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The world imposed a raft of economic sanctions on Russian banks and oligarchs on Thursday
with the goal of punishing Russia for invading Ukraine.
But one punishment that many analysts put forth as the most severe:
ejecting Russia from the Swift international payments system was missing from the list.
Western leaders appear to be split on whether Russia should be removed from Swift,
a move that would harm the country’s banks and its ability to trade internationally.
So, lets quickly go over what SWIFT is and what it would mean for Russia to be ejected.
Swift stands for Society for Worldwide Interbank Financial Telecommunication and you can think of
it as the Whatsapp of global banking. It’s a global provider of secure financial messaging
services, connecting more than 11 thousand financial institutions in more than 200 countries
worldwide. So, SWIFT doesn't move the money, but it moves the information about the money.
In fact you might remember a scandal from 2016 when hackers capitalized on weaknesses
in the security of Bangladesh’s central bank and attempted to steal almost a
billion dollars from their account with the Federal Reserve Bank of New York.
Now, SWIFT is headquartered in Belgium, and while sanctions can be imposed by any country in the
world, SWIFT doesn’t get to choose which sanctions to follow. It is incorporated under Belgian law
and so is required to comply with EU regulation, as confirmed by the Belgian government.
Being cut off from Swift is being put forth as a financial nuclear button,
but it wouldn’t prevent Russian banks from carrying out cross-border transactions, it
would just make them a lot more difficult. Foreign dealings would rely on the use of less-efficient
communication tools like emails and faxes. Getting thrown out of SWIFT, would be like
losing access to the internet for a financial system. While communication would be slower and
more difficult, it would still be possible. In the short term there would be chaos as Russia’s
banks would be left without a way to communicate with the rest of the world, but recovery is not
impossible. Doing this would impair Russia’s ability to collect international profits from
its oil and gas exports, which account for more than 40 per cent of the country’s revenue.
The sanctions on Russian state banks are possibly more severe than any SWIFT cut off,
Russia's $635bn in hard currency reserves will help to shield this blow, but a lot of Russian
reserves are in gold, some have been used to stabilize the ruble and some are in foreign banks.
The Banking sanctions prevent Russia from making any transactions in U.S. dollars, and freeze any
dollar-denominated assets or liabilities held by Russian banks both at home and abroad.
The ECB began warning European lenders with exposure to Russia to prepare for
international sanctions against Russia over a month ago, asking for details of how the banks
would handle different scenarios, such as a move to block Russian banks from accessing Swift.
Sanctions will cause considerable risks for international banks with large Russian exposure
including Citi in the US, Soc Gen in France and Italy’s UniCredit.
According to the FT International banks, have about $121 bn in assets owed to them
by Russian-based entities, and there is $128bn in loan and deposit funding
from Russian entities to foreign banks, according to the Bank for International Settlements.
If Russia was cut off, they wouldn’t be the first country. in 2012, the European Council, under
pressure from the United States, expelled Iran’s banks from SWIFT. The effects were immediate and
devastating— demonstrating the power of SWIFT over international banking, as well as how a new era
had emerged where global banking infrastructure could be transformed into political weapons.
Over the longer term while Iran was unable to pay for imports or accept payments for exports,
Iranian oil exports remained largely unaffected. Being cut off from Swift would not prevent Russian
banks from carrying out cross-border transactions but it would make them
significantly more costly and difficult. Cutting Russia off from SWIFT was first
discussed back in 2014, when Russia annexed Crimea and backed separatist forces in eastern Ukraine.
Russia announced then that kicking it out of SWIFT would be equivalent to a declaration of war.
At the time it was estimated that such a move could reduce Russia’s GDP by 5% in a year. It
was also pointed out that cutting Russia off from Swift would have ramifications for other nations
as well, since Russia is a key energy supplier to Europe and countries there rely on the Swift
system to pay for the fuel they purchase. The Bank of Russia started its own financial
messaging system SPFS back when they were threatened with being cut off in 2014,
but that system has struggled to attract users and mainly handles domestic transfers, SPFS has
only around 400 users and would not offer Russia much relief if thrown out of SWIFT.
The US backed away from the threat of banning Russia from SWIFT in mid-February after dangling
the threat for weeks. According to accounts in the news, European leaders were worried
that such a move would mean that the billions of dollars in outstanding loans to Russia would not
be repaid. The Economist estimates that European banks have nearly $56 billion owed to them by
Russian residents. Additionally, nearly $350 billion worth of EU assets reside inside Russia.
Experts are saying that SWIFT is overhyped as a financial weapon
and that cutting access could backfire by forcing Russia to find alternatives including
forging stronger ties with countries like China. Banning Russia from SWIFT would have significant
effects— but these would likely harm US and European interests too.
The current package of coordinated sanctions against Russian banks will possibly do the
same job but in a more targeted manner. This situation in Ukraine is truly terrible,
and it is impossible to predict what will happen over the next few
days. My thoughts are with anyone affected. Thanks for watching and talk to you soon. Bye.