Russia-Ukraine: Is India prepared for financial warfare?

When Russia attacked Ukraine, the world expected the U.S. to send military aid to Ukraine but it chose to take the war to financial terrains instead. The U.S., and its European allies, decided to bar Russia from using the SWIFT system that enables cross-border financial transfers and payments.

The French Minister of Finance and Economy, Bruno Le Maire, said ‘cutting off Russia from SWIFT would be a financial nuclear weapon’, and rightly so. Cutting off from SWIFT may result in a dip of 5% in Russian GDP, as estimated by the Carnegie Moscow Center.

For any country, an embargo on SWIFT access would bring all its foreign trade to a grinding halt.

Clearly, the art of war in the current times stretches beyond military might. Past events indicate that China and Russia have been working to strengthen their financial system categorically to defend against threats such as these. And in future, financial coercions may not work against these countries’ hostile acts.

India, which is surrounded by hostile neighbours and relies heavily on transient diplomatic alliances should draw lessons from this Sino-Russian case-study. With changing texture of modern warfare, where financial warfare is key to victory, it is imperative to assess how well India is prepared. After all, wars that strangle the economy can be lost without bloodshed.

What is SWIFT? And why does it empower U.S. and its allies?

Founded in 1973 with 239 banks in 15 countries, Society for Worldwide Interbank Financial Telecommunications (SWIFT) is not a payment system, but a kind of international language in banking communications through which banks from different countries interact. Legally, SWIFT just controls the transmission system of banking information exchange-only messages. In 2022, SWIFT has more than 11,000 institutional members hailing from more than 200 countries and territories.

SWIFT dominates other transaction systems because it is widely adopted, and its continuously evolving platform offers ease of usage along with security.

A vast majority of SWIFT transactions are settled in U.S. dollars which helps solidify the greenback’s status as global reserve currency. It also makes the U.S. wield an unequal influence over SWIFT.

Russia and China working for de-dollarisation of financial system

Those who challenge U.S. have already started to work on their financial defence strategies. The first step was to contest the U.S. dollar as global reserve currency.

Russia and China have been working to create a new world order that may overthrow the reign of the dollar, and weaken SWIFT’s stronghold over global finance at the same time.

China has been increasingly asserting its currency renminbi (RMB) for a few years now. China has been purchasing commodities, particularly oil, in RMB and using gold as a neutral settlement reserve. In 2016, the RMB became the first emerging market currency to be included in the International Monetary Fund's (IMF's) special drawing rights (SDR) basket — a reserve currency used by the IMF. The other currencies with SDR are U.S. dollar, euro, yen, and pound sterling.

China advocates using the SDR basket as the global reserve currency or a super-sovereign currency. With the currencies of major economies (including the RMB) being the constituent currencies, each weighted by its GDP share. The long-term strategy of China is to peg the currencies of its main trading partners to the RMB, while the RMB itself is pegged to this super-sovereign reserve currency.

Close ties between Russia and China are increasingly moving their monetary settlements away from the dollar and enabling payments in Chinese currency, thus strengthening the case against dollar as a global reserve currency.

Another step in strategic financial defence by these countries was to create an alternative to SWIFT

Alternative to SWIFT another step in strategic financial defence of Russia, China

In 2014, The Central Bank of the Russian Federation created its own messaging system — the System for Transfer of Financial Messages (SPFS). As of 2020, SPFS traffic is almost 13 million messages per day. More than 400 financial institutions are part of the Russian SPFS.

China launched the Cross-Border Interbank Payment System (CIPS) in 2015 that is backed by the People’s Bank of China (PBoC). CIPS offers a safe transactional system to China without the risk of exposing any information to the United States.

As per reports, CIPS processed around $12.68 trillion in 2021, and by January 2022, about 1,280 financial institutions in 103 countries and regions have connected to the system.

Back in 2018, dissatisfied with Washington’s imposition of sanctions in Iran, the E.U. had also launched INSTEX (Instrument for Supporting Trade Exchanges) as an alternative to SWIFT for humanitarian trade with Iran.

Role of DeFi blockchain and sovereign cryptocurrency

Financial and political pundits are now focusing on building the DeFi blockchain and sovereign cryptocurrency to immunise financial systems in times of political turmoil.

China launched e-CNY, Digital Yuan, in January 2022 and is driving its adoptions through mobile apps within the country. In 2017, Putin had announced his plans to launch the sovereign digital currency of Russia. The Russian CryptoRuble is expected to be launched in 2022.

The cheaper and more efficient blockchain technology is already a threat to the SWIFT. The added attraction of this technology is the freedom it offers. Sovereign cryptocurrencies transacting through decentralised finance (DeFi) blockchains would allow countries to be more resistant to bullying by those who dominate global financial systems.

India scant prepared for the next battlefield that is financial-politics

Epitoma Rei Militaris, the Latin book that was considered as the Military Bible of Europe, teaches the maxim — "Igitur qui desiderat pacem, praeparet bellum". It means, ‘In the times of peace, we must prepare for war.’

Whether the financial world is dominated by U.S.’s SWIFT and U.S dollar, or China’s CIPS and renminbi, India would always be at the mercy of another nation. In fact, China’s dominance in world finance is likely to be more disastrous for India.

India’s stance for peace has not prevented wars being waged on it by Pakistan and China. The loyalties of its smaller neighbours like Sri Lanka and Bangladesh, has been questionable. China’s financial might has heavy influence on Pakistan, Sri Lanka, Nepal and Bhutan. It is time for India to strengthen the defence of its financial systems as much as its military.

Since the inception of the Cold War, India has led the non-alliance movement. Diplomatically it is even more vital and easier for India to offer a non-allied, neutral financial system for itself, and the nations wanting to maintain their neutral stance about any superpower.

Like military preparation, it is imperative for India to develop its financial arsenals to protect its sovereignty. Creating India’s own alternative to SWIFT and its sovereign cryptocurrency may be the best first steps forward.