_in_sf

      Considering how much energy and food Turkey imports from Russia, and the currency crisis they have going on, I would think Turkey would be reluctant to turn off a source of rubles. If it requires a new merchant processor for the Russian credit cards, or planes loaded with paper currency, or blockchain verified petroleum futures, someone will find a way for Russians to spend their money there.

      Balance of trade info:

  2. nn

    To me the most obvious solution, if Russia is banned from accessing dollars/euros, is to demand payment for oil/gas in rubles.

    1. Yves Smith Post author

      The payments all go over dollar systems. The Russian side has to convert the dollars into roubles.

      And in any event, the payments for oil and gas are not the problem. Those are supposedly being carved out. It’s Russia using its dollars to make payments abroad that is being checked. No one will take those roubles you want Russia to get to buy goods and services outside Russia.

      1. nn

        OK, I probably should have say it’s more of PR “solution”, or just next counter move, and not like it will resolve the situation completely in Russia’s favor. But if Russia demands rubles for something it has and EU presumably wants, then EU will need to get them, which means offering something it has for exchange.

        Or they can refuse to pay for oil/gas in rubles and then explain that to their citizenry.

        1. Yves Smith Post author

          With all due respect, are you insisting on being obtuse? I suggest you read the post again because it appears you do not understand what it said.

          The West is prepared to pay Russia in dollars for oil and gas. But it at the same time is going to virtually entirely choke off Russia’s ability to use dollars.

          Paying Russia in roubles will not solve this problem. No one wants to take roubles from Russia. Effectively no one will take roubles or denominate their sales in roubles just because Russia has a lot of roubles.

          1. Amfortas the hippie

            forex is way beyond my ken…but surely there’s an alternative to 1. dollars and 2 rubles.
            free markets and all…i remember saddam threatening an oil bourse that would take euros or something instead of dollars, and that threat being a main behind the scenes driver for invasion.
            russia has too many nukes for that to happen…so why not demand payment for the oil and gas in euros or gold specie or semiconductors?
            europe apparently really needs that gas…so why not press the issue?

            1. Yves Smith Post author

              I haven’t held much truck with that theory. There have been zillions of explanations offered and the only one that makes sense is we wanted the oil…which we didn’t get, since the US government wanted basically to steal it and none of the oil majors wanted to do it that way, they knew it had to be on a sharing or royalties basis with the country getting a good sized slice of total revenues….and things somehow foundered.

              1. Pate

                I’m no doubt in over my head and have probably been sucked into some deep dark conspiracy hole, but possibly related to amfortas’ theory was Qaddafi’s “gold dinar” pan African currency to explain his exit?

                  1. Yves Smith Post author

                    You still don’t get it!!!

                    The intent of the SWIFT move is to prevent Russia from using the dollar it already has.

                    Acquiring more dollars by selling gold does not solve this problem. Russia already has large dollar reserves.

                    The plan of the West is for Russia to take yet more dollars by buying their oil and make Russia sit on an even bigger unusable dollar horde.

            2. Yves Smith Post author

              This is frustrating. The post VERY CLEARLY states that the point of the partial SWIFT block is to prevent Russia from SPENDING dollars. It needs dollars for imports from the US like cars and aircraft parts plus to defend the rouble in FX markets.

              1. Amfortas the hippie

                yeah, i get that part…trying to think like a country, here, as to workarounds.
                is the dollar merely the de facto global reserve currency…of is there a de jur under there somewhere?
                and is oil/gas denominated in dollars similarly out of habit/(fear) or is it codified in treaties and such?
                these would seem to be the structures the “pipes”/”plumbing”, as referenced above, of global payments, etc would be tied to.
                hell…why couldn’t they offer the gas germany needs in Mongolian tögrög?
                i reckon there’s lots of secret shoppers out there in geopolitico land who would dearly love someone to blaze a trail out of usaempire hegemony in these matters.

                1. amused_in_sf

                  The issues with using other currencies are:

                  1) Eventually, the people who produce what you want need to be paid in dollars or euros. So someone has to be able to make a transaction that the Fed or ECB will record (unless you are moving tens of billions of dollars in banknotes!), since central banks are where currencies are ultimately “stored” electronically. So you have to find a banking institution that is willing to take the risk or stupid enough to be fooled into performing a transaction for you.

                  2) Small countries don’t have the sheer amount of money supply to handle big transactions going in and out. Nor do they want your laundering to affect their exchange rates. Finally, you do not want to be stuck holding their currency or bonds when there are big swings in exchange rate or lack of liquidity.

                2. John Zelnicker

                  Amfortas – Back in the 1950’s the US made a deal with the Saudis that all oil trading would be denominated in dollars. In return, the Saudis would buy and hold US Treasury securities.

                  We were still on a gold standard for international trade, so there was a need to make sure that exporting countries held onto their dollar surplus rather than trying to redeem it for gold.

                  In fact, it was Charles de Gaulle’s demand in 1971 that we redeem France’s dollar surplus for gold that prompted Nixon to finally end the convertibility to gold. Otherwise, we would have been left with very little of the yellow metal.

                  1. Yves Smith Post author

                    That was last reaffirmed in the early 1970s.

                    In a no gold standard world, the pricing of oil does not matter. What matters is that by convention, the dollar is the settlement currency for most international trade. It’s the most liquid, everyone uses it, as so lowest transactions costs, particularly with very large transactions.

                    So what we have now is effectively a hangover, just the way issuing Treasuries is a convention, we don’t need to do that. But the convenience, the savings, and all the IT keeps reinforcing what amounts to deep grooves in a dirt road.

              2. Dave in Austin

                Great article on the plumbing and the histeria. Keep it up.

                I can barely understand the plumbing in my own home, but…

                If Russia said “Pay for the gas in $ into my account at Chase and I’ll pay for our imports out of that account” what would the US do? Either the Chase account is blocked (no money in, no money out) or the Russians take dollars in, demand real green pieces of paper, and send them to the exporter in a Brinks truck.

                I know too many people who made money in eastern Europe during the 1970s selling Levis to think the formal rules will really work in a political market disruption. By the way, the idea that Russia imports 11 billion in cars was no surprise but 6 billion in communications equiptment was a bit of an eye opener. The Chinese phone switch manufacturers must be smiling.

                The usual Russian backdoor into the Euro system was pay into a Turkish bank, have that bank send the money to the north Cyprus branch, transfer it to a Greek bank in the south (EU: “All Cyprus is in the EU we just can’t audit the north Cyprus banks right now”) and “Presto!”, the Money Laundramat. The Turks seem to be… quiet.

  3. The Rev Kev

    This is starting to resemble a sort of a Schrödinger’s sanctions. It is only when you open the box that you see if there is a real sanction of the SWIFT network there or not. I have no doubt that Washington & Brussels wanted to pull the trigger on a full SWIFT sanction but when New York, London & Frankfurt realized what that would mean to their bottom line, told the crazies ‘Hey! Not to fast, pardner.’ Maybe somebody tapped old Joe on the shoulder and asked him if he really wanted to push for a recession in an election year which a full SWIFT sanction would probably trigger, and so thought better of it. And maybe the EU’s Ursula von der Leyen was reminded that having 40% of the EU’s gas supply drop out because of a SWIFT sanction might not only be hazardous to the EU but also to the next stage of her profitable career. Conclusion? We are ruled by psychopathic children.

  4. Louis Fyne

    The irony is that these “sanctions” hurt Russian Atlantic-looking liberals and Putin’s domestic frenemies—the oligarchs.

    further irony, if one wants a lab to test MMT, Russian autarky is it. (versus USA, see USA goods trade deficit).

    1. PlutoniumKun

      I’ve noticed that the Guardian has started to refer to them as mere ‘Russian billionaires’, not oligarchs when they oppose Putin.

  5. hemeantwell

    Another round of applause for thoughtful and judicious work on a very complicated question. By way of contrast, Tooze’s clickbaity Chartbook headline:

    Chartbook #89 Russia’s financial meltdown and the global dollar system.

    What’s of value in the article is how Tooze, who did good work on international funding flows in analyzing the GFC and the Covid shock, here takes a look at Russian petrodollar recycling at what might be required from central banks.

    All told, Pozsar estimates that Russia may be responsible for providing in the order of $300 billion in funding to short-term money markets. If that funding disappears overnight it may deliver a serious shock to the Western financial system.

    1. Amfortas the hippie

      2 things from the Tooze:
      1″The crucial thing is that reserves of euros and dollars can be put to work only by selling them in western financial markets. Those transactions require intermediary banks. And those banks can be blocked from engaging in transactions involving Russia’s central bank. To do this to a fellow central bank involves breaking the assumption of sovereign equality and the common interest in upholding the rights to property. It is a major step not easily taken against a central bank as important and as much part of the Western networks as the central bank of Russia. It was not, as far as I am aware, contemplated in 2013-14. ”
      …so…state of exception to the entire edifice of Property Uber Alles and the rest of the neolib catechism?
      and 2.”The crucial point that this highlights is that Russia’s reserve accumulation, like reserve accumulation by other oil and gas producers such as Norway or Saudi Arabia, is a source of funding in Western markets. The reserves do not simply sit idly in central banks accounts, they are lent out. With sanctions, the funding provided by Russia’s petro- and gas-dollars is in jeopardy. And that impacts not only the Russians.
      If you sanction Russia and thus block hundreds of billions of dollars in the global balance sheet, you have to ask yourself: what happens to the other side of the balance sheet? Reserves are Russia’s assets, they are someone else’s liabilities, who in turn has balanced that liability with an asset and so on. Those chains can be ramified and complicated. ”

      so, for all the satanlike qualities, russia has still been embedded into the chokepoints of the whole system.
      and, echoes of 2008, and Enron, before it…how many “exotic financial vehicles” are wound up into this?
      the hypercomplexity that FIRE people seem to love can be a real downer when something essential breaks…especially when it’s not obvious(due to hypercomplexity) that that widget is essential(like the bad sensor essentially bricking the car).
      even allowing the energy carveouts in the sanctions regime…due to that tap on the shoulder…looks like there’s the potential for lots of black swans being born from all this.

      next on my list, a link embedded in the Tooze:

    2. griffen

      There is so, so very much a particular balance and nuance to the situation; do they put the screws to Putin / Russian oligarchy slowly but surely?

      And if the finance and financial market mavens are a bit unsettled or uncertain, then the rabble like myself are decidedly more disadvantaged. Unless one wades into global payments and global clearing processes frequently, it is not a read the cliff notes style of hurry it up education. My two cents.

      I highlighted a few items worth taking away.
      – Trading of Russian foreign bonds, maturity out to 2047. Probably not liquid today or anytime soon.
      – Immediate and subsequent increase to consumer lending rates
      – prior to the sanctions, Russia was active in short term markets and FX swaps / had rotated away
      from UST holdings during 2018

    3. Science Officer Smirnoff

      From Tooze:
      The latest report is that Russia will force companies to sell 80% of their foreign currency earnings – in other words buy rubles. This in effect substitutes private balance sheets for the central bank which is sanctioned. It is a de facto form of exchange controls.

      Whether this will be enough to hold the system together only time will tell.

  6. Bob

    Didn’t Russia avoid participation in the Western financial system in years past by a system of payment in kind (barter) ? I vaguely remember reading that Russia traded oil for Cubn sugar at one time.

    If so doesn’t this experience give the Russians some experience and some advantage in dealing with the Western financial system.

    I think that this means that the Western system CAN be bypassed at least to some extent. And that this may provide some, even if small, alternative route that will lessen the impact of SWIFT being cut off .

    I suspect the big impact is to Western financial institutions and even to large borrowers i.e. our recently departed dear leader (I hope).

    1. PlutoniumKun

      In the Soviet days, barter was surprisingly common. I remember being told as a schoolboy that Dublin’s buses were run on Soviet diesel – as part of a deal in exchange for Shannon landing rights for flights to Cuba. I’ve never been able to find out the precise details of that deal, or whether it was just an urban myth.

      I think straightforward old style barter is a possibility in certain situations, but it would take a lot of time, and a lot of trust to work out a deal like this, so its probably not a short term solution for the Russians.

      1. Robert Hahl

        I was told by someone who should know, that Douglas Aircraft once sold its products to Poland in exchange for canned hams, which were given to Douglas employees as part of their wages.

    2. amused_in_sf

      There was also a period when massive parts of the Russian economy were done via barter, post-1989. I remember a New York Times diagram of how agriculture, oil, electricity, fertilizer, etc. were all being exchanged instead of cash payments being made.

      Plus, they’ve been trying to bypass sanctions for a while now. Lots of experience and contacts, though of course every channel has a limit to the volume it can handle.

    3. Susan the other

      I’ve been thinking barter too. It is the most real-time method of direct value exchange. No need to go through a series of tokens, each requiring their own “exchange-rate”, to determine what the eventual value of the trade is (and always getting clipped here and there along the way). The neat thing about this old idea is that, globally, it could establish a global inventory of value – the global audit. Reducing the use of money to almost a local thing as an everyday medium of exchange. There would still be a need for either an international currency for travelers and whatever, but it could be created based on actual global value. Which might be harder to fudge. And exchanging local currency for global currency would be a more stable calculation if all nations/sovereigns were given an honest audit (assuming that every sovereign territory has a valuable inventory of assets – things like good soil, available water, a variety of mineral resources, good education and human resources) – it’s a long list of actual stuff but it would be more accurate than the screwy definition we now have of an exchange rate which is a totally circular bit of reasoning that seeks to maintain a “strong” currency for purchasing power by actually impoverishing people … and etc. Dreaming on.

    4. Harry

      Not deliberately but yes. My uncle, the finest man I ever met, used to do the barter trade in the 60s and 70s. He bought bulk chems from Warsaw pact countries, and would deliver things they needed which was often sugar. Very profitable. He made about $20 bucks from it. His only difficulties were in Bulgaria, where truck shipments were often hijacked.

      But back in those days, there were almost no prohibitions on the trade. No one really tried to stop it. I doubt it would work today.

      1. Harry

        Incidentally, he was a Lvov native. He didnt speak well of the locals. They were very helpful to the occupying power in getting rid of Lvov’s excess diversity at the time. But cos he was born in Lvov, he got a crash course in Russian, German to go along with his native Polish and Hebrew.

  7. griffen

    Will the Fed / New York Federal Reserve have to be on the ready to basically ensure global central bank functions are stabilized so as to avoid any remote potential for a “Lehman moment” repeating? I say this based on some reading of a write up, the yahoo article is sourcing Credit Suisse short term rates and strategy analyst Zoltan Poszar.

    Polszar was a go to expert in describing the details behind the short term repo markets conflagration in mid to late 2019. I am incredibly hesitant to speculate further, but global activities must have a clearing function performed in real time / same day. Situations like this are incredibly fluid and fast paced.

    Go long wheelbarrows for the Russian currency.

    1. Yves Smith Post author

      Except Polszar acted like it was a big deal, when it was the result of the Fed being so dopey as to not understand what would happen when it tightened when it had gone to reserves (for nearly 10 years) as its main mechanism for managing short term rates AMD had fired the two top guys on the NY Fed trading desk, who presumably knew how to do it the old fashioned way, daily interventions.

      Despite the scale of the screw up, it was strictly and totally a Fed inflicted wound…..and that should have been scary, that the Fed was and stayed so out to lunch.

      It has absolutely nothing to do with bank solvency as many incorrectly implied.

  8. Bart Hansen

    Setting aside that Russia can sell its gas to China and SE Asia, are they not reluctant to cut of Europe for fear of being broadly called an unreliable source of energy?

    1. Yves Smith Post author

      They can say they won’t take payment in a currency they aren’t allowed to spend. That is not hard to understand but the West will ignore any reason why.

    2. PlutoniumKun

      Russia can’t sell all the gas it wants to China and SE Asia instead of Europe because the pipeline infrastructure is not in place and it would take many years – maybe decades, to restructure the Russian system to change the direction of flow. It also doesn’t have the capacity to turn it into LNG either.

    3. Tj

      War is always a force majeure moment. It wouldn’t surprise me if the pipelines are being shut down already. It would be almost automatic in the case of war; those boys take a while to shut down safely.

      1. Marlin

        So far I have heard, that the volume of gas piped through Ukraine to Western Europe increased since the war started.

  9. Savonarole

    The dollar de-facto monopoly on trade is the biggest collateral damage so far.
    This will have more consequences long-term than who’s ruling Ruthenia. Some should have think twice.

  10. Maxwell Johnston

    This is a fascinating subject (for me anyway) and I look forward to hearing more input from Clive and other specialists as this drags forward. I simply don’t see how the global economy functions without Russian exports (not just oil/gas but also grain, metals, nuclear fuel, the list is long). Nor do I see how Russia will agree to continue selling its exports for USD/EUR which either cannot be spent or are subject to confiscation.

    I think the USA/EU has badly overreached by doing this alleged SWIFT ban and freeze on central bank assets (alleged because I still don’t see exactly how it will work in practice). It looks petty and will be used by Russia as propaganda (i.e., stealing Russian money). And it’s a card trick that can only be played once (like hijacking jets and flying them into skyscrapers); once bitten twice shy, and the Russians are unlikely to repeat this error (and the Chinese will surely learn from it).

    Short run, I expect workarounds. Maybe banks in neutral locales (Dubai, HK, K-stan) will set up terminals on both systems (SWIFT and the China/Russia analogues) and charge handsome fees to buyers and sellers for doing the USD/EUR to ruble switch.

    Long run, I expect China/Russia to solidify the details of this new independent payment system and then be joined by their satellites and major trading partners. This will prove to be the biggest consequence of the Ukraine war, after the dust has settled.

    1. Dave in Austin

      90% of the worlds Neon, required in chip manufacturing, comes from Russia… and 60% of that is purified in one plant located in Odessa before it is exported. Somehow I expect that plant is very well marked on all Russian, Ukranian and NATO military maps.

      1. RobertC

        Dave — I agree as are all export-oriented industrial and transport facilities in southeast Ukraine. For instance, Volkswagen’s wire looms are made in Ukraine.

        Sadly the negotiations did not result in a ceasefire so now begins the Russian punishment of Ukraine’s military, industrial and transport facilities and the shutdown of its civil infrastructure.

      2. Bob

        Are you sure about Neon production ?

        Doesn’t neon exist in very small quantities in atmospheric air ?

        And is not the preferred method of neon production that of fractional distillation of liquefied air ?

        Further since fractional distillation of liquified air is one of the most common methods of oxygen and nitrogen production with the byproducts being noble gasses i.e. xeon, argon, neon no one country has a monopoly on neon production.

        It is doubtful that Russia or any other country has a monopoly on neon production.

  11. Anthony G Stegman

    We’ve all been told repeatedly that as a share of global GDP the Russian economy is close to a rounding error. So why all the worries about the side effects of a complete ban on Russian access to SWIFT? If the rest of world did zero trade with Russia what would be the overall impact to the global economy? A minor recession?

    1. Maxwell Johnston

      Russia is the world’s number 6 economy in PPP terms (purchasing power parity, which compensates for undervalued exchange rates) and has an outsized footprint in many key sectors: oil/gas, grain, metals, fertilizer, and nuclear fuel, to name a few off the top of my head. Things people need vs things people want. The overall impact could be serious in terms of inflation and supply chain disruptions.

  12. schmoe

    It is worth noting that Iran has survived four years without SWIFT. On the one hand they were likely less interwoven in the West’s financial structure so less of a shock to be removed, but Russia is much more self-sufficient than Iran is for basic needs (ie, Iran cannot feed itself).

    I cannot imagine China supporting this sanctions regime, especially after the Huawei sanctions.

    One other item, Putin needs to emphasize that this hardship is necessary to avoid what happened in the 1990s when US/K-backed oligarchs stole everything. After all, I firmly believe that Putin’s cutting down to size some of the more arrogant oligarchs is the crux of this matter.

  13. Matthew G. Saroff

    Yves, this analysis is valuable, but you are missing an important export for both Russia and the Ukraine, grain exports.

    Together, they make up more than ¼ of all wheat exports, with most of this going to places like Egypt, Libya, Tunisia, Turkey, etc.

    If those exports are disrupted, which would benefit both American and EU farmers by increasing prices, it is likely that we would see massive protests triggered by this, just as we saw the “Arab Spring” protests triggered by a spike in grain prices.

    If US and NATO/EU politicians are short sighted (very likely) then they will find a way to exempt energy while including grain exports, which is going to lead to global disruption and hunger.

    Here is an interesting infographic on this.

    1. Yves Smith Post author

      I think you have this backwards.

      Turkey is the world’s biggest maker of flour. Turkey will therefore not go hostile to Russia despite US pressure. They’ll have excuses to feign neutrality.

      For a large, single commodity trade, Russia and Turkey could barter or Turkey could pay in euros. Turkey is not a dollarized economy.

      Russia exports only $93 million in cereals to Libya. So taking care of Turkey would probably go a long way toward solving the Middle East problem, since it looks like much of the Middle East purchasing of Russian wheat is indirect, via Turkish flour, rather than direct.

      1. RobertC

        Pardon my skepticism but it’s not clear that Russia would export to Turkey when they can sell to China, India, et al Asian nations. And if I’m correct about Putin and Xi intentionally weakening the Atlantic Alliance, I don’t see Russia selling wheat, etc to Turkey, Black Sea access notwithstanding.

        Regarding Ukraine selling to Turkey, I believe Russia will either achieve independence for the major Ukrainian port cities Odesa, Mykolaiv, and Kherson or else inflict costly (but repairable) damage that prevents their use this Spring, in which case it’s likely there will be an Arab Spring this Spring. I believe either outcome is acceptable to Putin.

        Please note Russia just destroyed the Ochakiv naval base we built in 2017. Soldiers love blowing stuff up (with YouTubers watching) and Russian soldiers are excited that Putin is giving them the go ahead.

        1. Yves Smith Post author

          Please don’t spitball here.

          China already decided to shift its wheat imports from the US to Russia.

          Of other importers, Egypt is #1, Indonesia #2, Turkey #3. India is not even on the top 15 list.

          The other “Asian” countries that are in the top 15 are in the US sphere of influence: Japan, the Philippines, and South Korea.

  14. RobertC

    I believe Russia’s central banker Elvira Sakhipzadovna Nabiullina has prepared for, within the obvious constraints, both exclusion from SWIFT and sanctions on the central bank. Both actions will damage the Russian economy and Putin’s popularity but I believe her preparations will ensure her nation’s economic survival as commodity prices and shortages threaten Europe’s economic and political survival.

  15. Tom Stone

    This is going to have an effect on both interest rates and confidence, both of which affect home prices with a lag.
    Money has been getting tighter for about 2 weeks ( Noticeably tighter underwriting) as well as rates starting to rise.
    Let the mess in the Ukraine hang on for a month or two and another Covid variant show up while lending standards tighten and it’s byebye bubble even with rates at 4%.

  16. SteveW

    The big guys/contracts will likely work out the settlement or barter mechanism (such as gas for German precision machinery). Individual consumers can use unipay for Chinese products (if they have Chinese bank accounts). Medium and small enterprises would have major problems getting things setup. Too big for cash and carry such as unipay but too small for major barter/exchane/settlement. Might need government intermediaries to get import/export done to bypass swift. So the biggest hit is to the overall business infrastructure/plumbing, a major hit on modern society.

  17. 40Wall

    TD on Monday wrote that “the private sector will need assistance from the CBR in sourcing hard currency,” which in turn depends on energy exports. “If Russia is able to continue to export oil and gas, the $200 billion of revenues here should be enough to cover our estimate of around $80 billion in short-term hard currency needs of the banking sector and government,” Rich Kelly and Cristian Maggio said.

    They also delivered a straightforward assessment of what, exactly, the West is trying to accomplish with the measures targeting the central bank. This might be helpful for readers who’ve expressed incredulity over the last 24 hours regarding how powerful Western sanctions actually turned out to be.

    “Sanctions against the central bank are meant to remove the power of the lender of last resort to intervene in two key areas — defending the currency from depreciation and backstopping domestic banks with hard currency needed to meet foreign financial obligations,” Kelly and Maggio wrote.

    So, yes, folks. The US (in this case acting in concert with the EU and UK) has the power to effectively strip a foreign central bank of its lender of last resort status vis-à-vis the capacity to protect its own currency and provide its banks with hard currency. This is what the “de-dollarization” crowd and the Kremlin propaganda didn’t tell you. The US can 1) engineer a currency crisis in an emerging market, then turn right around and 2) unilaterally impede the central bank’s capacity to stop the crisis.

    That’s the reality facing Putin’s Russia. As for the country’s gold, TD noted that, “they would likely find it extremely difficult to find a counterparty willing to do a location swap with gold located in a Russian vault… leav[ing] physical delivery in a way which isn’t sanctioned as the next outlet.”

    Good luck with that.

    1. Yves Smith Post author

      You seem not to have read the post.

      The Russian central bank intervened in the FX markets this morning in reasonable size. It was not barred from SWIFT, at least not yet.

      Our contact, at a TBTF which is getting the actual operating implementation, says it looks like Russia will be able to use cut-outs.

      The analysts are reacting to press releases, which as Clive said are too fuzzy to know what is being implemented. What is going down appears to be a lot flabbier that what was advertised.

  18. RickV

    The advent of the Javelin anti-tank, the Stinger anti-aircraft, and the Turkish Bayraktar TB2 drone have changed warfare forever. In large part tanks, armored troop carriers, helicopters, and low flying jet aircraft are gone from the battlefield as effective vectors of force. The Russians did not learn the lessons of the Armenian Azerbaijan War in 2020. We are now watching the development of financial warfare to replace it. We can only hope the doctrine of Mutually Assured Destruction continues to hold.

    1. Paradan

      Lets say Russians have lost 200 vehicles in the past few days, that’s like %1 of what they have deployed in the area. Can you find and authenticate photos of 200 wrecks? Also if the TB2 drones were the “Terrors of the Sky”, then there would be dozens of drone strike videos. Give the insane propaganda blitz we’re seeing, they would dominate all video sites.

      A war this size takes time, and you can’t judge whats going on after only the first week.

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