.svg)
As tensions around the Russia-Ukraine borders are heating up, VIXIO considers the implications of fresh sanctions on the country, including the possible cutting access to the SWIFT international financial messaging network.
In response to the growing Russian military buildup near Ukraine, several Western countries have taken a strong and mostly unified approach, making it clear that they will impose further sanctions on Russia should it attack Ukraine.
“If any Russian military forces move across the Ukrainian border, that’s a renewed invasion, and it will be met with a swift, severe, and united response from the United States and our Allies,” U.S. President Joe Biden said.
Despite daily discussions between leaders of the European Union and the United States, reports state many details are still under debate, such as how to define a “Russian attack” and what triggers a unified response.
Russia has been subject to U.S. and EU sanctions since 2014, when it first invaded Ukraine. Since then, further sanctions have been imposed on the country for malicious cyber activities, election interference, human rights abuses, use of energy exports as a political tool, and various other reasons.
U.S. officials have now said additional sanctions could include greater restrictions on transactions with Russian financial institutions and U.S. technology exports, while others speculated that additional sanctions could target Russia’s energy sector, or the country’s participation in international financial messaging services.
These speculations were in part confirmed by British Prime Minister Boris Johnson, who told Reuters last Tuesday that the UK and the U.S. were discussing banning Russia from SWIFT.
What does a ban mean?
SWIFT is a global messaging network that enables banks to communicate with each other, helping to support the flow of cross-border payments.
“Cutting Russian banks off from the SWIFT network basically means making and receiving payments to and from abroad will be much more difficult,” R. Andrew Gómez, managing consultant at Lipis Advisors told VIXIO.
Although a SWIFT ban on its own does not mean foreign banks could not conduct business with Russian institutions, it does make it more challenging.
“Corporates are reluctant to do business with a partner who is not reliable or is based in a country that could be cut-off from the international financial network,” Gómez explained.
“Countries that are on a so-called grey list already have trouble finding partners for correspondent banking relationships even if they aren’t under sanctions themselves, so this would complicate future matters,” he added.
This, however, would not be an unprecedented action.
In 2012, Iran was the first, and so far the only country, to be cut off from SWIFT. The ban was lifted in 2016, but it is estimated that the country lost almost half of its oil export revenues and 30 percent of foreign trade as a result of the ban.
Following a SWIFT ban, Russia could easily find itself in a similar situation.
Russia is very dependent on revenue from its energy reserves and the cutoff from SWIFT would make international commerce with Western countries “very, very difficult,” according to Gómez.
However, such a sanction could be a double edge sword.
The latest WTO data shows that the European Union was Russia’s largest export destination in 2019, purchasing 41.3 percent of all the goods sold outside its borders.
In addition, Germany does a lot of commerce with Russia, especially when it comes to energy, Gómez noted. Hence, “cutting off Russia from the SWIFT network would have serious consequences.”
An alternative
When Western countries first threatened Russia with being cut off from accessing SWIFT in 2014, the country decided to take steps to mitigate potential negative consequences.
In 2014, the Bank of Russia announced plans to launch an electronic financial messaging channel that could provide a SWIFT alternative.
The domestic messaging network, called SPFS, eventually kicked off in 2017, and currently claims over 300 participant institutions. These include 33 participants from nine foreign countries: Cuba, Germany and Switzerland, along with six former Soviet states.
However, in spite of continuous efforts by the Bank of Russia to promote the use of its own messaging service, the service could not be compared to SWIFT, which connects over 11,000 institutions in 200 countries.
In 2020, SPFS traffic doubled to about 2 million messages per month, but this still amounts to only 20 percent of the traffic of domestic messages sent via SWIFT.
Even if SPFS does not currently have a significant role in sending international messages, there are other alternatives available.
For instance, China’s Cross-Border Interbank Payment System (CIPS) offers clearing and settlement services in cross-border yuan payments and trade, and is scaling up.
The average daily transaction volume of CIPS reached 317.2bn yuan ($49bn) in August, still far behind SWIFT’s estimated $400bn, but this was double the previous year’s average.
While these systems currently process only a small share of international transactions compared to SWIFT, an alternative messaging system used by banks located in China, Russia and all the other countries that are threatened by the U.S. or EU sanctions regimes could cause significant disruptions in the global financial infrastructure.
Such cracks could provide an opportunity for China to fill this gap through offering its own CIPS, which is absent of any U.S. oversight.
SWIFT ban unlikely
Despite the threats, it is highly unlikely that at this point Western countries would cut Russia off from SWIFT, according to Gómez.
There are various other, impactful options that the U.S. and the EU could choose to deter Russia from an attack against Ukraine.
For instance, they could use their existing authority to designate further individuals and businesses involved in the military actions, Gómez said.
The designation would have the same effect - it would cut off the designated persons from the financial system - but will have significantly less chance to have a backlash on Western societies.
Furthermore, a SWIFT ban is the ultimate tool that Western nations have in their hands to influence Russia, Gómez pointed out. Its impact is hard to reverse and it is unlikely that Western societies would want to use their most powerful economic sanctions measure at such an early stage of the negotiations.
