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Why does settling in dollars make any difference? Like he said, if the SWIFT secure messaging service goes down, someone at a bank in Japan has the phone number

Why does settling in dollars make any difference? Like he said, if the SWIFT secure messaging service goes down, someone at a bank in Japan has the phone number of someone at a bank in New York and can "wire" money with a phone call instead of sending a SWIFT message. Wires will be orders of magnitude slower, but money is not frozen. And the real effect is that someone in Mumbai receiving a phone call from a Russian bank today will be especially careful to cross every T and dot every I.

JumpCrisscross 5y ago
> someone at a bank in Japan has the phone number of someone at a bank in New York and can "wire" money with a phone call instead of sending a SWIFT message Wires, as the article explains, are just debits and credits. And all non-paper debits and credits of dollars are ultimately governed by the banks’ credits and debits with the Fed. So no, you can’t wire dollars with a phone number if the other side is sanctioned. You can if they’re off SWIFT, but you need someone with an account at the Fed to make those changes.
sumanthvepa 5y ago
Because every single transaction in USD must result in a credit and debit to an account at the US Federal Reserve (except for transactions entirely in paper money -- this is the reason drug dealers like paper money.) For a transaction denominated Yuan(Renminbi) that transaction must eventually result in a debit and credit entry at the People's Bank of China (the central bank of China). In the latter case no US entity need be involved. The problem with the second transaction is that fewer people are willing transact in Yuan than are willing transact in USD. That is changing though, and quite rapidly. Many countries have switched to trading with Russia in other currencies. For example the Indian government purchases military equipment from Russia using the INR currency and therefore, its payment for such equipment does not flow through any US-connected financial system. The US can still stop such transactions though, through other forms of economic pressure: CAATSA regulation for example. Which is why India is particularly concerned about the Russia/Ukraine conflict. IF the US sanctions India through CAATSA to block it from purchasing Russian military equipment, India will be severely hurt and unable to defend itself against China (one of its two primary security concerns.) So bottom line, one can transact outside of the US financial system, but that is significantly less useful, and also does not mean that the US cannot stop such transactions. In the end the thing that enables the US to affect what other countries do, is the absolutely massive size of its economy relative to others and the absolute dominance of its military relative to that of others. As long as it maintains those two advantages, it will be able cripple any other country -- either through war or economic sanctions.
- jsmith99 5y ago
  > Because every single transaction in USD must result in a credit and debit to an account at the US Federal Reserve Are you sure about that? How about USD accounts outside America, commonly known as Eurodollars? Ultimately those dollars originally came from the Fed but they are effectively outside their control.
  - sumanthvepa 5y ago
    Eurodollar accounts are essentially deposit accounts at a non-US bank denominated in USD. They are, as are all deposit accounts, debt instruments issued by that bank. These accounts, as you point out, are not subject to US regulations in the sense that US laws regarding bank deposits need not be complied with. A domestic USD checking account at Bank of America is regulated by the FDIC with insurance against fraud etc. For Eurodollar accounts these protections don't apply. (Other protections provided by their home-country laws might apply though.) However, if you were to actually try to transact in USD with that account, the transaction path would still touch an institution that has an account with the Fed. And hence be controllable by the US government. For example if you were to withdraw $50 in cash from your eurodollar account, the bank would still have to purchase the dollars (or more generally acquire them in some way) to give them to you. They cannot print the dollars themselves. The same thing applies to electronic transactions, except that now, there will be a corresponding set entires in the electronic ledgers of some US bank that has an account with the Fed. So for the purposes of sanctions-busting, Eurodollar accounts are no good. Eurodollar accounts are, of course, extremely useful for international trade. Most exporters will need a Eurodollar account to keep transaction costs low. Expats often hold a Eurodollar account with banks in their home countries to insulate them from exchange rate risk. There are a myriad other uses. But evading sanctions is not one of them.
- ricktdotorg 5y ago
  insightful and illuminating! thank you.
- zodiac 5y ago
  > Because every single transaction in USD must result in a credit and debit to an account at the US Federal Reserve If I understand it correctly, in this case, isn't the thing prohibiting that transaction the US sanctions (i.e. https://home.treasury.gov/news/press-releases/jy0612 https://home.treasury.gov/news/press-releases/jy0612), rather than exclusion from SWIFT?

JumpCrisscross 5y ago

> someone at a bank in Japan has the phone number of someone at a bank in New York and can "wire" money with a phone call instead of sending a SWIFT message Wires, as the article explains, are just debits and credits. And all non-paper debits and credits of dollars are ultimately governed by the banks’ credits and debits with the Fed. So no, you can’t wire dollars with a phone number if the other side is sanctioned. You can if they’re off SWIFT, but you need someone with an account at the Fed to make those changes.

sumanthvepa 5y ago

Because every single transaction in USD must result in a credit and debit to an account at the US Federal Reserve (except for transactions entirely in paper money -- this is the reason drug dealers like paper money.) For a transaction denominated Yuan(Renminbi) that transaction must eventually result in a debit and credit entry at the People's Bank of China (the central bank of China). In the latter case no US entity need be involved. The problem with the second transaction is that fewer people are willing transact in Yuan than are willing transact in USD. That is changing though, and quite rapidly. Many countries have switched to trading with Russia in other currencies. For example the Indian government purchases military equipment from Russia using the INR currency and therefore, its payment for such equipment does not flow through any US-connected financial system. The US can still stop such transactions though, through other forms of economic pressure: CAATSA regulation for example. Which is why India is particularly concerned about the Russia/Ukraine conflict. IF the US sanctions India through CAATSA to block it from purchasing Russian military equipment, India will be severely hurt and unable to defend itself against China (one of its two primary security concerns.) So bottom line, one can transact outside of the US financial system, but that is significantly less useful, and also does not mean that the US cannot stop such transactions. In the end the thing that enables the US to affect what other countries do, is the absolutely massive size of its economy relative to others and the absolute dominance of its military relative to that of others. As long as it maintains those two advantages, it will be able cripple any other country -- either through war or economic sanctions.

jsmith99 5y ago
> Because every single transaction in USD must result in a credit and debit to an account at the US Federal Reserve Are you sure about that? How about USD accounts outside America, commonly known as Eurodollars? Ultimately those dollars originally came from the Fed but they are effectively outside their control.
- sumanthvepa 5y ago
  Eurodollar accounts are essentially deposit accounts at a non-US bank denominated in USD. They are, as are all deposit accounts, debt instruments issued by that bank. These accounts, as you point out, are not subject to US regulations in the sense that US laws regarding bank deposits need not be complied with. A domestic USD checking account at Bank of America is regulated by the FDIC with insurance against fraud etc. For Eurodollar accounts these protections don't apply. (Other protections provided by their home-country laws might apply though.) However, if you were to actually try to transact in USD with that account, the transaction path would still touch an institution that has an account with the Fed. And hence be controllable by the US government. For example if you were to withdraw $50 in cash from your eurodollar account, the bank would still have to purchase the dollars (or more generally acquire them in some way) to give them to you. They cannot print the dollars themselves. The same thing applies to electronic transactions, except that now, there will be a corresponding set entires in the electronic ledgers of some US bank that has an account with the Fed. So for the purposes of sanctions-busting, Eurodollar accounts are no good. Eurodollar accounts are, of course, extremely useful for international trade. Most exporters will need a Eurodollar account to keep transaction costs low. Expats often hold a Eurodollar account with banks in their home countries to insulate them from exchange rate risk. There are a myriad other uses. But evading sanctions is not one of them.
ricktdotorg 5y ago
insightful and illuminating! thank you.
zodiac 5y ago
> Because every single transaction in USD must result in a credit and debit to an account at the US Federal Reserve If I understand it correctly, in this case, isn't the thing prohibiting that transaction the US sanctions (i.e. https://home.treasury.gov/news/press-releases/jy0612 https://home.treasury.gov/news/press-releases/jy0612), rather than exclusion from SWIFT?