March 3, 2022

Biden Sanctions Russia. But Who Will Really Gain?

A hundred years from now, when they write the history of the Biden Presidency, it won't be the disaster in Afghanistan or the terrible inflation which will be their great failure.

No, in my opinion, the greatest failure will be the loss of SWIFT. The international interbank transfer system.

Let me explain.

Since the end of World War 2, the dominant financial country in the world has been the United States. And with this title of the world's strongest economy, came the subsidiary benefit, that the dollar became the world's reserve currency. And nowhere was that more apparent than with SWIFT, the inter-bank transfer system.

Briefly put, what SWIFT accomplished was to make all the world's cross-border transactions in dollars. No small feat.

Cross-border finance became infinitely easier when both sides of a transaction are dealing in dollars. There is no currency fluctuation. I sell to you in $X dollars, you buy from me in the same currency. Everyone is satisfied. Currency translation occurs after the transaction is complete.

In the past, this has created some really interesting stories. Back in the 1970s for instance, the Saudis especially were not happy with the US. And tried every way possible to get out from under some of the old Aramco Agreements. At which they were largely successful. But the one thing they could not extricate themselves from was the US Dollar. Oil still trades to a large great extent in dollars.

What this does, is to gather much of the world's financial assets under the dollar umbrella. And while those assets may not be in dollars for very long, the buyer and seller likely rush to convert dollars back to their home currency

Nonetheless, even a brief stopover in our currency is worth it. Ask any modern broker or mutual fund, and they'll tell you that the objective is always to gather as many assets under your roof as possible.

And so the international banks which are on the Swift System must have the offsetting collateral for that transaction. And what better form than in US Treasury Bonds.

Write that last sentence large. Because this is the power of being the world's reserve currency. Everyone, everywhere, must hold dollars if they want to do international transactions, especially on the SWIFT System.

I know that was a lot to take in. But just suffice it to say, that if you are on the Swift System, and almost everyone has had to be, then you are going to deal in dollars.

That is until President Biden devised a "brilliant" strategy in response to the Russian Ukraine incursion.

Now, mind you, as I've said before Ukraine is not of vital strategic importance to the US.

But SWIFT is. Swift may be our most important international financial asset. For nearly 50 years friends and foe alike have had to use SWIFT. And it's helped make the Dollar the reserve currency.

But SWIFT isn't quite as dominant as it used to be. Lurking in the weeds has been China. With its own version of SWIFT, called CIPS, the China Interbank Payment System.

And there are lots of countries that might want to go on that new system, but conversions are hard. And up to now, few have wanted to start over on a new system.

Enter President Biden. Biden sees the Ukraine conflict and decides to take it out on the Russian Banks. First, by cutting them off from any international funds transfer. Yesterday, incidentally we saw the two big tech firms, Apple and Google cut off individual Russians from their tech funding.

And yes, this is going to create a big headache for the major Russian Banks, and for many individuals in Russia. But it's also creating a mountain of resentment. And it's pushing Russia right into the hands of the Chinese International Banks.


So almost immediately CIPS, the Chinese Inter-bank Payment System will reach critical mass. Add in a few dissident countries like Iran and Saudi Arabia, and suddenly you have more than enough transaction volume to challenge SWIFT.

It is a classic strategy of hitting Russia where it hurts America the most.

And seems to be the hallmark of this Administration.

I sometimes wonder just who's side the President is on?

Can you say, Chinese Yuan Reserve Currency?