David Frum writes:

The EU Commission announced this afternoon that the European Central Bank will deploy its most powerful financial weapon against Russian aggression. Several hours later, Secretary of State Antony Blinken announced that the Federal Reserve will impose sanctions of its own upon the Russian central bank.

Central-bank sanctions are a weapon so devastating, in fact, that the only question is whether they might do more damage than Western governments might wish. They could potentially bankrupt the entire Russian banking system and push the ruble into worthlessness.

Russia is also being hit by a partial cut-off from the SWIFT system. SWIFT is a messaging technology based in Belgium that allows banks to talk to one another in secure ways, enabling the safe and sure electronic transmission of funds. SWIFT is not a bank, nor is it exactly a payments system. It is instead a way to guarantee that money moves where it is supposed to go. Countries cut off from SWIFT, as Iran was in 2012, are effectively cast back into the precomputer era—forced to rely on primitive barter transactions, or Breaking Bad–style pallets of physical cash, to fund their governments and their economies.

Details are still pending about the Western central-bank sanctions. To better understand the possibilities, I spoke with Michael Bernstam, an economist and Soviet-born analyst at Stanford’s Hoover Institution. Bernstam has studied the potentially decisive impact of such sanctions since the prior Russian invasion of Ukraine, in 2014.

Bear with me as I walk you through some banking and currency technicalities. I promise the destination will be worth the trouble. [Continue reading…]