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Thank God for financial globalization, the Americans must be thinking. The Russian financial system is no longer an island, as it was in the Soviet era. But it can effectively be turned back into one, just like that – by flicking a switch.

The switch is SWIFT. Its messaging system sends 40 million payment orders to 11,000 banks and other financial institutions around the world every day, making it the key component of the international money-moving network. SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. It has been around since the 1970s, operates as a co-operative and is based in Belgium.

SWIFT is designed to make international payments quick and easy. It can also be used as a weapon, even though it is nominally independent. In 2012, SWIFT, under pressure from the United States and the European Union, agreed that Iran’s membership violated American and European sanctions against the country.

For Iran, the pain came fast and furious. After its banks were disconnected, the country lost almost half of its oil export revenues and 30 per cent of its foreign trade, according to Maria Shagina, a sanctions expert who is visiting fellow at the Finnish Institute of International Affairs. (Most Iranian banks were reconnected in 2016.)

Is Russia next? “The impact on the Russian economy would be equally devastating, particularly in the short term,” she wrote last May in a piece for the Carnegie Moscow Center.

Cutting the Russian financial system out of SWIFT might happen if Russia invades Ukraine, as the Ukrainian government fears will soon happen. On Dec. 7, U.S. President Joe Biden warned his Russian counterpart, Vladimir Putin, that “the U.S. and our allies would respond with strong economic and other measures in the event of military escalation,” according to a White House summary of the video call.

Would eliminating Russia from SWIFT be sufficient threat to prevent an invasion, or sufficient punishment after an invasion? Would blocking Nord Stream 2, the new pipeline built to deliver gas from Russia to Western Europe via Germany, be more effective?

Russia would hate having its US$11-billion Nord Stream 2 pipeline rendered useless. But the pipeline has yet to deliver gas since the project awaits approval from EU regulators, so the damage inflicted on Russia by shutting it down might be bearable to Putin & Co. The regulators’ rules require “unbundling,” meaning the companies producing, transporting and distributing the gas have to be separate entities. The regulators also insist that any pipeline open itself to other energy shippers on a non-discriminatory basis. At the moment, North Stream 2 is owned by state-controlled Gazprom, which has a monopoly on Russian gas exports.

Germany is the wild card. Under Angela Merkel, the chancellor who stepped down this month after 16 years in office, Germany always took a pragmatic view of Russia. It was happy to buy Russian gas in vast quantities but also supported EU sanctions against Russia, as it did after Russia invaded Crimea in 2014. The new Chancellor, Olaf Scholz, is reportedly willing to put Nord Stream 2 on ice if Russia invades Ukraine, but he also knows that extra supplies of gas would help moderate the soaring energy prices that are punishing German industries and consumers.

For maximum pain delivered at maximum speed, cutting the Russian financial system out of SWIFT absolutely wins. That’s why it is often called the “nuclear” option, and Russia has not denied that it dreads the scenario, all the more so since gas and oil – the country’s top exports – are mostly priced in U.S. dollars. Disconnection from SWIFT would stop the international payments for those commodities, at least until an alternative payments system was found (both Russia and China have their own versions of SWIFT, but they are relatively small).

In 2014, when Russia seemed on the verge of exclusion from SWIFT, Alexei Kudrin, a former finance minister, forecast that the sanction would shrink GDP by 5 per cent. The then prime minister, Dmitry Medvedev, said it would be tantamount to “a declaration of war.”

Even though Russia has been propped up in the past year by surging hydrocarbon prices – oil is up 50 per cent and European gas has tripled – being SWIFT-less could still devastate its economy. The pain would be even more intense if sanctions were also placed directly against Russian banks, preventing them from converting rubles into dollars and other foreign currencies. The United States could also prevent investors from buying Russian bonds, creating a liquidity crisis.

The game of chicken between Russia and the West is on. The history of sanctions has decidedly mixed results, but the SWIFT weapon has never been deployed against a major economy that was fully embedded in the global economy. Warfare is changing. The globalized financial system has created new, bullet-free opportunities to inflict economic destruction. Mr. Putin’s aggression calculus has never had a bigger economic dimension.

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