Old Tech Sanctions Are About To Meet New Tech Digital With Global Trade Implications
The advent of Sovereign Digital Currencies has left the West behind and will accelerate BRICS+ trade
A little-noticed element of the West’s sanctions upon countries such as Russia and Iran has been how technological development invariably speeds up during times of acute stress, and especially wars. In fact, the Russia-Ukraine conflict, when seen in the broader content of a struggle between perceived Western hegemony and opposing rivals, may well be ultimately settled as a result of technology, as opposed to brute force and administrative measures designed to hinder trade – sanctions.
When taken as a force with which to punish countries, the United States and European Union, among others, have imposed an unheard of level of sanctions against Russia in particular. Between February 22, 2022, and February 10, 2023, territories and organizations worldwide imposed 10,608 restrictions on individuals from Russia. The United States, the world’s largest economy, has imposed over 2,000 list-based sanctions alone. Yet without going into discussions about the rights or wrongs of the Ukraine conflict, one can look at the effectiveness of these punishments.
As concerns the SWIFT disconnection, this entailed, apart from rushed through legislation, little more than turning off a switch. That simple action was designed to cut Russia (and previously Iran) off the global financial payments system as in Russia’s case, took place on February 1st 2022 with Russia’s Sberbank, the countries largest, being added just a month later. Other banks have been added since, with nearly all Russian financial institutions cut off from the network. Predictions at the time were that doing so would cripple Russia’s ability to import and export and collapse the economy. But this didn’t happen, although it certainly created damage and made Russia’s international trade more difficult.
But all Moscow did was use its Ruble as a trading currency instead of the US dollar. As Russia was at the time in the top ten of global economies in terms of size, it had plenty of takers for its own money, not least China and India, the world’s second and fifth largest economies. Two elements are striking here, firstly the old tech nature of SWIFT disconnection, and secondly the naievity that the US dollar was paramount to the Russian economy. It wasn’t, and hasn’t been for many years – Moscow has taken a policy of de-dollarising its economy since 2014 and has paid down most of its foreign debt. The Ruble therefore rode to the rescue with plenty of significant global actors willing to take it in payment.
The additional sanctions themselves, which are ongoing and now being rolled out by the West upon third party agent (The UK sanctioned Turkish and UAE businesses last week) are again a fairly basic form of trade rebuttal. They are merely laws, pieces of paper, that threaten punishment in terms of further trade withdrawal – including threats of SWIFT disconnection. It’s a bit like being issued with a ‘cease and desist’ court judgement. While inconvenient, it is hardly hi-tech. And this is where the West is about to be caught out.
The main pillar of the sanctions – and the threat of sanctions has been the SWIFT network. While Russia has been able to withstand that – and even thrive (its Q2 GDP growth hit 4.9%) SWIFT disconnection for smaller economies could be a huge problem. But that said, Iran has been disconnected from SWIFT since 2018. It hasn’t resulted in regime change. Clearly there is resistance.
The SWIFT end of the sanctions stick however is also about to be eroded, as new, digital technologies – partially hastened since the West began using it as a sanctions weapon are about to kick in. This is where the future role of Digital Currencies begins to rear its head – with the West currently behind in the development race.
The introduction of Digital currencies is a game changer as countries that use them can bypass the SWIFT payments network altogether. They are a new tech solution to analogue tech sanctions.
This is because such currencies are not based on a single protocol and therefore cannot be visible to the Basel-based BIS, which is the SWIFT operating platform. This means that it is possible to effectively bypass SWIFT and the West’s financial sanctions. It also partially removes the West’s threats of SWIFT disconnection to third countries as an alternative exists. So when will this happen?
The answer is that the process is already underway. On August 1st, Russia officially launched the Digital Ruble. It is managed by the Central Bank of Russia, so doesn’t operate like a cryptocurrency, it is merely the digital version of the standard Ruble and supported by the Central bank. Other sovereign digital currencies, such as the Digital Yuan and Digital Rupee, are the same. Even smaller countries, such as Kazakhstan (itself an important conduit for Russian trade east and west) and Kyrgystan, amongst many others – including the likes of Iran – are all way down the path of introducing digital versions of their currencies. Russia, China and India are all at the stage of conducting real-world trials, with the Bank of Russia saying that a full roll out to all Russian banking clients who wants to use the Digital Ruble expected in early 2025. The same will probably be true for China and India. Brazil and South Africa, the other members of BRICS also have Digital currency developments well underway. That is important to note as the BRICS members are also the lead nations amongst their respective regional trade blocs: Mercosur, the CIS/EAEU, SAARC/BIMSTEC, the RCEP, and the AfCFTA/Southern Africa Customs Union. Digital currency expansion, and the sharing of these technologies will be, to coin a pertinent term, ‘Swift’. This will eradicate most, if not all, of the West’s financial and economic sanctions upon Russia – and anyone else.
But where is the West amongst all this currency digitisation? In fact, they’ve been left years behind. The United States have only just completed their ‘proof of concept’ – a stepping stone Russia, India and China completed three years ago. The EU is in the same position.
While it is true that economies such as the United States and European Union are rather more complex, this has in turn hindered their ability to adapt easily to technological change. Even tiny Laos, one of the smallest and poorest countries in ASEAN, is rolling out sovereign digital currency trials.
The unexpected, and somewhat stunning reality therefore is that the West both failed to fully comprehend the extent of Russia’s economic strength, have been over-confident in terms of being able to manipulate global trade via SWIFT, and at the same time have been left behind in the development of new alternative digital technologies.
It also means that the ushering in of a new global economic structure is currently underway. It is time to buckle up for the ride.
Chris Devonshire-Ellis is the Chairman of Dezan Shira & Associates. He may be contacted at asia@dezshira.com
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