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Slow Swift Action

Iran stands today isolated like no nation before, at least since electronic banking became the standard.  They have been cut off from Swift, the Society for Worldwide Interbank Financial Telecommunication, so money can’t enter or leave the nation except that which is carried over the border manually.  This came in response to their failure to allow an inspection of their nuclear program.

How Iran came to be contained so tightly and so quickly may set a new precedent for dealing with rogue nations.  But the process for doing this is not what most people would ever expect.

Iran has been going back and forth for decades with the representatives of the “six powers” that have been commissioned to supervise its nuclear program – United States, China, Russia, France, Germany and Britain.  The program was originally set up with US help under the Shah in the 1950s in order to provide electric power and cancer treatments.  Since the Iranian Revolution in 1979 there has been a growing suspicion that this program is going to be used to develop nuclear weapons – the facilities have not been thoroughly inspected since.  In 1981 one of their reactors was destroyed in an Israeli airstrike.

There are few more contentious issues around the world than nuclear proliferation, and in this case there has been actual shooting in the effort to prevent it from being developed.  Tightening sanctions imposed since 2007 have seemed like a weak response to many nations.

Enter the first ever complete cutoff of a nation by Swift.

Swift, based in Belgium, is nothing more than a messaging protocol over very secure lines that allows banks to speak to each other in complete confidence.  It is up to the banks that use it to be sure that everything is square, but without these secure lines there would be no international banking system.  The majority of international transfers from one bank to another use Swift, but more importantly all of the large transfers between national banks are done on this system.  It processes 15 million messages per day, and has been called “The glue that holds the global financial system together.”

It is a very independent operation that operates largely outside of international supervision.  In 2001 it cooperated with the US to track transactions between terrorist organizations, but that was discontinued when it was deemed to be a violation of Belgian and European privacy laws.  There is a rather secretive process now in place where US authorities can obtain something like “warrants” to very selectively track some transactions.

The action that was taken against Iran was forced on Swift because the European Parliament voted to impose sanctions over the inspections standoff.  Action by the US did not cut off Iran, nor did a vote in the UN.  It takes the EU, and the EU alone, to isolate a nation from the world financial system.

Iran survives almost entirely on its ability to export oil, so this is a crippling move.  After decades of playing around their hand is being forced in a very draconian way.  Nations like China have said that they intend to keep buying oil from Iran, but without a way to pay them it is hard to imagine how this is going to happen.  No one knows just how the embargo will play out because it simply has never happened before, but it has to hurt.

Morteza Masoumzadeh, a member of the executive committee of the Iranian Business Council in Dubai and managing director of the Jumbo Line Shipping Agency, told the Reuters news agency: “If Iranian banks cannot exchange payments with banks around the world then this will cause the collapse of many banking relations and many businesses.”  The pressure on the Iranian government has intensified dramatically with this one crucial step.

What does this mean for the future?  If this becomes a standard response to EU sanctions against a nation there is little doubt that the power of Europe has increased dramatically – even as they work to keep their union together through the sovereign debt crisis.  But it certainly begs the question as to why this has not been done before and, more importantly, how this will continue to work in the future.  It is almost certainly more powerful than bombing or any of the action contemplated by the US through our State Department, on the campaign trail, or by talking heads on teevee.  And it completely out of US control, outside of our ability to leverage oil reserves.

Time will tell how effective the embargo by Swift really is, but initially it seems that it can only be devastating.  That, by itself, would be both a victory for the international community and a very new cause for concern at the same time.

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14 thoughts on “Slow Swift Action

  1. Mind blowing in so many ways. Where do you find these things? I read another article on the sanctions against Iran but it sounded like it was just one more step and no big deal. Stopping them from selling oil makes US military action seem puny in comparison. This is a big deal – why didn’t this happen before?

    • Isn’t it mind blowing? I read this on the BBC updates and immediately knew that it was unique – I hadn’t even heard of Swift since the dust-up in 2003 or so over US terrorist-tracing. Why didn’t this happen before? It seems that a strange side effect of smacking down the US ability to use Swift data indiscriminately made it clear that Swift falls under EU law – and they are complying with that. It’s a sword and a shield, it seems.
      I agree, this is way bigger than what we could ever do with military action. I think it shows once again that $700B doesn’t buy us as much as we think.

  2. Cutting off a nation to all international trade is drastic but I thought this had already been done to Iran. If they can be sealed off it would be a big improvement but I can only imagine how they will respond. I agree that this is way worse than bombing them and stuff. Do they have to import food to feed everyone?

    • The noose has been tightening slowly on Iran – apparently they have been preparing for something like this for a while. You hit the nail on the head when it comes to food imports and so on, a very wise question! They import 59B$ worth of stuff according to the CIA World Factbook, which is about 7.2% of their $819B GDP (at PPP). It’s not huge. They do import $7.4B in food, which does not seem like a huge share of their total food, so I don’t think this will starve them out. It does sound like enough to cause a very serious recession, however, which will increase political pressure – given that the mullahs have been tightening the screws lately that could prove explosive.
      A very new twist! We will see how it shakes out.

  3. This is good news even though it means gas prices will keep going up. I would not be too quick to dump on our military strength because it sounds to me like the Europeans and US together make a ‘bad cop – badder cop’ strategy that really ups the pressure. If something changes in Iran that would be very sweet. It is probably a long way off still but we can see it happening now and that is really cool.

    • Good point. I have been slow to accept that our incredibly high military spending is useful, but I will agree that before we cut it dramatically we have to solve a few problems. If Iran is at least neutralized along with Syria I think we have a case for withdrawing and spending less. The Obama administration has done a very good job on this score and I can’t help but think that Secretary of State Clinton has been very instrumental in getting us to where we need to be.

  4. We gave Iran its nuclear program? Is there anything wrong in the world that isn’t ‘blowback’ from our screwups?

    • Not much, I think. North Korea isn’t our fault, but I can’t come up with much else that we didn’t at least have a hand in creating one way or the other.
      That’s the problem with being the biggest, baddest cop on the planet – it’s all our fault, and we tend to do things up big. Yeesh.

      • There is truth in the saying “Hindsight is 20-20,” and it is easy to criticize past actions, foresight is not so good…

        “The program was originally set up with US help under the Shah in the 1950s in order to provide electric power and cancer treatments…”

        Could we have known in the 50’s that the Shaw would be deposed in the 70’s? What are the future ramifications or the Swift cut off? Just a question, not a criticism.

      • This is an excellent question, and I did some digging to see if there was a good, clear answer. There were serious questions raised in 1974 when the nuclear program was being installed in Iran, according to a memo to the Secretary of Defense which has been declassified:
        “… domestic dissidents or foreign terrorists might easily be able to seize any special nuclear materials stored in Iran for use in bombs.”
        “…an aggressive successor to the Shah might consider nuclear weapons the final item needed to establish Iran’s complete military dominance of the region.”
        http://www.gwu.edu/~nsarchiv/nukevault/ebb268/doc02.pdf (pdf)
        The answer is that at least some people prominently placed (ie, they were advising a member of the cabinet) were aware of this potential problem. So it was foreseeable. But that was an excellent question and my initial glib statement was not entirely appropriate.

        As for the future ramifications of the Swift cutoff, this has never been done before so we can only guess. Iran has about 7% of its GDP in imports and 10% in exports – people in both of those business are likely to face unemployment. Their major source of money, oil exports, is likely to be cut off. It has to be devastating. It will take a month or two to sink in, but this has to increase the pressure on the government dramatically.
        Will the people of Iran blame their government for the serious Depression that is certainly coming, or will they accept that almost certain official position that this is the result of western imperialism / meddling / aggression ? My guess is that over time it will shift, but in the long run they will blame their government. We know there are demographic forces already at work pushing for change in Iran – now take all those young people and make them unemployed.
        The more I think about this, the more serious it seems. This may have to head into another post.
        Thank you for making me think and do some research. This is the ‘net at its best, and I’m proud to host this conversation!

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