How President Biden Gambled Away Our Commercial Crown Jewel
President Biden’s decision to block Russia from using the Society For Worldwide Interbank Financial Telecommunications (SWIFT)) has been epic. SWIFT has been the chief means by which international trade takes place. SWIFT is the method used to move money from one account to another, from buyer to seller. President Biden’s move to block Russia, (for years one of SWIFT’s major users), violates SWIFT’s basic values of fair and impartial dealings.
To understand just how important SWIFT has been to international commerce and the vital role SWIFT has played in supporting America’s commerce and trade, we need to go back to the beginning.
It all began in 1973. It was when the Yom Kipper War raged between Israel and its Arab neighbors, chiefly Egypt and Syria. The United States supported Israel by providing arms, equipment, and technological support — this inflamed King Faisal of Saudi Arabia. The Kingdom supplied the US with nearly 700K barrels of oil daily. It was a vital supply, as US oil production had declined, and without Saudi oil, supplies here in the States would run short.
Faisal saw the “oil weapon” as his way to support his fellow Arabs. In October 1973, the King, as the head of the Organization of Petroleum Exporting Countries, announced that the Countries assembled would stop exporting oil to the United States and seven other countries, all of whom had supported Israel.
As you can imagine, cutting off all OPEC Oil caused significant shortages in the United States. Drivers lined up around the block to get gasoline for their cars when and if it was available. Eventually, the country decided to split up the gas customers based on their license plates: odds fill up on odd days, evens on even days. But even so, it was a mess.
It fell to Secretary of State Henry Kissinger to meet with King Faisal and see if any agreement could be reached. Talk about a weak hand. Kissinger was going up against one of the toughest negotiators in the world after supporting Faisal’s bitter enemy, Israel. What’s worse, Faisal was a notorious antisemite, and Kissinger, of course, is Jewish.
Despite the long odds, Kissinger was able to pull off one of the most significant diplomatic “coups” ever. In a multidimensional agreement, Kissinger first assured Faisal that the fighting would end and that the United States and the USSR (Russia) would ensure that hostilities stopped. Next, he was able to get Faisal to turn the oil spigot back on. But the part most people miss, implicit in the agreement, was that OPEC could increase the oil price. But with a significant twist, the oil would need to be priced in US Dollars, and those transactions would be placed through the newly created SWIFT International Settlement System.
So, at the end of the day, Faisal got peace and a higher price for his oil. While Kissinger had just made America the world’s bank, with oil priced in Dollars and transactions through the US-centric SWIFT system. It was the beginning of the “Petrodollar,” the origin of what would become America’s Commercial Crown Jewel.
The instrument of that Commercial Crown Jewel is the SWIFT System of International Trade. Although SWIFT is headquartered in Belgium, it is solidly in the US camp, with most transactions priced in the US Currency. As they say down on Wall Street, the King got the “price” while Kissinger got the “terms” (financing).
It would be the single factor contributing to American dominance in world trade and finance over the next half-century. Without the SWIFT System, it is doubtful that this country could have established our extensive international trade network. Our ability to source consumer goods from Asia, oil from the Middle East, agricultural products from Eastern Europe, high-end machinery, and finished goods from Europe depended on SWIFT. Without a reliable and convenient way to pay for offshore goods and services, America, the trading behemoth, could not exist.
But, as it turned out, Kissinger’s agreement went far beyond trade. It created “America the Banker.” US Government Securities became the convenient way for countries to hold their “reserves” between purchases and sales. Rather than transfer funds back to the home country between purchases and sales, why not just leave them on deposit with the US or other SWIFT member banks? And by remaining in US instruments (like T-Bills, Notes, and Bonds), you would avoid any FOREX risk. (Foreign Exchange, the risk of change in the value of one currency against another).
It created a vast pool of funds for the United States that helped support our ever-growing need for capital. And SWIFT made it easy for countries to transfer their funds into US Treasuries. As Ned Johnson, head of Fidelity Investments, used to say, the easier it is for people to withdraw funds, the more likely they are to invest with you.
Biden’s Gamble
In its 50-year history, SWIFT has grown to be the dominant exchange system in the world, with over 11,000 member banks, not counting the associated correspondent banks and brokers. Nearly 80% of all major transactions flowed through SWIFT in the years before the Ukraine War.
But even those numbers understate the influence of SWIFT. SWIFT is a community of bankers and traders who have grown together in a tight-knit association. These bankers know and rely on each other to provide honest and trustworthy transactions. After a time, bankers from one group have learned those colleagues whom they can count on, come what may.
Finance is a world unto its own, and they take pride in rising above petty politics and the sometimes irrational acts of countries. Political feuds, petty grievances, and even wars do not interfere with the continued functioning of SWIFT. India and Pakistan exchange artillery, the Taliban takes over Afghanistan, Somalia falls into civil war, it’s all irrelevant to SWIFT. Transactions by any of those parties will be honored. It is a source of pride that SWIFT will rise above politics and maintain its status as the world’s impartial, objective banker.
President Biden changed all that with his “sanction” of Russian member banks. Biden insisted and eventually got seven of the largest Russian Banks expelled from SWIFT. Only once had SWIFT ever expelled a member. It was during the Iranian Revolution when Iran wasn’t really using the service. It was considered more of a symbolic gesture.
But here was the United States using SWIFT as a political weapon. The President and the European Union members’ clear objective was to cut Russia off from international finance, making it impossible for Russia to sell its oil, gas, and agricultural products abroad.
The objective of the Collective West (principally the EU and US) was to isolate Russia and separate it from the rest of the financial world. The reality has been just the opposite. Instead, the Russian Sanctions have infuriated many in the Global South (see: https://david-reavill.medium.com/saudis-signal-the-end-of-the-petro-dollar-719e2c7019a9).
Sanctions were seen as a pernicious, unwarranted action that went against the fundamental values of SWIFT. Suddenly, SWIFT was no longer the impartial, objective financial exchange the world thought it was. It now acted like a partisan, politically aimed way to harm a member country. Biden was directing SWIFT to violate basic international norms and conventions.
What we’ve seen in the months since has been nothing less than a full-scale global revolt. China took the wraps off its international transactions system (CIPS) that had been sitting in the back closet for years. The BRICS Organization (representing the countries of Brazil, Russia, India, China, and South Africa) suddenly came alive. Countries like Saudi Arabia and Iran were lining up to join. Rumors of a BRICS currency began to circulate.
This past weekend, the Shanghai Petroleum and Natural Gas Exchange began trading, putting the final nail in the Petrodollar. And so America comes full circle. Half a century ago, a clever Secretary of State, Henry Kissinger, pulled us out of the fire. OPEC had cut off our much-needed oil, and America was looking at a bleak future of reduced economic growth and progressively higher energy costs. Kissinger’s bargain created the Petrodollar, which would later evolve into the World’s Reserve Currency, America’s Commercial Crown Jewel, the instrument that would allow this country to achieve the world’s highest standard of living — trading around the globe to purchase the finest goods at the best price.
Joe Biden put all that on the line when he announced that the international trade and commerce (SWIFT) standard would be subject to US approval. No longer impartial and objective, SWIFT was to be subject to American control. It was a pure power play, one that Biden lost. And with it, Biden lost America’s Commercial Crown Jewel: the US Dollar’s Status as the World’s Reserve Currency.
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