In a couple of interviews on Swiss Italian language radio RSI this weekend (here (from minute 18), here (from minute 8) and here), I argued that the SWIFT sanctions were the right thing to do and we already see their short-term impact in the form of a de-facto collapse of the Russian banking system: people are hoarding cash (credit cards have stopped working, they are ultimately based on the US infrastructure and the SWIFT payment systems) bringing the banking sector to crumble. And the firepower of the Russian central bank in terms of currency stabilization has been severely curtailed because its foreign-currency reserves (which of course are not sitting as dollar cash piles in its vaults but on foreign bank accounts) have effectively been seized. The effect has been a collapse of the rouble and will be high domestic inflation, coupled with the collapse of many small private firms which will no longer have access to bank credit.

Even though there is a risk that some of this will also spill over to western banks who are heavily exposed to Russia, I would argue that this can be dealt with. In fact, some political willingness to also accept some economic disruption in the west will be needed to make the sanctions develop their full impact.

Against this background, the current extent of the sanctions can still be seen as too small, since some Russian banks still have access to SWIFT. This allegedly was the condition of e.g. the German Italian government for their agreement to the SWIFT sanctions because they want to make sure they can still pay for Russian energy supplies on which they depend more than most western countries. It is true that, for maximum short-term impact, this loophole should be closed quickly because in the current setup German and Italian energy payments effectively help the regime in Moscow finance its war in Ukraine.

But while SWIFT sanctions are a sharp sword in the short run, there is a risk that its continued use will make the sword if not blunt but then considerably less sharp over time. Unavoidably, there will be some kind of medium-term adjustment. Russia has developed its own payment system since its first invasion of Ukraine and the annexation of Crimea in 2014 and will be trying to expand it. I don’t expect this to come to much though.

Much more importantly, the Chinese stand ready to provide access to their own system, CIPS (China / Cross-border international payment system) which they have developed since 2012. It is part of China’s decade-long effort to establish the Renminbi as an international reserve currency and as a currency of invoice in international trade. Having international energy trade denominated in renminbi (imagine a barrel of oil being quoted not only in dolla but also or even only in Renminibi) is a long-standing dream of the Chinese government. In the current situation, Russia will undoubtedly turn more of its energy exports to China and also increasingly use China as gateway to channel its oil and gas to global markets. While this does not mean that the renminbi will come to rival the dollar as the world dominant currency anytime soon, it is a unique opportunity for China to take a decisive step in that direction.Tellingly, China has already announced that it is not going along with sanctions on Russia….

And maybe that’s why even the U.S. is, at least for now, willing to accept German and Italian recalcitrance on closing the door on Russian energy exports to the west completely….