Image from US Institute for Peace – The Iran Primer.

What is the SWIFT Banking System?

Investopedia explains: The Society for Worldwide Interbank Financial Telecommunications (SWIFT) system powers most international money and security transfers. SWIFT is a vast messaging network used by financial institutions to quickly, accurately, and securely send and receive information, such as money transfer instructions.

Most global transitions touch SWIFT in some way. The EU wanted to develop a way around SWIFT because the EU is sick (rightfully so) of the US setting sanction policy for the whole world.

Russia beat the China to secure SWIFT avoidance mechanism.

Russia’s Trade Routes to Iran

Eurointelligence discusses Russia’s Trade Routes to Iran

Business between the two most sanctioned countries in the world, Russia and Iran, is thriving. Iran’s exports to Russia have surpassed the $2bn mark last year according to Iran’s ambassador to Moscow. This is a considerable jump from the figures the previous years, and a 30% rise throughout the year, according to the Tehran Chamber of Commerce. The total value of bilateral trade between the two in volume reached $4.9bn in 2023 according to Iran’s official statistics. A Russian economic delegation with 170 representatives was in Tehran this week as the two countries held the 17th round of their joint economic commission. The two sides have pledged to increase trade tenfold over the coming years.

What facilitates their trade is their own banking solution, which the two countries set up last year to circumvent the dollar. The two central banks managed to connect Iran’s Sepam national financial messaging service to Russia’s SPFS messaging service, its equivalent to the Swift system. In connection with this new system, Russian banks started operating offices in Tehran, and offered credit lines to ease exports from Russia to Iran. There are similar plans in Iran for exports towards Russia. Intensifying trade with Russia is part of Iran’s Look to the East strategy that aims to neutralise the effects of US sanctions by expanding into new markets.

Lesson of the Day

Didn't you declare victory on these sanctions?

Here's the deal: China and India will always buy. And they should. It's in their best interest.

— Mike "Mish" Shedlock (@MishGEA) September 18, 2023

On September 19, 2023, my Lesson of the Day was Sanctions Don’t Work Because They Create New Markets

Lesson of the Day: Sanctions Create New Markets

Foreign Policy: “Since Russia’s invasion of Ukraine, Greece’s mighty shipping sector has continued to earn good money shipping Russian oil. But Greek shipowners have discovered an apparently even more lucrative source of revenue: selling the ships themselves to mysterious buyers linked to Russia. One publication has declared that a “Great Greek Tanker Sale” is taking place, and no price seems too high for a secondhand tanker. But the formerly Greek ships are entering a Hades-like shadow economy.”

Lesson Number Two

Countries, political leaders, and market makers act in their best interest.

It is in the best interest of Greek shippers to sell ships so they do. It is in the best interest of India and China to buy Russian oil and Greek ships so they do. It is in the best interest of Dubai middlemen to make a market in ships so they do.

What this boils down to is simple: It is the best interest of middlemen in Greece, Russia, India, China, and Dubai to tell Biden to go to hell, so they do.

How Russia Makes a Mockery of US Sanctions in One Picture

Unprecedented US and EU sanctions against Russia have had no impact on Russia’s oil exports or revenue. Who’s the beneficiary?

(Click on image to enlarge)

On December 29, 2023 I explained How Russia Makes a Mockery of US Sanctions in One Picture

Buyer’s Cartel Silliness

The number of economists promoting a buyer’s cartel to suppress the price of Russian oil (and only Russian oil) only was stunning.

I laughed at the idea when it was proposed on June 28, 2022 in A Laughable Explanation of the G7 Oil Price Buyers’ Cartel Emerges

Despite the obvious stupidity of the scheme, some prominent economists backed the idea.

How China Gets Around US Sanctions on Semiconductors

The largest source of rising Chinese semiconductor equipment imports comes from lithography machines used to print circuitry patterns onto silicon wafers, but purchases up and down the semiconductor manufacturing process have risen dramatically in 2023. pic.twitter.com/QV3vWC7JO5

— Joey Politano 🏳️‍🌈 (@JosephPolitano) February 17, 2024

On February 18, 2024 I noted How China Gets Around US Sanctions on Semiconductors

If You Weaponize the Dollar and Confiscate Assets, Expect Retaliation

By weaponizing the banking system against enemies outside and within, advanced economies are losing their 'risk free' status. This may not change the global currency order for now, but could lead to a wild scramble for gold and other tangible assets.https://t.co/QFkdkBMnf4

— Joseph Wang (@FedGuy12) March 7, 2022

Russia seized the local assets of Carlsberg beer and yogurt maker Danone. It now threatens Austria’s Raiffeisen bank.

My lesson of the day on July 20, 2023 was Lesson of the Day: If You Weaponize the Dollar and Confiscate Assets, Expect Retaliation

At the onset of the war, the Fed, under direction of the Biden Administration, illegally seized Russia’s foreign reserves. Illegal is the correct word.

Nowhere does the act give the Fed the right or power to confiscate the reserves of sovereign nations. But that is exactly what the Fed did when it seized Russia’s US dollar reserves. 

If the Fed can confiscate Russia’s reserves, who’s next?

Weaponization of Swift

Please consider the Richmond Fed article What Is SWIFT, and Could Sanctions Impact the U.S. Dollar’s Dominance? 

The recent removal of Russian banks from the SWIFT messaging system has highlighted the importance of payments in supporting economies. But the weaponization of SWIFT has also left some commentators worrying about the loss of the U.S. dollar’s dominance, as it might drive banks and firms to other substitutes. This Economic Brief discusses the economics of SWIFT and explains why emigrating from the U.S. dollar may be more difficult than we thought.

It appears to me Russia and Iran just succeeded.

US policy is to blame.

However, it’s easier for Russia than it will be for China because China is too dependent on exports to the US and EU. Regardless, more dollar and SWIFT avoidance is in the pipeline.

The BRICS are working on a similar idea. They will fail to achieve much traction except in one area, sanction avoidance.

For discussion and reasons why, please see What Would it Take for a BRIC-Based Currency to Succeed?

None of the conditions for a meaningful launch of a BRIC-based currency are in place, at least on a dollar volume basis. Talk of dethroning the dollar is silly.

However, sanction avoidance is another matter. Coupled with central bank digital currencies, countries and individuals will have a clear means of sanction avoidance. US sanctions on Iran, Venezuela, and other nations and individuals are a tiny percent of global trade, but those sanctions are not trivial to the individuals and countries sanctions.

I wrote that August 23, 2023. And here we are.

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