The Financial Weapons of War: And the risks to the West.

• Author: Davies, Howard

Faced with the horrors of Russia's invasion of Ukraine, and recognizing the limited military options open to them, Western governments understandably deployed their economic and financial arsenal. Such sanctions have been imposed on errant countries before, of course, with varying success, but not to anything like the same extent as against Russia now.

Notably, the United States and its allies seized much of the Russian central bank's foreign exchange reserves, and cut off some Russian banks' access to the SWIFT financial messaging system for international transactions. The world has learned a new word--"deswifting"--and the financial system has been weaponized as never before.

It is too early to assess the impact of the sanctions against Russia; there is no sign yet of a decisive effect on President Vladimir Putin's regime or its policies. But the longer-term damage to Russia's economy will probably be considerable.

At the same time, the consequences of the current Western-led sanctions will not be limited to Russia and Belarus, their direct targets. Other countries are asking whether they, too, might find themselves cut off from the dollarbased financial system if their governments cross a US. red line. Saudi Arabian policymakers are concerned, and China has been anxious for some time about its vulnerability to U.S. financial sanctions.

I do not know whether there is a Mandarin ideogram for deswifting. But Zhou Xiaochuan, the former governor of the People's Bank of China, has talked about the risk to China of U.S. sanctions, and advocated defensive measures to increase the use of the renminbi in global markets. Others have openly asked whether any Chinese move against Taiwan would trigger similar sanctions from the West.

In recent years, China has taken steps to mitigate this risk. For example, it has established its own Cross-Border Interbank Payment System, which has the same messaging format as SWIFT, to offer cross-border renminbi settlement among its members. CIPS has grown rapidly, with some active participation from major Western banks, although the volume of transactions processed through it before the Ukraine war was still less than 1 percent of the SWIFT volume. While that number will likely increase as Russian banks cut off from SWIFT seek to use CIPS as a substitute, their transaction volumes will be too small to make a significant difference.

Although CIPS has so far not seriously threatened Western payment systems' global...