As the EU wrings its hands over what to do about renewed fighting in Eastern Ukraine, Russian bankers are opening a new front against the West: by threatening to build a financial transfer system that Western sanctions can’t throttle. The FT reports:
The suggestion that Russia could be shut out of Swift triggered widespread alarm in Moscow’s financial community when it was floated by western politicians last summer. Russia’s banks rely heavily on the Belgium-based payments system for both domestic and international payments. However, the move was at the time considered too punitive a sanction, being described by one adviser as “the nuclear option”. […]“The more you press Russia, I do not think the situation will change,” he said, pointing out that the country was moving to reduce its reliance on western payment systems such as Swift. […]Igor Shuvalov, Russia’s deputy prime minister, echoed this theme. “We are developing our eastern vector,” Mr Shuvalov declared, pointing out that although efforts to build links with China had been under way before the crisis, they had dramatically intensified since sanctions started, as Russia looked for alternatives to the west.Mr Shuvalov said that the so-called Bric countries (Brazil, Russia, India and China) were ready to help each other in a financial crisis too. “Large Chinese investors are coming to us,” he said.
It is important not to underestimate the amount of bluster and bluff in Russian talk about its friendship with China and its turn to the east. Repeated failures to build an effective Russia-China partnership date back to the era of the Soviet Union and Mao. But both countries, and they are not alone, are deeply and seriously concerned about what they see as the excessive power that the present day SWIFT system gives the U.S. and its Western allies; essentially, the ability to cut a country’s banks off from the global financial system. These are the sanctions that have been so effective against Iran. Russia and China, and a number of other countries, would like very much to break this weapon, something they see as one of the chief props of American world power.It isn’t easy to build an alternative, and countries like China which depend on large flows of both investment and trade with the rest of the world, and whose financial systems are pointed toward greater rather than less integration with the global system are somewhat less eager about building an alternative than countries like Russia. Furthermore, lots of ne’er-do-wells like Venezuela, Argentina, or perhaps a Syriza-led Greece would love to join an alternative system thinking that it offers them new chances to stiff a new set of creditors.Still, the more powerful the sanctions weapon becomes, and the more we try to use it, the greater the incentive we create for other people to challenge it. This should at the least cause the West to think twice before slamming sanctions down when somebody jaywalks; this is a tool that should be reserved for great dangers, not pesky annoyances. Yet there’s a longstanding tendency in the West to use sanctions as a substitute for military action—public opinion demands action, politicians don’t want to send troops (and think the public demand for action will cool rapidly when the body bags start coming home), so sanctions become the way to look tough while staying cool. If the extremely powerful SWIFT sanctions start getting used in this fundamentally unserious way, we can expect (and will deserve) some blowback.Meanwhile, it’s worth noting that the efforts of countries like Russia and Iran to fight back against the American power embodied in the structure of the world financial system is not unlike the struggle of many countries against the internet, another global system that gives the U.S. inherent advantages. Here China is taking the lead, using both the Great Firewall of China and an increasingly focused and well-financed push to drive Western tech suppliers out of its market to create a true Sinosphere: a cyberworld that has connections to the global internet but is anchored in Beijing.Revisionism these days isn’t just an affair of boundaries (though Russian troops in Ukraine and Chinese maritime expansionism remind us that the old fashioned revisionism is still around); it extends into the financial and digital realms.The task of maintaining a peaceful and liberal world order is getting harder and more complicated; this means Americans and our allies have to become smarter and more serious about what we do and how we do it.