We are definitely living in strange times, the war currently happening in Ukraine is more of a self-fulfilling prophecy than an accident. The west has been having talks about it for months that war is brewing in eastern Europe. Russian officials played it down in order to calm down the general public and the outside world.
As the western media continued with the narrative, the world was wondering if it ever was going to happen. In our short attention span era filled with superficial virality, emojis, and memes floating around on social media, on February 24, 2022, the world realized that war is real.
I will not dive into the details that lead up to that war, I will save that for another post that will be uploaded after things have died down a bit as I am still assessing the possibilities. I am more concerned with the idea of cutting Russia out of SWIFT and what it means from a geopolitical and economical perspective.
What is SWIFT?
SWIFT (Society for Worldwide Interbank Financial Telecommunications) basically is at the nucleus of the international financial industry, especially in the western region. It is a secure messaging system that is used to make international cross-border payments.
It was created in Belgium by different international bodies to facilitate a fair international trading system. Over the years it seems to have been working quite efficiently and all partners involved are to agree satisfied with it. In 2020 it was estimated that 38 million transactions per day were settled by SWIFT.
Current Political Chess
Over the last few days, things have escalated pretty quickly to a level that I am unable to predict what will happen. Shortly before Russia started the “military operation” on Ukraine as deemed by President of Russia, Vladimir Putin, plans were in place to sanction Russia to the nth degree.
It seemed Mr. Putin couldn’t care less as he understands the situation that he was going to be in and from my understanding I am hoping that his risk management team does their job across all areas whether that be economic, political, etc.
One of the main sanctions that the western media was dangling in front of him was the Nord Stream 2 pipeline. This is a pipeline that would deliver natural gas to Germany under a deal that was laid out by former German Chancellor Angela Merkel in 2015.
The deal will be settled in Euros and essentially, undermine America’s petro-dollar monopoly which is the bread and butter for the US economy to keep the narrative that the world still trades energy deals in US dollars.
Biden’s administration and certain NATO nations thought that Russia really cared about this. They were sidestepped as Mr. Putin had other plans and was carefully crafting a strategy behind the scenes.
On the opening day of the Olympics, Mr. Putin went to the opening ceremony of the Olympics and signed a deal with a “no limits” deal. It is still unclear what it means but one of the main things that came out of it was China is going to purchase lots of natural gas and oil from Russia in a deal worth tens of billions.
This was a strategic play by Putin to ensure that the Nord Stream 2 deal wasn’t used as dog food to lure him into a bait.
Fast forward today, the Nord Stream 2 is canceled practically the same day Vladimir Putin declared “break-away” nations Donetsk and Luhansk as independent states.
The main consensus around this move by the Russian president is that these two nations are filled with Russian-speaking citizens and there has been a civil war there since 2014 when they decided to basically side with the Russians.
Despite their choice, Russia couldn’t intervene as they still see it as part of Ukraine and never wanted to break any international law, which is basically subjective these days. Laws are usually massaged to fit a particular leader’s regime; every large major power uses.
The key is the narrative, control the narrative and you control the minds of the people. This was not accepted by US or NATO and thus they decided to impose sanctions on Russia.
Russia is Sanction Proof?
The sanctions came from all angles and were essential to curb Russia’s further aggression onto Ukraine. They targeted Russia’s banks, Oligarchs, it was a great theatre and spectacle for conservatives living in their poshed and cozy homes, giving commands to Amazon Alexa.
It never deterred Russia’s insistence to invade Ukraine and change the alleged, “corrupt regime”. Russia has been heavily sanctioned when they annexed Crimea, yet another Ukraine state in 2014. These sanctions though did have an impact but it wasn’t effective in hindsight.
Russia grew resilient over those eight years and developed multiple systems to counter the sanctions. It seems to have worked from the outskirts looking in. One of the reasons that led to this was because of the fact that Russia is large, it is the largest country in the world by landmass and is rich in resources, most of them untapped due to being blockaded from the outside world.
Another factor is that Russia controls a very valuable resource which is oil and natural gas. Despite our technological advances, we are still very reliant on these natural resources to power up our economies.
Russia overtime started to export oil aggressively and moved farther away from the petrodollar monopoly. They mainly settled in euros and other currencies, trying to minimize the risk of the US dollar.
Russia’s Own Alternative
Additionally, Russia has been developing its own SWIFT alternative called SPFS (System for Transfer of Financial Messages). It has been in development since 2014, the first transaction involving a non-bank institution was in December of 2017.
Despite that huge leap, a lot of factors affect the adoption rate such as cost per transaction, technology, etc. As of now it only works in Russia but there are talks to expand the initiative and push it forward with its partners.
China On The Horizon
China is currently pushing its own version of SWIFT which is more significant than Russia’s due to the fact that China is seen as the next world leader or we exist in a multi-polar world with different world leaders, taking their size of the pie. Strategically it’s fair and rational, if you are doing big business, you need your own infrastructure.
The problem is China and Russia creating a system that the United States and their western allies don’t have any say in, that’s what’s scary and is exactly why there might be some hesitancy to not pull Russia from the SWIFT system just yet.
If that were to happen, Russia would trade directly with China which could involve eastern allies such as Iran, India along with European countries as well. This will then undermine the dollar’s monopoly on trade and the global financial system.
It’s hard to tell the implications of this but it would catastrophic for the US which has shaped into a very strange-looking empire over the last 3 decades.
The Interconnectedness of Russia
Russia is deeply embedded within the European trade and financial system; it would be an emotional decision to exclude from SWIFT. It might look good for the optics and the appeasement for social justice warriors over what is happening.
At the moment Russia controls over 40% of the energy supply to Europe in various means and that’s a lot of money to be traded in other currencies and not the US. It’s not just from an Energy perspective but even from a financial perspective, it would be hard to isolate Russia from Europe at such a volatile time and the future is uncertain.
There are a lot of unknowns such as trade agreements, financial settlements, etc. It’s too connected at the moment and it would pose a systemic risk to Europe.
Blockchain and New Financial Instruments
Recently Russia laid out plans to ban cryptocurrencies or at least regulate it to ineffectiveness. Putin had other plans and is watching how events unfold as I am sure he planned this attack for months and he assessed the risk through various simulations. It is too coordinated at the moment and decisive not to see that everything was planned, irrespective of what the world thinks.
If Russia is banned from SWIFT I am assuming he could quickly transition into modern financial instruments such as blockchain technology which is slowly becoming the de-facto standard in our society to engage in finance.
It’s a bit new at the moment and filled with get-rich-quick schemes pushed by anonymous agents who have ulterior motives and want to undermine the technology.
When the dust settles and the industry is moved from the basements of the programmers and is at an industrial level, it will be revolutionary. Russia is not a perfect country and depending on how you look at it, it has a lot of problems but it is technologically advanced and from a social capital perspective they have civilians who are smart and productive.
If you look at the history of science and even modern technology, they have brought a lot of ideas and inventions to the world. Thus, they have the human capital to build interesting products and it has shown in their military supremacy despite working on a smaller budget than other world leaders.
What Lies Ahead
It’s hard to predict what lies ahead, the world has changed for sure. Ever since the start of the pandemic, the world has changed but this might be another event to add to the list of changes.
I am hoping that the situation is resolved quickly as war is not a solution to anything but I would be kidding myself to think that mankind’s lust for power is going to stop in our so-called liberal era.
It’s an illusion which I will expand on in another post, but I am hoping that all parties can resolve conflict as soon as possible and come to an agreement that will maintain world peace.
