Monetary Gatekeepers as Jacks-of-All-Trades
A Little Bit of Money
Thought Experiments on Cross-Border Payments - Of Couriers, Bankers, and Bitcoiners
Series 28: Monetary Gatekeepers as Jacks-of-All-Trades
Payment Hubs are Tender Spots
For the most part, fund movement is centralized. That’s why politicians can use it as a leverage point in international relations. Being cut off from SWIFT is bad news for any economy and is therefore not much appreciated by countries that step out of bounds. Governments use their regulatory power to dictate who can and cannot be the counterparty in correspondent banking relations. Russia’s banks are currently facing such restrictions.
Protectionism uses the tactics of monetary policy
In Russia's case, the funds in foreign currency come mainly from natural gas supplies, oil exports and diamond productions. Before the Ukraine war, the U.S. exempted diamonds from sanctions because it is the largest consumer of diamonds - after all, our American friends didn't want prices to rise. Banning gas and oil seemed fine because Europeans are the ones who have to pay for it. Meanwhile, the sanctions were extended to diamond mining companies.
U.S. Dollar Clearing Capabilities Dominate the World
The dollar clearing mechanism through USD correspondent banks is quite efficient. The vast majority of global commodity payments are in USD and must be cleared and settled through the US banking system. There is no way to circumvent this. So if the U.S. government wants to block a country or a particular bank, it can simply cut the dollar rails. Cutting off dollar payments renders the dollar balances of the affected parties virtually worthless, since transfers from dollar accounts are withheld as long as the restriction is in effect.
Successfully Blackmailing the Swiss Banking Anonymity
Swiss bankers learned this lesson the hard way. In 2014, the U.S. threatened to stop its USD clearing if Swiss banks continued to facilitate tax evasion by U.S. citizens. Eventually, Swiss authorities got cold feet and abandoned their famous banking secrecy. As a result, UBS, Credit Suisse and several other banks were forced to pay fines in billions of dollars. The Swiss banks that did not cooperate became insolvent. Some Swiss still view this policy change as a glorious failure, but in reality it was an adjustment to the unequal balance of power. The U.S. authorities did not care whether their strategy was fair or not. After all, a number of U.S. states are known as tax havens - to this day without any problems in clearing USD.
To be continued. Further Reading:
R. Balmforth and N. Zinets. “U.S. diplomat plays down leaked call; Germany’s Merkel Angry.” Reuters, Feb. 7, 2014.
R. Pallas. Bitcoin Security. Master’s thesis, Tartu University, 2012.
F. Varesano. COIN: a distributed accounting system for peer to peer networks. Bachelor’s thesis, University of Torino, 2012.
M. Alexeev and S. Weber, eds. The Oxford Handbook of the Russian Economy. Oxford University Press, 2013.
A. Billings et al. "Curbing Tax Evasion through Offshore Bank Deposits in Swiss Banks: A High Priority for the Obama Administration." The CPA Journal 85.10 (2015): 30.