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.
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!
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.
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.
…a modest proposal
Using a variety of spices, salts and seasoning, we devour debts lest a banquet of consequences come calling from the small debtor, but alas there is no free lunch however.
This whole thing about trashing the SWIFT system which helps underpin the US dollar seems to make no sense. The only thing that comes to mind is that officials in Washington were utterly convinced that for all those other countries, There Is No Alternative. There was no way that the US dollar could ever be sidelined. Of course the actual workers in the Treasury Department might have voiced a lot of protests as well as misgivings but I suspect that nobody was listening to them.
We’re at this crazy moment where the real estate market is finally crashing everywhere english is spoken with oodles of inventory about to chase prices down, just as the almighty buck is under stress as being all that, which of course would effect all of those countries in particular.
Glad the objects of my desire have no price tags on them and never will.
I believe the old wall street saying, “Bulls make money, bears make money, pigs get slaughtered” should have some counter part that applies here to empires post their peak and ready for the dustbin of history as they do something really dumb just because the assume they can get away with it.
Thank you, Yves.
The new African bank payment and settlement system, https://papss.com/, is also being worked on for integration with what China has and is being proposed by Lula for Latin America.
A team of African former Rothschild bankers and a PM of Benin, Lionel Zinsou, worked on this project. Zinsou is well aware of the politics.
China has been advised on this, and its reserves in potential adversary states, by the likes of Mervyn King.
It’s not just Russia and China. There are still some Gaullists in France who oppose US (and EU) hegemony, political and financial, and think France has a role to play in a multipolar world. One wonders if a period of chaos and institutional reform after an inconclusive second round of lower house elections in France could allow this “courant” to reemerge. I will leave that musing to NC’s David to comment further on.
I blame it all to paranoia. The US blob, the several security agencies, are acting as if they see enemies everywhere. Anyone included NATO allies can turn enemies in the blink of an eye and treated accordingly If they do not strictly follow US patronage. The seemingly united Western front might be rotten inside without us knowing it.
You mention the Gaullists and I see them as kind of very conservative nationalists. I don’t know if, for instance, Jean-Luc Mélenchon plays also the nationalist game. Is Left-nationalism a possibility in France?
Re today’s post on the evils that central banks have done and are doing: Does China’s central bank display any “better” (for us mopes) skills and behaviors in its handling of money and “policy?” Will the SWIFT replacement, which of course will be heavily lobbied and punched around by existing towers of great wealth and influence, be any wiser, or is it just the case that a money-based system ineluctably will flow into the same old channels, or something pretty indistinguishable from them?
The powers that be seem to agree on what they want the political economy of nations and the world to look like. Any chance the mopes will ever agree on a set of elements of a metastable model of commensal political economy? And figure out how to get there, short of violent dismantlement by war and/or revolution?
The billion dollar question, isn’t it? When I read the Sino-Russian vision for the world, I’m drawn to it. I’m also wary because almost any system can be corrupted (and perhaps all political/economic systems experience entropy). But I’m willing to give it a shot since it mostly sounds like a UN as it should function. Perhaps the basket of currencies and commodities is a better way to denominated reserves.
Economics being far from my strong suit, I appreciate the knowledge of writers and commenters here.
My own modest proposal would be a UN Security Council that did away with the veto in favor of consensus. Plenty of room left for dysfunction but at least it would require effort at dysfunction.
Withholding consensus would be the functional same as a veto, only without the onus of saying ” I veto”. One of the “5 Powers” could say ” I’m still thinking about it” and achieve the same thing.
But if the 5 Permanent Members think that “consensus” really would be giving up the veto, they will all achieve consensus on vetoing giving-up-the-veto.
russia and china also claim that full sovereignty will be respected, and countries can develop at their own speed.
this will of course set the fascists free traders bouncing off the walls. its why you see such crazy policies coming about. the free traders are simply enraged that anyone would dare to enact a system that cuts their idiotology out of power.
It seems to me that in light of our massive fiscal and trade deficits, if the US ever loses its ‘exorbitant privilege’ of dollar hegemony our overseas empire of military bases will quickly become obsolete. Our sanctions policy has therefore handed our self-made adversaries the ultimate weapon.
One can only hope! I consider the war machine in DC to be the most feared adversary of all, with its offshoots in every police department. As it’s unlikely to be brought to heel by citizens, its own goal is all the more welcome.
I don’t think that our current generation of leaders (or mismanagers really) thinks about the long term implications of what they have done to Russia by freezing their currency reserves.
In the long run, I can expect that the US dollar will play a smaller role in international commerce. That was inevitable with the rise of China, but is now accelerating with their most recent actions. Freezing the Russian currency was a rash, emotional act by the neoconservatives.
Apparently the rumor (and take this with a grain of salt) has it that the US Federal Reserve opposed the freezing of the Russian foreign reserve, and fought with the neocons on this. You can learn more if you want to by watching the Duran.
This will result in the short to medium term in a loss of living standards. The US is heavily reliant today on the import of manufactured goods. A weaker USD means that the import of said goods will cost a lot more than it did previously.
In theory, a weaker USD means that American exports may be more competitive.
Of course, this requires that the ruling class have the competence to develop a competent industrial policy. I do have one quibble with the article above – the skills needed to develop a manufacturing sector are not the same as a software programmer at Silicon Valley, a banker at Goldman Sachs, or a consultant for a company like McKinsey.
It would also require that the ruling class think longer term. Perhaps the one possible area for improvement is that a loss of US superpower status might exile the current leadership from actually running things.
Yes, the plebes are in for a wild ride!
The US, with broad oceans to help defend its territory and nuclear weapons, will remain a superpower despite the loss of financial hegemony. However, the plebes may experience a ride similar to the break-up of the USSR.
It just might be time to hedge one’s bet by holding securities in Remnimbi and Roubles, rather than Dollars.
Forgive the noob question, but is a strong dollar bad for the US economy as it exists?
If you are a company that sources domestically and sells abroad (even if the contracts are in USD, your customers’ capacity to pay is based on their own currency), I cannot see how it could be good, but maybe someone can disabuse me.
I believe your logic is correct. “Strong” means expensive, which means the price of US goods goes up for foreign buyers.
“Bad” for whom? A strong $USD favours US importers and harms US exporters — and vice versa. There is no given exchange rate that is universally bad for all US citizens.
Which makes the trade deficit bigger.
So which other reserve currency (multilateral) countries will deficit spend like we have done? Will it be necessary in a digital world? Or a world that recognizes the limits to growth? Our existential reality is changing so quickly we will have to adapt to it with new methods. Seems like SWIFT was based on industrial-military power and technology, which is now ubiquitous. Instead of perpetuating the power-trip and risking nuclear war, we can now spend into the environment; make repairing the planet the new industrial engine that runs the economy. Deficit spending into the environment really isn’t deficit spending. It’s servicing a long overdue debt.