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With Russia’s invasion of Ukraine intensifying, Western allies have finally agreed to cut off a number of Russian financial institutions from the interbank payments system.
Although SWIFT is a neutral body and the global payment messaging system has no authority to make sanction decisions itself, Russia’s conflict with Ukraine has left European and US leaders searching for ways to adequately pile on the pressure.
“We commit to ensuring that selected Russian banks are removed from the SWIFT messaging system,” said a joint statement from leaders in the West. “This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally.”
In the run-up to the decision, which was announced on Saturday evening (February 26), Ukraine’s government, as well as politicians in the UK and EU, had been pushing for the country to be excluded from the network.
Germany’s leadership, in particular, was believed to have been tentative about the move, as well as the likes of Cyprus and Hungary.
"This is a pretty serious and tough sanction because it will basically cripple businesses by not allowing them to export, import and access finance," said Dr Dimitrios Salampasis, academic director at Swinburne University of Technology.
As a sanction, it is already beginning to have dramatic consequences as well, with the European Central Bank announcing this morning that Sberbank's European headquarters in Austria and subsidiaries in Croatia and Slovenia are failing or likely to fail, owing to a deterioration of their liquidity situation.
It is important, however, to clarify that transactions do not become impossible; they rather become more complicated, difficult and of course costly, said Salampasis. "On the other hand, this move shall also impact countries/economies that have a direct economic exposure to the Russian market. Global supply chains will definitely be affected especially in relation to food, oil and gas."
“The SWIFT sanctions are a step in the right direction,” said Ruta Bajarunaite, expert at the Centre of AML Excellence in Lithuania.
However, she cautioned, consequences must not stop there.
“Now more than ever it is important that public and private sectors work together to hunt down and freeze all assets of sanctioned Russian oligarchs and companies, their mansions, private jets and any other ill-gotten wealth that can be found and frozen,” she said.
Information sharing between public and private sectors on identified subjects that must have their assets frozen according to EU sanctions ownership or control criteria is crucial, she added.
“There could be significant consequences, and possible disruptions, of cutting Russia off the SWIFT,” said Jan Dunin‑Wasowicz, counsel at Hughes Hubbard & Reed law firm.
These could include effects on EU companies’ affiliates in Russia seeking to transfer funds to other entities outside Russia, such as their EU holding company, he said. “Current contracts under which payments are due from Russian counterparties could be also affected. There are a fair number of smaller companies, particularly in certain parts of the EU, that have high exposure to Russia; if they cannot be paid, this could create a liquidity problem for them.”
Meanwhile, the Paris-based lawyer pointed out that the level of coordination and alignment between the various sanctions regimes is unprecedented. “There are differences between them but they all serve the same objectives. It may take a bit of time before we start seeing their full effect.”
"There a number of scenarios in relation to the effectiveness of this ban," said Salampasis.
From a financial and geopolitical standpoint, for example, there is a chance that Russia would be able to circumvent the SWIFT ban by using alternative systems, including its own System for Transfer of Financial Messages or China’s Cross-Border Interbank Payment System.
"Needless to say that these alternative systems do not have scalability and processing capacity, along with, acceptance as SWIFT. However, increased utilisation could weaken the current dollar-denominated financial system," he suggested.
The Central Bank of Russia, meanwhile, has said that it will provide domestic banks with cash and non-cash liquidity in roubles to maintain financial stability and protect the economy from the impact of the latest Ukraine-related Western sanctions, the regulator said in a statement on Sunday.
“The Bank of Russia will continuously provide banks with cash and non-cash liquidity in rubles. The REPO (repurchase agreement) auction on Monday will be held on an unlimited basis, with full satisfaction of all applications received from banks,” the statement released by the central bank said.
The regulator continued: “The Bank of Russia has the necessary resources and tools to maintain financial stability and ensure the operational continuity of the financial sector”, adding that the country’s banking system is “stable, has sufficient capital and liquidity to function smoothly in any situation”, funds held on bank accounts are safe, and banking services will be provided as usual.
