Russia's Red Line?

It would be akin to poking a wounded bear in the eye with a stick; booting Russia out of SWIFT. The likely outcome might be unnerving for the markets, since it would almost certainly cut US and Russian diplomatic relations, which could be the pretext to war.

Commenting on the issue Andrey Kostin, chairman of the Russian state bank VTB, said, "If that happens it will be a huge worsening relations between East and West".

"Ambassadors in Moscow in Washington might as well go home the next day. We would be on the verge of war and it would be a very dangerous situation, going far beyond the banking sector", added Kostin, who is a close friend of President Vladimir Putin and a member of the board of Rosneft, Gazprom’s smaller but powerful rival. Mr. Kostin is part of Mr. Putin's “inner circle” and the second most prominent politician in Russia, according to a respected Russian newspaper Vedomosti.

So what is SWIFT?

It is the economy's windpipe, enabling it to trade internationally in hard currency. SWIFT payments are a type of international transfer sent via the SWIFT international payment network. It is the largest financial messaging system in the world. Russia’s banks rely heavily on the Belgium-based payments system for both domestic and international payments. Russia does have a local equivalent for payments but it still relies heavily on the SWIFT payment network for international payments.

Most international trades are facilitated with SWIFT in hard currency, US dollars. So if Russia were to be kicked out of SWIFT, facilitating payments for such things as machine parts or consumer toiletries will be difficult. Obtaining hard currency to buy imports will become challenging, oil rich Venezuela is currently experiencing this problem.

“If there is no Swift, there is no banking. . . relationship, it means that the countries are on the verge of war, or they are definitely in a cold war”, said Mr. Kostin.

The move to exclude Russia from the International SWIFT payment system had been discussed by western diplomats last summer as a punitive measure against Russia's alleged military involvement in supporting pro-Russian separatist in Ukraine. But at the time it was considered too punitive by some western diplomats, describing it as “the nuclear option”.

Nevertheless, the Ukrainian war, which started in April shows no signs of abating with each side pointing the blame at each other. Already 5,100 people have been killed in the conflict. Fighting this week was the most intensive since a cease-fire deal was signed in September. Russian Foreign Minister Sergey Lavrov told journalists that rocket shelling Saturday in the city of Mariupol, which left at least 30 people dead, was a tragedy that was being manipulated to "whip up anti-Russian hysteria" in the West. President Vladimir Putin's spokesman, Dmitry Peskov, told Russian news agencies that Ukraine was responsible for the "barbarous shelling" and said that the crisis could only be resolved if there was "firm political will on the part of Kiev".

Western diplomats are now mulling over whether to exclude Russia from the International SWIFT payment system yet again. Is “the nuclear option” real being considered by the West?

Russia believes that their annexation of Crimea, and its support of separatist fighters in East Ukraine are a pretext for tough economic sanctions. “If all this had never happened, any other excuse would have been created” as a result of the “policy of containment [of Russia] which was invented not yesterday, but has been held against our country for decades, if not centuries.” said Mr. Kostin.

Russia also suspects that the US and Saudi Arabia are behind the fall in the oil prices, which has depleted it of export earnings. Oil and gas were worth 68 percent of Russia's total export revenues in 2013.

So what is the end game, war with Russia?

Why not trade our way out of this mess? If a system needs to destroy every now and then to survive, is it worth saving? Admittedly, WWII did help get the US out of a Depression but at what cost? More than 20 million people dead, Europe was left smouldering with half its infrastructure in ruination and most of Germany's adult males were dead. Create, destroy, create, aaand destroy. what is the point?

The market's response to Russia being excluded from SWIFT would obviously be negative, particularly for European companies trading consumer goods and machine parts. Airline stocks might also be adversely affected with air-route diversions in retaliation. If we start seeing Russian and American diplomats being sent home, it would be a clear sign of a deteriorating and concerning situation. A worsening in East-West relations would have a negative impact on equity markets, and probably boost precious metals.

But assuming that East-West relations deteriorate to a point where diplomatic relations are cut, the crisis could have the potential of being very serious. Bear in mind that while the Russian economy has taken a beating through western imposed sanctions it still has teeth and claws… and an arsenal of nuclear weapons.