It’s no wonder that our European allies, while vocal in their support of sanctions against President Putin’s regime, are so far unwilling to cut off Russia’s access to SWIFT, the aorta that channels the blood of global trade.Whether you need to send money to your ailing aunt in Poland or have to buy hundreds of millions of dollars of Russian natural gas, the SWIFT system is how it happens.Launched in 1977, the Society for Worldwide Interbank Financial Telecommunications is technically just a platform on which banks exchange messages — in its way a kind of early-adopter texting system. Tens of thousands of institutions worldwide use the highly specialized SWIFT terminals, and some say that the only country in the world without one is North Korea.SWIFT is underpinned by the U.S. dollar, still the world’s reserve currency. If you ever have trouble conceiving what that means, imagine being told: Yes, I will buy your precious natural resources — and promise to pay you in either Aruban florins or Bhutanese ngultrums. While it may sound counterintuitive to bring “feelings” into the alpha-male world of finance, they do matter. One cannot operate effectively without having faith in the currency with which we work. The person on the other end of each transaction must believe — whether dealing in dollars or ngultrums — that the piece of paper is worth what it claims to be worth.This hints at the quasi-absurdity of American sanctions on Russia. In effect all the Biden administration has done is make it slightly more difficult for Moscow to borrow more money and to pay what it already owes. As the saying goes, though, the stock market is kindergarten; the bond markets are grad school.If the U.S. had wanted to truly “punish” Russia for anything, we would have removed Moscow from the SWIFT system and left the country well and truly isolated, unable to service its debt and pushing it to bond defaults that would be ruinous for countless investors worldwide. Moscow would’ve been mired in debt it could not pay — the torpedo to sink Mr. Putin’s battleship.As a former Trump administration international finance official, Marshall Billingslea, put it, “Biden had the opportunity to deliver a severe, consequential shock to the Russian system. But he didn’t.”The main reason he didn’t, and couldn’t, is that Germany is dependent on Russian natural gas for more than half of its energy needs. Germany needs SWIFT to buy that gas. A unilateral American action to crush that would pose the threat of leaving millions of people in Europe’s richest economy with no heat in their homes — a chilling prospect indeed. The European Union was never going to back Mr. Biden on this.It is an open question whether the president misread the tea leaves or is just generally incompetent, but the sanctions hardly amount to a slap on the wrist even though individual banks will feel the squeeze.We should be glad that the Germans shut down any prospect of cutting off Russia in this way. China is actively and aggressively trying to position its yuan as the world’s reserve currency, and the prospect of decoupling Russia from SWIFT no doubt thrills Beijing. Like air in a chamber, China fills more of the world’s vacuums of power with Russia less of a force. It is playing the long game, from its Belt and Road Initiative to its tyranny of Asian waters to its dominance of our consumer products to its hoarding of a massive chunk of what is now more than $30 trillion of our national debt. But it can’t quite supplant the greenback just yet.The Pollyannas among us will believe that the currency of a nation as brutal and despotic as China can never be the world’s reserve currency. Yet the realists know that America should be grateful that Germany is entirely dependent on Russia’s natural gas — and needs the dollar-reliant SWIFT system to pay for it.Even the sanctions America is imposing risk ceding more power to China. All nations float on debt, and cutting off Russia from our debt markets makes it only more likely to bring Moscow and Beijing ever closer. The Biden administration needs to think about that. Swiftly.
