Streetwise Professor

January 27, 2015

A Good SWIFT Kick

Filed under: Economics,Politics,Russia — The Professor @ 7:39 pm

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.

Today Medvedev (yes, he’s alive! and awake too!) reiterated the threat:

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.)


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  1. SWIFT is merely a secure messaging system, and if Russian banks will be cut off from it, they will have no trouble finding alternative channels to communicate with their correspondents in the west. Maybe I’m overthinking it, but perhaps Medvedev and Kostin are making threats about SWIFT in order to distract attention from other measures which they consider more threatening.

    P.S. Kostin is a remarkable figure. While Russians back home have been stocking up on buckwheat before prices increase further, he was hosting a lavish party in Davos with caviar and live music by Al Di Meola. During his tenure the bank has received two government bailouts, but in spite of this, he’s the highest-paid official of any government-owned company in Russia.

    Comment by aaa — January 27, 2015 @ 10:48 pm

  2. It’s pretty clear to me that the Kremlin is scared to half-death of getting cut off from SWIFT. “Unlimited response” does not sound like a credible threat, more like a paroxysm of panic. What I don’t understand is how the ayatollahs have survived without SWIFT since 2012.

    Comment by Alex K. — January 28, 2015 @ 1:58 am

  3. How does the EU pay for Russian gas if Russia is excluded from SWIFT?

    Comment by Kommie — January 28, 2015 @ 2:56 am

  4. The price of the Dollar at any given time is always a compilation of different forces. It is very rare to see all of the forces lining up on one side of the boat. More often there are 6+s and 2-s.

    Today we have a strong dollar because:

    -The US economy is outperforming everyone in the G10.

    -The BOJ has done everything in its power to weaken the Yen.

    -The ECB has just lit a big QE fuse – the clear intention of this policy is to cheapen the Euro.

    -The US Fed keeps saying they will increase % rates later this year.

    -Global commodity prices have fallen. This weakens the C$ and the A$ (and also the Ruble).

    -Global politics have created a safe haven demand for dollars.

    -Bond yields in German/France/Japan are a fraction of those in the US – the global carry trade goes to the High Yielder – today that is the US.

    These factors (and some others) have been the source of the $ appreciation. They are transitory – two years from now some on this list will turn negative for the $.

    We also have the US waving a very big stick at Russia and Iran. The idea that the USA will kick Russia (China next?) off of SWIFT is a very aggressive step. If you were Russian (or Chinese, Iranian, Indian, Brazilian) You would have to feel threatened by the US action. In the short-term you have few options, SWIFT is an essential part of the global payments system. But long-term you would look for alternatives. And that is exactly what China, Russia, Iran, India and others are doing today. Over time they will be successful. Alternative payment system will evolve because the one run by America can’t be trusted. As this progresses the dollar’s role in global finance will be diminished. The need to maintain global reserves in $s will decline. Using SWIFT as a political weapon today is shooting the $ in the foot.

    In January of 2015 the forces that favor the dollar trump those that don’t. As a result, the dollar is higher on net. But if you can’t see how the USA using the global payment system as a weapon is not a long-term threat to the Dollar’s role as THE global currency, well, then I would say you’re
    not so streetwise at all.

    Comment by Bruce Krasting — January 28, 2015 @ 8:50 am

  5. First of all it’s worth mentioning is that Russia could be cut off from the SWIFT banking system from one minute to the next. The result would be devastating and the felt within one month. The GDP would fall no less than 10% from this one act alone. Not only would Russian banks not be able to trade with foreign banks, but Russian banks would not even be able to trade amongst themselves.

    There is another way that Russia could be excluded from the SWIFT banking system.

    If for example the USA, Canada, Australia, Germany and the UK were to officially classify Russia a ‘Terror Exporting State’ then they could easily bar Russia from using the SWIFT banking system. There need not be a consensus to do so by all 28 European states. The USA could do it on it’s own but a better scenario would be a few of the larger countries joining forces and Russia would be booted from the SWIFT banking system. No other country would be able to use it to assist Russia. Russia would have to trade in cash and that is very difficult to do when dealing with million of dollars.

    Comment by Michael Brytan — January 28, 2015 @ 10:01 pm

  6. In January of 2015 the forces that favor the dollar trump those that don’t. As a result, the dollar is higher on net. But if you can’t see how the USA using the global payment system as a weapon is not a long-term threat to the Dollar’s role as THE global currency, well, then I would say you’re not so streetwise at all.

    The dollar’s role as the global currency is akin to Churchill’s description of democracy: the worst option, except for all the others. Putin never quite understood that a reserve currency is something adopted freely by millions of people, and not something decided in a smoke-filled room by a shadowy cabal of global financiers. This is why he came out with the laughable suggestion that the rouble “should” become a reserve currency, he honestly believed it was something decided by a committee somewhere. Truth is, nobody trusts the rouble not to collapse – hell even Russia’s own politicians, let alone the population, didn’t trust the rouble not to collapse. And collapse it duly did. So if not the dollar, what other currencies? The Euro? With Greece, Italy, Spain and Portugal still on board? No chance. The Yuan? A look at the number of Chinese shifting their money abroad will give you an indication of how much confidence they have in their own systems.

    So yes, Iran, India, and Russia could create their own international payment system to challenge the dollar, just like they could create their own smartphones to challenge Apple, OS to challenge Microsoft, and aircraft to challenge Boeing. But for reasons that are quite easy to identify they can barely get traffic lights working properly. It is their own sheer incompetence that is preventing them from gaining independence from the US banking system, but if they were even half competent they’d not need to in the first place.

    Comment by Tim Newman — January 29, 2015 @ 1:46 am

  7. Michael Brytan: I would consider creating another designation – “Hostile State” rather than “Terror-exporting State”. Then amend Trading with an Enemy Act to include a state designated as such in addition to those with whom the US is in a state of war.

    A ‘hybrid’ warfare calls for appropriate changes in legislation.

    Comment by LL — January 29, 2015 @ 12:32 pm

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