The sanction will only push Putin into the arms of China
“Anyone can create money; the problem is getting it accepted.” So said the brilliant economist, Hyman Minsky. This is a crucial point: you or I can create an IOU with a pen and a piece of paper and offer to someone for goods or services. But who will accept it? Your best friend might. But take it to a supermarket and you’ll be laughed out of the shop.
The credibility of money relies on what economists call ‘network effects’. A network effect is a phenomenon where if an increased number of people use a service, its value increases. It is something that social media companies like Facebook and Twitter try to maximise. If people left Twitter en masse, for example, its value as a service would collapse.
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A payments system like SWIFT also depends on network effects. The technology behind SWIFT is easily replicable. Its value rests on the fact that it is widely used. That is why threatening to remove Russia from SWIFT could cause potential damage to the world.
Russia is, after all, a country that has vast energy reserves that are crucial for the European economy. While in the short run, the loser from a Russian SWIFT ban is Russia and Russian banks, in the long run the likely loser is SWIFT itself.
China already has an alternative to SWIFT. It is called CIPS and it is used to clear transfers in Chinese renminbi. It is no secret that the Ukraine conflict is creating a de facto alliance between China and Russia and so it seems logical that if Russia is thrown out of SWIFT they will turn to a Chinese alternative.
The Russian SWIFT ban appears to have a carve out for energy-related transactions. But if Russia turns to CIPS for non-energy transactions, how long before they switch their energy transactions over? If CIPS is already used in renminbi trade, the additional use for Russian energy transactions would mean that many in Europe would have to adopt it alongside SWIFT.
The long-run outcome then, would be a viable alternative to SWIFT operating alongside SWIFT. An even more dire prospect would be an increasing dominance of renminbi transactions in global trade. The United Kingdom should pay close attention to this because its economy rests almost entirely on London’s strength as a global financial centre.
Decisions made under this kind of emotional and geopolitical pressure rarely pan out well. The political environment right now is combustible — and social media is making it worse. But there are grave risks that may seem beneficial in the short run, but will hurt us in the long run.