Last week, Russia's attack on Ukraine was followed by retaliation, disagreement and controversy from various nations around the world. NATO allies have decided to impose sanctions by cutting Russia out of the global SWIFT financial ecosystem, which many considered a just "punishment for President Vladimir Putin's invasion of Ukraine".
The SWIFT controversy
The United States and the European Union (EU) have partially cut off several Russian banks from the leading international payment gateway, SWIFT. Russia's central bank assets are expected to be frozen, limiting Moscow's ability to access its reserves overseas.
According to a joint statement, the intention behind this move is to "further isolate Russia from the international financial system". SWIFT stands for Society for Worldwide Interbank Financial Telecommunication. The system is a secure platform for financial institutions to exchange global monetary transactions such as money transfers.
Experts expect that excluding Russian banks from the SWIFT platform could hit the country's economy hard. The White House also said cutting off access to SWIFT will cause the country to rely on the "phone or fax" to make payments.
However, as previously mentioned, the move could give central bank digital currencies (CBDCs), especially CBDCs such as China's digital yuan, an edge in the global market. A Bloomberg analyst anticipated that this move could provide other "geopolitical rivals, especially China, with an excuse to promote digital versions of their central bank money in global trade and finance." This move, if taken, could further weaken the international dollar weight.
Meanwhile, cryptocurrencies have played a major role in the larger narrative as international tensions intensify. According to reports, more than $ 19 million in BTC, ETH and USDT has been donated to the Ukrainian government until now.
China could play its cards
Bloomberg analyst Andy Mukherjee further stated that the key pillars of US economic hegemony are SWIFT, CHIPS and the dollar. Therefore, arming these tools against Russia could further persuade China to build an alternative to escape American domination.
China has reportedly already started building an effective alternative to CHIPS - the Clearing House Interbank Payments System. The nation is said to be building its own cross-border interbank payments (CIPS) system.
Just as CHIPS settles international payments in USD, CIPS aims to pay credits in Yuan while operating on its messaging network. However, while CHIPs has a global market share of 40%, CIPS only processes 3% of international transactions.
Additionally, the analyst says the digital Yuan, e-CNY, can help China redefine its position in the global financial market. As with China's central bank PBoC, the token currently in pilot execution is “technically ready” for cross-border use.
Won't the sanctions have the desired effect?
Furthermore, economist John Hopkins believes that putting sanctions on Russia could be counterproductive for the West. He said in a Tweet that while arming the SWIFT international payments system could cut Russia out, “it risks eroding the dollar-dominated global financial system. In fact, it will give rise to alternative systems developed by China and Russia ”.
Thus, while some believe sanctions are counterproductive, others find the strategic move to eliminate Russia from the greater economic narrative. While the dollar's dominance would not subside in a day, with more alternatives in sight, the market share of top players could be affected in the years to come.