U.S. sanctions? Russia, China and India create their own payment system

The U.S. government has threatened to cut Russia off from international payments if the situation in Ukraine escalates. By boycotting financial institutions from SWIFT, an international payment system used by 11,000 banks in more than 200 countries, the Americans could increase the pressure on Russia. But do these kinds of economic sanctions still have an effect? Or are the Americans smashing their own windows in the process?

It seems like a safe and easy way to put pressure on Russia. Instead of risking a military escalation in Ukraine, the Americans can also try to hit Russia economically. Denying access to SWIFT will make it difficult for Russia's oil and gas sector to make international payments. Putin would think twice about a new geopolitical adventure.

Economic sanctions

It would not be the first time that the Americans managed to cut off a country from the SWIFT payment system. This also happened with Iran, after the country was accused of developing nuclear weapons. The country could no longer export its oil and foreign investors withdrew en masse. In this way, the Americans managed to hit the country hard economically.

A more recent example is Venezuela, where Nicolas Maduro is still firmly in control. Much to the dismay of the Americans, who believe that opposition candidate Guaido is the rightful president. To put pressure on the country, the U.S. government imposed sanctions that prohibited U.S. banks from doing business with Venezuela. The result? Oil producers in Venezuela could no longer sell their oil to the U.S., causing significant revenues to be lost.

What does that mean for Russia?

Venezuela and Iran got into serious trouble because of the US sanctions, but will it Russia be the same? Probably not. For example, the economy of Russia is many times larger than that of Iran and Venezuela. Moreover, the European allies of the US are still highly dependent on oil and gas from Russia. Due to the close economic ties that European countries have with Russia, there is a good chance that they will resist US sanctions.

Even if the United States and Europe unite against Russia, the sanctions are unlikely to have much effect. European countries simply need the energy from Russia to keep their economies going. From day one, European companies will come up with a plan to still be able to do business with companies in Russia.

Alternative payment systems

Today, SWIFT plays an important role in international payments. But that's not to say there aren't alternatives. Ever since the developments in Crimea in 2014 and the Western sanctions against Russia, the Russians have been working on an alternative payment system, better known as CPFS. This payment system is already fully operational and is already supported by 23 banks outside Russia, including banks in Germany and Switzerland. Paying for oil and gas via this system is therefore already possible.

Other superpowers on the Eurasian continent have also been busy in recent years. Out of dissatisfaction with the dollar monopoly, countries such as China and India are also working on alternatives. For example, in 2015, China launched the China International Payment System, abbreviated as CIPS. This system is already supported by banks on six different continents and in 47 different countries as an alternative to SWIFT. China's payment system already processes an average of $50 billion in transactions per day, compared to $400 billion per day for SWIFT.

India also sees its dependence on the Western SWIFT payment system as a risk. A committee in India wrote recently a more than 500-page report on data security of the Indian population, stating that dependence on SWIFT is an economic and political risk. Two years ago, the government of India began to explore the possibility of building an alternative payment system, in thecooperation with Russia and China.

Gold as the ultimate reserve

The geopolitical balance of power makes it very risky for the Americans to impose economic sanctions on Russia. It would give the various power blocs on the Eurasian continent even more reason to ditch the dollar and switch to alternatives. In a worst case scenario, European countries, together with Russia, China and India, can still consider the nuclear option, namely a Return to Gold for international payments.

Both China if Russia have increased their gold reserves fivefold since the 2008 financial crisis. Russia now has even more reserves in gold than in dollars. Also India has been buying plenty of gold in recent years. Since 2018, that country has replenished its gold reserves from 550 to more than 700 tonnes. This offers opportunities for a monetary reset, should geopolitical tensions leave no room for an alternative.

In short: the U.S. government may try to cut off Russia from international payments, but the consequence may be that the Americans will cut their fingers and the dollar will lose its dominant position.

This contribution comes from Geotrendlines