Reserve theft and SWIFT abuse will end US economic hegemony

Anis Chowdhury

Anis Chowdhury

The US and its allies have frozen Russia’s foreign currency assets as part of their punitive sanctions against Russia for its special military operations in Ukraine. They are contemplating to confiscate Russian reserves to pay for Ukraine’s reconstruction.

The European Union (EU) also blocked Russian banks’ access to the global payments messaging system, known as SWIFT to disrupt payments for Russia’s valuable energy and agricultural exports.

But these unilateral moves, unauthorised by the United Nations Security Council (UNSC), are likely to undermine the US dollar’s dominance, and advantage China, seen by the US as a geo-political rival due to its growing economic strength and influence.

Reserve theft

Before seizing about US$300 billion of Russia’s reserve, the US confiscated reserves of about US$9.5 billion Afghan and US$342 million Venezuelan.

Washington Post columnist Daniel W. Drezner referred to the seizing of Afghanistan’s reserves to benefit US citizens as “theft.”

These illegal and arbitrary actions should have been seen as warning signs for others who can easily be targeted for any number of reasons.

Some bankers have called the seizer of Russian reserves a turning point in financial history, predicting that US rivals have new incentives to start using other currencies. Similar warning has also come from the First Deputy Managing Director of the IMF.

SWIFT abuse

SWIFT – Society for Worldwide Interbank Financial Telecommunication – is a instant messaging system to inform its users when payments have been sent and arrived. It allows the smooth and rapid transfer of money 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.

It is jointly owned by more than 2,000 BFIs, and governed by the National Bank of Belgium together with the central banks of Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the UK, and the US.

Its joint ownership was meant ostensibly to keep it out of geopolitical disputes. However, born during the old Cold War era, its Western control has ensured that it could be used against the old foes.

The Western action to bar Russia from SWIFT has undermined trust in it. Other States wonder whether they could equally be barred if deemed recalcitrant by the West.

In fact, the EU prohibited SWIFT in 2012 from providing any services to Iranian banks as part of the US-led sanctions against the country. It prevented transfer of any foreign funds to Iran until 2016 as part of the nuclear deal.

US hegemony

Although based in Brussels, with a data centre in Virginia (USA), SWIFT is a “financial panopticon” that allows Washington’s surveillance of cross-border fund flows. In the current SWIFT system, banks of both importing and exporting countries need to have USD accounts in American banks for payments in dollar The US’s actual policing happens out of New York, where 95% of the world’s dollar payments are settled through the Clearing House Interbank Payments System (CHIPS), a private club of 43 financial institutions.

CHIPS settles US$1.8 trillion in claims every day using its account at the Federal Reserve. All CHIPS’ members maintain US offices, and are subject to US law, making it easier for authorities to catch and punish. CHIPS members like BNP Paribas SA, Standard Chartered Plc and others have paid nearly US$13 billion in fines over nearly two decades of Iran-related sanction violations.

US exorbitant privileges

The US dollar being the currency of choice for international trade and global reserves entitled the US to “exorbitant privilege” since the end of the World War II. The US profits enormously from the difference between cost of printing dollar notes and their face value that one must pay to obtain them for settling international transactions. 

The US also pays paltry interest rates for the dollar that countries keep as reserves, enabling it to borrow cheaply to fund its ever-growing deficits and debt; spend more on its military; and still never has to worry about its  currency collapsing because it is used everywhere. A strong dollar makes foreign goods cheaper.

For quite sometimes countries have been using other currencies, e.g., Euro, for international transactions and reserves. This has seen gradual declines of  dollar’s dominance. Since the launch of Euro in 1999, the share of USD in the global foreign currency reserves declined from 71% to 59% in 2021.

This process is likely to accelerate as the US is increasingly confiscating other countries reserves. On 20 April, 2022, Israel, a staunch US ally, unveiled a new strategy for its more than US$200 billion of reserves to reduce the share of US dollars and increase portfolios of currencies of its other major trading partners, including China’s Yuan. As of the end of last year, Russia held nearly a third of the world’s Yuan reserves.

Alternative systems

The barring of Iranian banks from SWIFT triggered China to develop its own financial messaging system, CIPS (Cross-border Interbank Payment System), operational since 2015, administered by the People’s Bank of China. As of 2021, CIPS had 80 financial institutions as its members, including approximately 23 Russian banks.

Russia, threatened to be excluded from SWIFT during the Crimea crisis in 2014, developed its own messaging system SPFS (Financial Message Transfer System), using the same technology available to both SWIFT and CIPS. It was launched in 2017, and as of April 2022, most Russian banks and 52 foreign organizations from 12 countries had access to SPFS. Both CIPS and SPFS are still in infancy, largely confined to domestic BFIs.

However, the current event has certainly created an urgency for both geo-political rivals of the US to expand their systems or even unify them.

Rivals are active

Thirteen years ago in the wake of the 2008-2009 global financial crisis, China called for reforms international reserve currency system away from the currency of a dominant country.

Russia has complained bitterly for years about the US abusing its currency supremacy. Russia has attempted to de-dollarize for years by severely cutting its use of greenbacks in trade with Brazil, India, China and South Africa, and in the holdings in Russia’s national wealth fund.

Vladimir Putin said last year that the US is biting the hand that feeds it, by reducing confidence in the US-centric system. He warned, “the US makes a huge mistake in using dollar as the sanction instrument”.

China now has a digital currency system with a so-called e-yuan (or, e-CNY) app that has over 260 million users. The USD share of China’s assets declined from 79% in 2005 to 58% in 2014, presumably falling further since then. 

The People’s Bank of China is currently doing extensive pilot runs with its digital yuan, e-CNY. The POBC says, e-CNY is “technically ready” for cross-border use. As China’s share in global trade rises, and if importers from China are required to send their payments in c-CNY then SWIFT will never see the transactions, and CHIPS will not have to clear them. Indeed, no Western bank may be needed to move funds across borders.

US hegemony’s inevitable decline

The key pillars of US economic hegemony are SWIFT, CHIPS, and the dollar. Weaponising any one of them should naturally encourage others to look for alternative systems for smoother cross-border transfer of funds.

The Russia-Ukraine conflict has accelerated transition to a multipolar world, a process that has been underway for some time. However, what is new and different now is the manner in which the US’s geopolitical rivals Russia and China are cooperating to shift the multi-polar world in their favour. The process will be further accelerated by others, especially China’s Belt and Road Initiative and trade partners, joining them.

Anis Chowdhury, Adjunct Professor, Western Sydney University and former senior United Nations official (anis.z.chowdhury@gmail.com)