On February 27, the United States, together with the United Kingdom and the European Union, issued a statement on relevant economic sanctions against Russia, in which the United States and its allies pledged to remove selected Russian banks from the Institute of Financial Telecommunications (SWIFT) system of global interbanks, promising to impose sanctions on the foreign reserves of the Russian central bank.
A financial regulatory institution in the United States
SWIFT, a high-security network that connects thousands of financial institutions around the world, was founded in 1973 and is now used by more than 11,000 financial institutions to send security messages and payment instructions. Since there is no globally recognized alternative, it is an important "throat" of global finance, and in the global currency war, SWIFT is recognized by the market as a "financial nuclear bomb".
The use of the US dollar's monetary monopoly and SWIFT, which is indirectly controlled by the US financial system, will block the connection between Russian financial institutions and the global banking system, meaning that global customers will not be able to use SWIFT to receive and pay across borders to Russian-related enterprises, which in turn will affect Russia's global capital flows and international business activities.
In this regard, the SWIFT spokesperson of the Swift Association for Global Bank Financial Telecommunication said that the market is concerned that the use of this "financial nuclear weapon" will affect Russia's oil and gas supply and settlement in Europe, but in terms of specifics, there is no specific statement which Russian banks will be cut off from SWIFT, and the spokesman said that gazprom, which is responsible for the international payment and settlement of Russian energy imports and exports, may not be within the scope of sanctions.
In fact, Russia has taken steps in recent years to mitigate the economic and financial shock when it is removed from SWIFT. Back in 2014, Russia established its own payment system, SPFS. According to the Central Bank of Russia, SPFS now has about 400 member users, and 20% of transfers within Russia are currently done through SPFS, according to the Russian State Development Corporation VEB. SPFS can be used for international transactions to further facilitate bilateral trade, RF said.
At the same time, Russia is increasing its international assets to hedge the risk of economic sanctions, with data showing gold and foreign exchange reserves hitting record highs.
According to the latest data released by the Bank of Russia on February 25, as of February 18, Russia's gold and foreign exchange holdings had reached a record high of $643.2 billion. Russia's international reserves are highly liquid foreign assets held by Russian banks and the country, including exchange funds, special drawing rights of the International Monetary Fund (IMF), and monetary gold.
In recent years, Russia's Finance Ministry and central bank have been reducing the country's exposure to the dollar, moving assets out of the United States and reshaping its international assets in favor of other currencies and gold.
Russia is working to divest dollar assets
Russia, for example, has completely divested its share of the dollar from its national wealth fund and is selling U.S. Treasuries at a liquidation rate to replace gold, which is now less than $2 billion (down 98.3 percent from a high a few years ago) to replace assets such as renminbi, euros and gold.
International rating agencies have previously said that Russia's financial reserves will enable the country to cope with the negative impact of SWIFT restrictions, because Russia's international reserve assets are already very diversified, the share of dollar assets is less than 21%, and the dependence on the dollar has been significantly reduced.
Russia's finance minister said western sanctions against the Russian economy could lead to increased market volatility, but because of its abundant international reserves, Russia's economy and financial markets would be able to withstand restrictions and would ensure that all bank deposits and all transactions, including foreign currency transactions, were secured.
The Russian finance minister added that "our financial shield includes gold and foreign exchange reserves at record highs, surplus budget and budget rules, low debt, etc., which can fully resist economic sanctions, and if the new sanctions target Russian energy companies, Russia will be prepared to reallocate its supply to other markets." (End)