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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 mon

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?
- sumanthvepa 5y ago
  Yup. You are right. In this case the US Treasury has frozen the account of the the Central Bank of the Russian Federation(CBR) holds with it. So the CBR cannot transact in USD, and in turn any Russian Bank relying on the CBR providing dollars for purchases of foreign goods and services will not be able transact through that route. It is not exclusion from SWIFT itself that is causing difficulties for Russia in this case, but freezing of the CBRs account with the Fed. However, transacting through the route that goes from consumer -> Russian Bank -> CBR -> Fed -> US Bank -> US merchant (or in the reverse direction) is not the only route. A Russian bank could also transact with a correspondent bank in another country that transacts with a US bank that transacts with the Fed. So the following transaction might still be possible: consumer -> VTB (Russian bank) -> ABN Amro (dutch bank) -> Citi (US bank) -> Fed -> Bank of America -> US merchant. In fact this is probably the more common path (except VTB might have directly transacted with Citi before last week). The easiest way to stop these other routes is to ban all Russian Banks from the SWIFT system. This is because pretty much every US bank uses SWIFT to serve as the messaging platform by which they transact with correspondent banks (And they will NOT use any other system -- because of US regulations). So simply preventing SWIFT messaging for all Russian banks makes it enormously difficult for Russian Banks to transact in USD. Hence the emphasis on blocking SWIFT. But it is not the end of the world for Russia. They still have three avenues for international trade: 1. Trade in another currency, preferably of a country that is less susceptible to US pressure (e.g. China, and eventually their own) This avoids SWIFT, the US Fed and US controllable financial entities altogether. 2. Use proxies. Have an entity located in another country trade in USD on behalf of a Russian entity. It is usual to keep such proxy relationships secret. However, should US govt. discover the proxy aiding a sanctioned entity, they may sanction the proxy itself, and the jurisdiction in which the proxy does business. So this method of transacting is risky for many entities (both banks and other non-financial entities.) So most won't do it. But some will. 3. Barter. This is not as ridiculous as it sounds. For example India had to use this system to buy critically needed oil from Iran, initially, after the latter was banned from SWIFT. For a very large country like India or (especially) China, that domestically produce a very wide range of goods and services, it can be very viable way to trade. But it is still limiting. Both countries have since moved to their own SWIFT like systems to trade with Iran. But of course, one cannot buy US produced (or more generally western goods) this way. So no iPhones.

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?

sumanthvepa 5y ago
Yup. You are right. In this case the US Treasury has frozen the account of the the Central Bank of the Russian Federation(CBR) holds with it. So the CBR cannot transact in USD, and in turn any Russian Bank relying on the CBR providing dollars for purchases of foreign goods and services will not be able transact through that route. It is not exclusion from SWIFT itself that is causing difficulties for Russia in this case, but freezing of the CBRs account with the Fed. However, transacting through the route that goes from consumer -> Russian Bank -> CBR -> Fed -> US Bank -> US merchant (or in the reverse direction) is not the only route. A Russian bank could also transact with a correspondent bank in another country that transacts with a US bank that transacts with the Fed. So the following transaction might still be possible: consumer -> VTB (Russian bank) -> ABN Amro (dutch bank) -> Citi (US bank) -> Fed -> Bank of America -> US merchant. In fact this is probably the more common path (except VTB might have directly transacted with Citi before last week). The easiest way to stop these other routes is to ban all Russian Banks from the SWIFT system. This is because pretty much every US bank uses SWIFT to serve as the messaging platform by which they transact with correspondent banks (And they will NOT use any other system -- because of US regulations). So simply preventing SWIFT messaging for all Russian banks makes it enormously difficult for Russian Banks to transact in USD. Hence the emphasis on blocking SWIFT. But it is not the end of the world for Russia. They still have three avenues for international trade: 1. Trade in another currency, preferably of a country that is less susceptible to US pressure (e.g. China, and eventually their own) This avoids SWIFT, the US Fed and US controllable financial entities altogether. 2. Use proxies. Have an entity located in another country trade in USD on behalf of a Russian entity. It is usual to keep such proxy relationships secret. However, should US govt. discover the proxy aiding a sanctioned entity, they may sanction the proxy itself, and the jurisdiction in which the proxy does business. So this method of transacting is risky for many entities (both banks and other non-financial entities.) So most won't do it. But some will. 3. Barter. This is not as ridiculous as it sounds. For example India had to use this system to buy critically needed oil from Iran, initially, after the latter was banned from SWIFT. For a very large country like India or (especially) China, that domestically produce a very wide range of goods and services, it can be very viable way to trade. But it is still limiting. Both countries have since moved to their own SWIFT like systems to trade with Iran. But of course, one cannot buy US produced (or more generally western goods) this way. So no iPhones.