On Wednesday, Biden and the European Union has excluded seven Russian banks from the SWIFT messaging system this is due to the latest sanctions imposed on Russia over its invasion of Ukraine.
Biden and the European are celebrating this temporary victory that they thought they won. But Biden’s recent action could end America’s status as the World’s reserve currency. Let’s start with the SWIFT sanctions.
SWIFT, which delivers secure messages among more than 11,000 financial institutions and companies, is central to the global financial system, and an inability to access it could cause significant economic damage. Russia has developed its own financial messaging system, but it has fewer than 400 financial institutions and few foreign firms.
SWIFT, based in Belgium, said that while it is a neutral global cooperative with members in 200 countries, it’s obliged to comply with EU and Belgian regulations. “We will disconnect them once we receive legal instruction to do so,” the organization said in a statement Tuesday.
This only means that businesses that would like to buy Russian exports will not be able to pay for them in dollars. This would only be possible if the SWIFT sanctions were not imposed on those Russian banks that receive payments from the United States and Europe for oil.
But SWIFT is not the only game in town. There are alternatives:
CIPS – sponsored by China, for trade-related deals in the Chinese currency with Chinese clearing banks
SFMS – sponsored by India
SPFS – sponsored by Russia, mostly composed of Russian banks
CIPS in particular represents a direct threat to SWIFT dominance. A recent discussion at MarketPlace between David Brancaccio and Jennifer Pak is illuminating:
David Brancaccio: So, an alternative for Russia could be China’s cross-border interbank payment system, acronym CIPS. How’s it work?
Jennifer Pak: China’s CIPS connects participants inside China and out to do trade or investment and then settle those transactions using Chinese yuan.
Brancaccio: Well, How’s it different from the SWIFT global payment system based in Belgium?
Pak: Right. So let’s say I sell you shoes. Normally, you’d reach for PayPal to settle it in U.S. dollars, right? But instead, you could use CIPS and pay me in Chinese yuan. And it actually relies heavily on SWIFT’s financial messaging services. So you can think of CIPS as being enhanced by SWIFT rather than working against it.
Brancaccio: But in the Chinese currency, that’s key. What kinds of institutions currently use the CIPS system?
Pak: Well, CIPS says they have roughly 1,100 financial institutions from 100 countries, but they’re mostly from China, and also ones from Russia.
Many analysts believe CIPS is still a pipe dream. I do not. I think the West has underestimated the seriousness of this threat. Consider this fact–of the top ten banks in the world, the top four are all based in China (the following data is from January 2021).
Revenue (TTM): $123.6B
Net Income (TTM): $45.3B
Market Cap: $231.8B
1-Year Trailing Total Return: -6.9%
The largest bank in the world in terms of total assets under management (AUM) is the Industrial and Commercial Bank Of China Ltd. This institution provides credit cards and loans, financing for businesses, and money management services for companies and high-net-worth individuals. Though this is a commercial bank, it is state-owned.
Revenue (TTM): $102.2B
Net Income (TTM): $38.7B
Market Cap: $196.6B
1-Year Trailing Total Return: -3.7%
The second Chinese bank on our 10 biggest list is China Construction Bank Corp. It provides corporate banking services such as e-banking, credit lines, and commercial loans. China Construction Bank also provides personal banking through a separate segment, offering personal loans, deposits, wealth management, and credit cards.
Revenue (TTM): $89.7B
Net Income (TTM): $30.9B
Market Cap: $131.5B
1-Year Trailing Total Return: -14.1%
Agricultural Bank of China is state-owned institution that provides not only personal and corporate banking services, but it also offers a special suite of products for agricultural customers such as small farming operations and larger agricultural wholesale companies.
Revenue (TTM): $79.4B
Net Income (TTM): $27.2B
Market Cap: $109.1B
1-Year Trailing Total Return: -12.7%
Bank Of China focuses primarily on commercial banking activities such as deposits and withdrawals and foreign exchange. The bank also is even licensed to issue banknotes in Hong Kong and Macau.
Russia could still survive once these banks will forge a closer relationship with them. Russia provides some critical commodities despite being not one of the huge markets and the US is buying 7% of its oil from Russia even the larger chunk of Europe also came from Russia.
Russia is also the largest producer of refined nickel that is a critical component in stainless steel and batteries. And aside from Belarus, Russia is also the major producer of potash–an essential commodity needed to produce fertilizer. A reduction in potash exports means less fertilizer for American farmers come September.
According to Tyler Durden at Zerohedge, an enormous spike in the price of oil looms on the near horizon:
This self-imposed embargo which has effectively halted a majority of Russian oil shipments, threatens to drive up energy prices globally by removing a gusher of oil from a market that was tight even before the Russian invasion of Ukraine. Meanwhile, Russia, waging war and in need of revenue with its financial system in turmoil, is taking extreme steps to convince companies to buy its most precious commodity. . . .
“The market is starting to fail,” a trader at a major commodities trading house told the WSJ, which is a problem because with Russia exporting roughly 5 mmb/d, the oil market – already extremely tight – could find itself in a historic supply shortage in just a few days, and will need massive demand destruction, read much, much higher oil prices, to stabilize as Goldman wrote over the weekend. . . .
As a result of these sanctions, and fears that a full-blown embargo on Russian oil output will soon follow, energy buyers have balked at the prospect of using the existing “loophole” worried that in just a few days they may be stuck with billions in Russian oil they can’t sell. As a result the entire Russian oil supply chain is collapsing.
Which is not to say there are no buyers left: as prices for Russian crude tanked last week, companies in India vacuumed up around seven million barrels of Urals oil, but even there companies are taking steps to limit sanctions risk according to the WSJ.
It appears that Vladimir Putin was anticipating the possibility of sanctions in light of the agreements he signed with China in early February:
Russia forged new long-term supply deals with China as the Kremlin aims to strengthen ties with the Asian nation amid souring relations with the West.
Energy giants Gazprom PJSC and Rosneft PJSC signed agreements with the world’s largest energy consumer as President Vladimir Putin met his Chinese counterpart Xi Jinping in Beijing ahead of the Winter Olympics.
Gazprom signed its second long-term gas deal with China National Petroleum Corp. Under the agreement, the producer will deliver 10 billion cubic meters per year over 25 years via a new pipeline from Russia’s Far East.
Rosneft reached an agreement to deliver 100 million tons of crude oil to CNPC via Kazakhstan within 10 years, following the expiration of a similar contract next year. The volumes will be used as feedstock for refineries in China’s north-west, Rosneft said in a statement.