Academic Papers

The global financial system and the US hegemony

Euan Southwell

The financial system plays a significant role in the global political economy and its stability. This paper demonstrates the critical role of financial capital in the global economy by focusing on two systems: The Society for Worldwide Interbank Financial Telecommunications (Swift) and The Instrument in Support of Trade Exchanges (INSTEX). In doing this, the paper will define Swift and INSTEX and examine their critical role in upholding the global order, particularly in maintaining US hegemony. Finally, the essay will use a case study of Iran and Russia to demonstrate the success of sanctions imposed via Swift and INSTEX on both countries. 

Swift is a system that banks use to make immediate and secure cross-border payments in more than 200 countries. Since its inception in 1973, Swift has enabled cross-border payments, becoming the largest facilitator of international payments worldwide. It works by allowing companies to make international payments to a global cooperative that acts as a communications liaison between banks. Swift does not deal with physically sending money but with sending information, such as names, account numbers and other personal information. Swift is now the largest telecommunications company in the world and represents 80 per cent of global transactions in the financial world, “Swift was founded to replace the telex. It is a member-owned cooperative connecting more than 11,000 banks, financial institutions, and corporations in more than 200 countries and territories.” (Swift, 2022). Swift is a key part of the financial world, allowing people to use ATMs that don’t belong to their banks and transfer money at home and abroad, amongst other financial services. 

Fiscal institutions, multilateral corporations, and governments also use Swift. In addition, the Group of 10 economically powerful countries (including the European Central Bank) monitor Swift. In 2012 Swift opened itself up to more banks outside the West, such as the People’s Bank of China, Hong Kong Monetary Authority and Reserve Bank of India. However, it is still monitored closest by Western financial institutions. As a global service, it can be seen to be firmly monitored by the West to fit in with the liberal order of finance that the US keeps close control of. “The Swift Oversight Forum provides a setting for the G-10 central banks to share information on Swift oversight activities with a wider group of central banks.” (Swift, 2022). Its size and this close link to the West means the US has sought to use Swift as a tool in its fight in the war on terror. 

After 9/11, “… the Central Intelligence Agency and US Treasury demanded access to the financial transaction databases of Swift, to be used to map terrorist networks” (de Goede and Westermeier, 2022, p.7). This demand for access put a strain on US/EU relations due to Swift supplying the information which broke EU privacy laws, “…in order to grant the United States access to its financial records, Swift had to violate Belgian and EU privacy laws prohibiting the transfer of personal data to nations with relatively lax privacy laws, such as the United States” (Connorton, 2007, p.284) Swift was punished by Belgium, and because of the demand on the part of the US to continue accessing Swift’s information, a deal was made between the EU and the US called the US – EU compromise. This allowed the US access to Swift and changed the operations of Swift itself. This incident highlights how a company registered in Belgium and operating under EU financial laws can still decide to disclose financial information to the US. This serves to demonstrate the power of the US and how the US uses private financial institutions to further its own security and foreign policies. The US – EU compromise can be seen as an event that changed the US and Swift relations moving forward, illustrated next by the US use of Swift to further its sanctions in discussions with Iran. 

The US used Swift to enforce sanctions placed on Iran and Syria in 2012 and 2018 before and after the Joint Comprehensive Plan of Action (JCPOA) talks. For example, in 2012, President Obama issued sanctions to deter transactions of Iranian oil exports, “This sanction is designed to deter Iran or any other country from establishing payment mechanisms for the purchase of Iranian oil to circumvent the NDAA sanctions.” (White House President Barack Obama, 2012). These sanctions severely affected the Iranian economy and show how financial systems are a key focus of sanctions for the US, which can punish a financial organisation or state that is caught breaking the sanctions. This occurred in 2012 when Obama stated, “Today, the Department of the Treasury imposed sanctions under CISADA on Bank of Kunlun in China and Elaf Islamic Bank in Iraq, for knowingly facilitating significant transactions or providing significant financial services to Iranian banks designated for their connection to Iran’s support for terrorism or proliferation.” (White House President Barack Obama, 2012). 

One of the main pieces of infrastructure that played a big part in enforcing the US sanctions was Swift which cut off nearly all Iranian banks during the sanctions. This meant that it was almost impossible for banks, financial institutions, businesses, and governments to communicate financially in and out of Iran. This shows how the US reinforces itself as a hegemonic power; the sanctions meant that when JCPOA talks came about, sanctions crippled the Iranian economy, and the Iran government was put on the back foot in negotiations, leaving it with a nuclear program below, which it then wanted, “The disconnection from international payment infrastructure placed considerable pressure on Iran during the negotiations of the JCPOA, which was eventually concluded in 2015” (de Goede and Westermeier, 2022, p.7). The JCPOA negotiations showed how Swift was used to bolstering the US position in talks, as it was powerful enough to use financial systems to further its position. Although Swift helped the position of the US in the JCPOA talks, this followed the coercion of Swift and discussions with the EU, which ultimately allowed the US to use Swift in its sanctions policy.  

Although Swift may be seen to align itself with the US, the US used coercion to change how Swift operates. During the sanctions, Swift was the last piece of financial infrastructure left in Iran and a vital part of keeping the financial system connected to the rest of the world. We saw this as Swift defying Iran sanctions such that in February 2012, the US Senate Banking Committee passed legislation that would “permit the imposition of sanctions on Swift if it continued to provide services to the Iranian financial institutions on its campaign list” (Scott and Zachariadis, 2014, p.133). As well as threatening to put sanctions on Swift, the US also engaged in talks with the EU to alter its sanction policy to force Swift further to pull out of Iran and come into line with US foreign policy: “On 15 March, there was an EU Council decision that amended existing Iran sanctions to prohibit the provision of financial messaging services to identified sanctions institutions…” (Scott and Zachariadis, 2014, p.134). The need to control the operations of Swift the US demonstrates the power they are willing to use to ensure that financial systems align with their foreign policy. Re-negotiating the EU sanction laws to follow theirs closer clearly illustrates this power; the US puts immense pressure on both states and financial institutions via coercion through sanctions to break the neutrality of Swift. 

Swift is not the only financial system used in the Iran sanctions as the Instrument in Support of Trade Exchanges (INSTEX) was built by EU nations to continue aid trade following the 2018 sanctions. Sanctions towards Iran were supported by the EU (as shown above), and sanctions laws were even changed to closely follow US sanctions resulting in Swift pulling out. Yet, in 2018 when the Trump administration pulled out of the JCPOA agreement, they also pulled out of the deal for the EU and the US to send medical aid to Iran. The EU did not follow the US in supporting this pull-out of the agreement choosing to honour the deal and keep the JCPOA agreement alive. A significant problem that the EU faced was that there needed to be a system in place that could facilitate the transfer of aid due to Swift no longer being connected to Iran. INSTEX instead allowed EU nations to trade with Iran without breaking US sanctions laws so, allowing transactions not to be disrupted by the US: “The goal of INSTEX is to facilitate legitimate trade with Iran in light of challenges faced by European market participants who wish to continue trading in and with Iran in an unobstructed manner” (INSTEX, 2020). 

INSTEX, like Swift, does not deal with the transfer of money but instead works on a barter system that operates in a closed-loop system. This closed loop system works by an exporting company paying into INSTEX, which corresponds to its Iran counterpart, Special Trade and Finance Instrument (STFI), which receives the goods and sends payment to INSTEX who then pays out: “INSTEX completed the first transaction to export European medical supplies to Iran in a complex Rial–Euro denominated barter system” (de Goede and Westermeier, 2022, p.8). Working on a barter system that deals only in Rial-Euro derivatives allows companies to circumnavigate US sanctions legally, meaning the US could not punish them under its own secondary sanction laws. 

Another critical part of using INSTEX is avoiding the transaction using dollar dominators that are closely monitored and controlled by the US. This would allow the US to monitor transactions in and out of Iran, thus identifying companies or governments caught trading with Iran. INSTEX operates within the US Office of Foreign Assets Control, which permits the sending of aid to Iran: “INSTEX-facilitated trade remains within the domain covered by the general licenses issued by the US Office of Foreign Assets Control (OFAC) that allow humanitarian trade with Iran and does not present a conflict with US sanctions provisions” (Schindler, 2021, p.30). These factors make INSTEX a tool for the EU to use to shield itself from the US and continue to pursue its own foreign policy. Because of the capability of INSTEX, and its ability to go around US sanctions, the Trump administration saw it as a challenge to the US financial hegemony. 

INSTEX can be seen as a different type of challenge to the US hegemony power of the liberal financial order. There are three aspects to how INSTEX challenges the US. The first is that the US can do little to stop its use due to its capacity to work around the US sanction to facilitate aid to Iran. The US reaction towards it has been dismissive, and its creation angered the Trump administration. The US Treasury Department warned INSTEX president Per Fischer “to carefully consider the potential sanctions exposure of INSTEX . . . Engaging in activities that run afoul of US sanctions can result in severe consequences, including a loss of access to the US financial system.” (de Goede and Westermeier, 2022, p.9). Although threatening to disconnect INSTEX if caught breaking sanctions, the way INSTEX is created makes it incredibly difficult for the US to move in blocking the INSTEX as a financial system” “Transactions facilitated by the Iranian counterpart to INSTEX involve inter- or intra-bank transfers within Iran, which US regulators would be unable to stop” (Prebble, 2022, p.365). 

The second challenge is in its evaluation of its possible capability to weaken the dollar as the dominant currency in trade: “Some analysts see INSTEX as an effort to undermine dollar dominance” (Prebble, 2022, p.366). What this means is if INSTEX were to become popular within Europe, with many nations signing up for its services, there could be the potential for it to become a bank. This would affect the US as INSTEX is set up to avoid using dollar denominations, meaning that transactions would be in either euros or another currency, thus undermining the dollar: “Were INSTEX to become a bank, it could rely on settling trade and transactions using the euro or other non-dollar currency, effectively depriving the United States of its ability to target dollar-exposed financial firms” (Prebble, 2022, p.367). The result would be that the US could no longer target states or businesses via sanctions and would have to use broader sanctions that could severely affect its trade within its borders (Prebble, 2022, p.367).  

The third point of challenge concerns how INSTEX can undermine US secondary sanctions. Secondary sanctions apply to a person or organisation that does not operate within the US but who is caught dealing with a person or organisation under sanctions from the US and is punished by the US. The US has found success in implementing secondary sanctions by being able to track transactions through Swift, which has “led the policymakers in Washington to look into secondary sanctions as a possible foreign policy tool to deal with “bad” actors and to resolve difficult conflicts” (Han, 2016, p. 475). INSTEX could become a challenge to the successful secondary sanctions since if INSTEX grows and more members join, allowing for further exchange of products through its system, the US could no longer track what is being traded in and out of Iran, so undermining their secondary sanctions: “INSTEX could provide a smokescreen through which trade could be settled, effectively shielding potential sanctions-busting trade and dulling the impact of secondary sanctions and the extraterritorial application of secondary sanctions” (Prebble, 2022, p.367). Although two of these points are theoretical, the potential for INSTEX to challenge the dollar and severely change how the US sanctions policy works is a severe challenge from Europe to its US ally, the hegemonic financial power. 

Through evaluating these two financial systems, Swift and INSTEX, in the context of sanctions, we can see how the former reinforces US economic hegemonic power whilst the latter challenges it. After 9/11, Swift has become a vital tool in US foreign policy through US coercion with sanctions and negotiating with the EU to make Swift align with US foreign policy. This resulted in Swift weakening Iran’s economy and allowing the US to evaluate its position in negotiations. INSTEX, on the other hand, shows how the US can be challenged, as it was set up to enable EU companies to continue trading with Iran, thereby avoiding US sanctions. INSTEX also has the potential to threaten the dollar and US sanction policy. Overall, by evaluating these two financial systems, this paper has shown how critical they are when it comes to reinforcing and challenging the Global economic hegemony and its power in this world. 


Connorton, P. (2007). Tracking Terrorist Financing Through SWIFT: When US Subpoenas and Foreign Privacy Law Collide. Fordham Law Review, 76 (1), 284. 

de Goede, M. and Westermeier, C. (2022). Infrastructural Geopolitics. International Studies Quarterly, 66 (3), 7. 

Han, B. (2016). The role and welfare rationale of secondary sanctions: A theory and a case study of the US sanctions targeting Iran. Conflict Management and Peace Science, 35 (5), 474–502. 

INSTEX. (2020). About Us – INSTEX. instex-europe.com

Prebble, K. (2022). ‘If You Can’t Beat ’em, Join ’em: An Argument for US Support of and Participation in INSTEX.’ Global Trade and Customs Journal, 17 (Issue 9), 364–369. 

Schindler, H.-J. (2021). An Assessment of the Efforts to Mitigate the Impact of US Secondary Sanctions: The EU Blocking Statute and INSTEX

Scott, S.V. and Zachariadis, M. (2014). The Society for Worldwide Interbank Financial Telecommunication (SWIFT) : cooperative governance for network innovation, standards, and community. London; New York: Routledge.

Swift (2022). Swift and sanctions. Swift. Available from https://www.swift.com/about-us/legal/compliance-0/swift-and-sanctions#what-is-swift?

The White House Office of the Press Secretary. (2012). Fact Sheet: Sanctions Related to Iran. whitehouse.gov. Available from https://obamawhitehouse.archives.gov/the-press-office/2012/07/31/fact-sheet-sanctions-related-iran.

Euan Southwell

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