Moscow won’t even blink as the West tightens its financial grip

But there are two key differences this time around. One is that Iran’s removal from SWIFT was accompanied by sanctions on its oil and gas exports. It was this latter ban, not denial of access to SWIFT, that was by far the more important factor in poleaxing the Iranian economy. Such is European dependence on Russian gas, together with wider fears about the consequences of another oil price shock, that for the moment a similar ban on Russian hydrocarbons is not on the table.

The other difference is that in the eight years that have followed the annexation of Crimea, Russia has taken steps to develop alternatives to SWIFT, such that it is now partially prepared for sanctions of this sort. When key Russian banks were denied access to Western payments systems after the Crimean invasion, Russia set up its own alternative, Mir (World) credit card system which has been relatively successful in Hoovering up the domestic market and is even accepted in some overseas territories.

While Russia has been busy making itself safe against SWIFT-style retaliation, Europe has almost incredibly been going the other way by further increasing its dependence on Russian energy supplies. The naivety and negligence of it is quite breathtaking.

While Russia has been busy making itself safe against Swift-style retaliation, Europe has almost incredibly been going the other way by further increasing its dependence on Russian energy supplies. The naivety and negligence of it is quite breathtaking.

One reason the UK is better positioned to push for Russia’s removal from SWIFT is that beyond the excesses of London’s high-end economy and the attractions of the City as a haven for dirty Russian money, trade with Russia is relatively limited. The same is not true of a number of European countries. All of them need Russia to remain in SWIFT more than Russia needs access to SWIFT, if only as an enabler for the purchase of Russian gas and other commodities.

Yet even in the UK, the Government has pause for thought. The risk of retaliation through cyber attack is high. Bring down SWIFT, part of the plumbing of the international banking system, and it would be a bit like disabling the cloud computing universe. The financial system would struggle to operate without it.

As painfully demonstrated by the financial crisis, moreover, we live in a highly interconnected world, where one bank’s counterparty risks can have potentially catastrophic knock-on consequences for all the bank’s other counterparties.

Given how meticulous Putin has been in preparing, it would be a major surprise if he had not also ensured that the Russian banking system was a net creditor to Western banks. If banned from SWIFT, Russian banks wouldn’t be able to pay, and would therefore default on their obligations. Britain’s direct exposure to Russia may be small, but its secondary and tertiary links are likely to be much bigger. Even the Bank of England, the prudential regulator, is struggling to get a proper handle on the wider exposure.

Besides, there are alternatives to SWIFT, though quite how reliable has yet to be tested. In its determination to challenge dollar hegemony, China has already established its own international payments system, and if push came to shove, Russia could always fall back on older, analogue forms of transfer developed after sanctions were imposed over Crimea. Another possible conduit would be the EU’s Instrument for Supporting Trade Exchanges (Instex), set up as a way of delivering humanitarian aid to Iran when Trump-era sanctions made money transfers via SWIFT all but impossible. Unlike Trump, Europe wanted to keep the nuclear deal alive, and therefore sought means of bypassing the ban. It would on the other hand be quite hard for EU member states to justify its use if they had agreed to remove Russia from SWIFT. It would defeat the purpose.

But the point of this article is not just to demonstrate how difficult it is to impose meaningful sanctions on Putin if not also prepared to cut off his exports of oil and gas. That’s the only thing likely to inflict real damage on him. All else is just noise.

The other purpose is to highlight what is likely to be a progressive unravelling of key aspects of today’s economic and financial order. Weaponising the dollar and its payments systems against Western enemies, though potentially quite effective, brings its own risks, for it also incentivises those it punishes to break with prevailing dollar hegemony and seek out alternatives. Already we can see the beginnings of bifurcation into two separate worlds, once integrated through global finance and trade, but now driven almost irreversibly apart by growing security concerns. What is the West to do if having barred Russia from access to SWIFT, it finds that the backdoor of Chinese payments systems is used to make money transfers instead? Are we to impose financial sanctions on China too, or squeeze its banks out of SWIFT? That would truly mark the end of more than 30 years of globalisation.

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The efficiencies of today’s long, integrated international supply chains would be turned on their heads as nations scrambled for self-reliance in everything from energy to food and manufactured goods. Some might welcome such disintegration, but the cost to living standards and lifestyles would be high. The trouble with sanctions is that the sanctioner often ends up paying as big a price as the sanctioned. It is generally ordinary people, not the regimes that govern them, that pay the highest price of all.

Telegraph, London