They say a foolish consistency is the hobgoblin of little minds, so it must be that Russians have truly expansive minds indeed. On the one hand, by May they will have established a payments system that will eliminate dependence on the international payments system called SWIFT. The Russians have also been boasting about how deals with China and Iran to conduct business using their own currencies rather than the dollar will immunize them from American financial measures. Do your worst, stupid Americans!
On the other hand, excluding Russia from SWIFT would be a declaration of war. According to VTB CEO Andrei Kostin, the day after this occurred, ambassadors would be leaving capitals.
Western countries’ threats to restrict Russia’s operations through the SWIFT international bank transaction system will prompt Russia’s counter-response without limits, Prime Minister Dmitry Medvedev said on Tuesday.
“We’ll watch developments and if such decisions are made, I want to note that our economic reaction and generally any other reaction will be without limits,” he said.
Without limits! And that goes for non-economic reactions too! So I guess that Putin plans to do a reverse Reagan, and in the event of a SWIFT cutoff take to the airways and intone “My fellow Russians, I’m pleased to tell you today that I’ve signed legislation that will outlaw the US forever. Bombing begins in 5 minutes.”
Of the two inconsistent sets of statements, the ones where the Russians freak out about being shut out of SWIFT are much more likely to be true. It would be a devastating blow to the Russian economy, and even if a parallel system is in place, unless foreign entities agree to use it, it could not supplant SWIFT for international transactions (including getting cash out of the country!) And even if foreign entities were considering ROTS (Russian Overseas Transactions System, as I’ve decided to call it), they could easily be persuaded not to by the US imposing penalties on those who did. Due to the FUD effect, even the potential for such penalties would have a deterrent effect.
Word to the wise: autarky ain’t all it’s cracked up to be.
Realistically, though, I don’t think either the US or the Europeans have the fortitude to take this step. Russian hysterical threats of “unlimited” responses are no doubt intended to feed Western reluctance. Normally I’d say the Russian threats aren’t credible, but Putin is just crazy enough that there’s room for doubt, especially given that a SWIFT kick would be an existential threat to the Russian economy.
The Greek election, which has put a pro-Putin coalition in power, makes European action even less likely. Once the EU’s Greek gangrene was only financial: now it has infected foreign policy as well, as just today the new PM rejected an EU statement blaming Russia for the Mariupol attack, and threatening additional sanctions. The Euros should have amputated long ago, and are likely to rue their failure to do so.
It is unlikely, therefore, that a SWIFT cutoff will be used, precisely because it would be so devastating. But if Putin goes all in in Ukraine, who knows?
One last humorous aside. Zero Hedge highlighted the Medvedev threat and Russia’s move to reduce its exposure to the dollar system. ZH claimed that this is another in a series of blows against the dollar: de-dollarization is one of its favorite hobby horses to ride.
So riddle me this, Tyler: if there is such panicked flight from the dollar, led by such countries as Russia, China, and Iran, why is it up almost 20 percent (as measured by the DXY) since May? That would be the most bizarre flight from a currency in recorded history. (h/t Ty-not Tyler-for pointing me to the ZH post, and the contradiction.)