Why SWIFT is the nuclear option of Russian financial sanctions

The United States and its NATO allies have rolled out a number of unprecedented sanctions against Russia such as those for last week’s invasion of Ukraine, including a ban on the export of advanced technology to Russia.

One measure that Ukraine and some of its allies have begged for is to cut Russia off from SWIFT, the world’s largest financial trading network. It’s an option that would cut Russia off from most international banking and potentially cripple its economy for a while.

On Saturday, The United States and its allies have moved forward with plans to do just that. “We are committed to ensuring that selected Russian banks are removed from the SWIFT messaging system,” the leaders of the European Commission, France, Germany, Italy, the UK, Canada and the US said in a statement. joint statement. “This will ensure that these banks are disconnected from the international financial system and compromise their ability to operate globally.”

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a financial messaging network used by more than 11,000 financial institutions in 209 countries. Supervised by G10 central banks, the SWIFT payments network uses secure, standardized codes that allow financial institutions to send and receive information, such as instructions for transferring money across borders.

The SWIFT network is important for cross-border transactions, as it allows businesses in one country to secure payments in another. For example, an EU business purchasing Russian products must use SWIFT to transfer funds from a local bank to a Russian supplier’s bank account using SWIFT’s bank code.

Once Russia is disconnected from the network, its governments and businesses will not be able to receive payments for goods and services unless Russia establishes secondary measures. According to Aseem Prakash, co-founder and Global Futurist at the SWIFT network, 40% of Russia’s revenue from oil and gas sales is Future Innovation Huba consulting firm based in Toronto.

The split of the SWIFT ban could be felt quickly. On Saturday night, for example, an MSNBC reporter tweeted that he was asked to pay his hotel bill in Moscow immediately. “My hotel in Moscow asked me to pay my bill early because they weren’t sure if the credit card would work when the SWIFT sanctions went into effect.”

However, using the global financial network as a punitive weapon could have lasting consequences beyond Russia’s borders. First, it could undermine confidence in the US dollar and SWIFT itself as a non-political network. It could accelerate the creation of alternatives such as local currency trading, the use of cryptocurrencies, and the formation of new bilateral free trade agreements, Prakash said. For example, China, Iran and India have traded in local currencies.

“More than [the] The US weaponizes its currency… or cuts countries off from SWIFT, the more countries are forced to create or find alternatives. It already happened. And, most likely, Russia has already looked at those options,” Prakash said before Saturday’s move was announced.

In 2014, Russia created its own banking network – Transfer of Financial Messages (SPFS) – in response to threats from SWIFT sanctions at the time. Russia may also choose an alternative to China’s SWIFT called CiPS – Cross-Border Interbank Payment System. Have a plan to integrate SPFS with China’s Cross-Border Interbank Payment System.

Russian President Vladimir Putin may not care about the economic difficulties caused by sanctions. However, the Russian banks targeted are mainly controlled by Russian oligarchs and Putin may be interested in them. That is one of the main reasons that the first round of multinational sanctions was imposed last week against the country’s democracy.

Announced on Tuesday by the United States and key allies in the European Union, Britain, Canada, Japan and Australia, those sanctions include “complete containment” of two of the intuitions Russia’s largest financial institution – VEB and Russia’s military bank, Promsvyazbank, carry out defense missions. US President Joe Biden said.

A Treasury Department statement said the VEB is “critical” to Russia’s ability to raise capital, while Promsvyazbank is an important part of Russia’s defense sector. The two institutions and their 42 subsidiaries hold $80 billion in total assets, the statement said. The Biden administration said it had also blocked financial transactions from five key Russian oligarchs believed to be “participating in Russia’s kleptocracy.”

Even so, calls to cut Russia off from SWIFT grew as Russian troops and equipment flooded into Ukraine and the capital, Kiev. Ukraine’s government has called for Russia’s expulsion from the banking system, but the move is seen as such an important step that some countries have called for caution.

On Thursday, the European Central Bank, British Prime Minister Boris Johnson, Canadian Prime Minister Justin Trudeau and Czech President Milos Zeman all called for Russia’s expulsion from SWIFT. However, Germany warned about it and other EU countries took reservations. G7 officials say some members are reluctant to do so because this would make it impossible for them to pay for Russian energy, which could indirectly cause a rise in international energy prices, a concern of the G7. Washington.

“If the West cripples the Russian economy, Russia can turn off energy supplies in retaliation. That would create absolute chaos in Germany [gets] 65% of its natural gas comes from Russia,” said Prakash. “If Germany’s economy and society were to be disturbed, it would have a huge negative impact on the rest of Europe (since Germany is Europe’s largest economy).”

In addition, Western banks have hundreds of billions of dollars already spent, especially in oil and gas futures. There are oil and gas tankers at sea that have been purchased weeks and months ago. Cutting off Russia from SWIFT could make those purchases destabilizing, Prakash says, and it’s US and EU banks that could make the money, Prakash said.

It remains unclear how those purchases will be resolved following the latest sanctions.

Biden asked at a news conference on Thursday about the possibility of cutting off Russia’s access to SWIFT, saying Europe still doesn’t feel comfortable doing so, which is why the country is excluded from the talks. sanctions announced on that day. Instead, the sanctions extended financial penalties to all 10 of Russia’s biggest banks, financiers and the high-tech sectors, Biden said.

“Unprecedented export control measures will cut Russia’s high-tech imports by more than half, limit Russia’s access to key technological inputs, shrink its industrial base and undermine Russia’s strategic ambitions for influence on the world stage,” Biden argued.

The President also acknowledged that removing Russia from SWIFT could affect the EU. “It’s always been an option, but right now that’s not the position the rest of Europe wants to be in,” Biden said on Thursday.

EU President Ursula von der Leyen said the bloc still planned to present a package of “large and targeted sanctions” for European leaders to approve. “We will target strategic sectors of the Russian economy by blocking their access to technologies and markets important to Russia,” she said.

(EU and US also pursued Putin more directly with sanctions aimed at him and top aides announced late Friday.)

The technology sanctions specifically aim to deny the export of sensitive technology to Russia’s defense, aviation and maritime sectors.

In addition to far-reaching restrictions on the Russian defense sector, Biden said the US government will impose Russia-wide restrictions on sensitive US technologies produced abroad using software, technology, and technology. technology or equipment originating in the United States.

The restrictions affect semiconductors, telecommunications, cryptographic security, lasers, sensors, navigation, avionics and marine technology and are designed to cut off access to cutting-edge technology of Russia.

Prakash noted that US sanctions on high-tech items do not only include products made by US companies. The sanctions also prohibit any product made anywhere that uses any type of US technology (software, sensors, etc.).

“Yes, China will be able to fill some of the gaps. However, the sanctions will hurt Russian manufacturers that import all kinds of products from different regions of the world,” Prakash said. “They will have to rethink everything – the supply chain, the payments and the design of the factory floor.”

While semiconductors are relatively easier to control through the supply chain because of a relatively small number of companies that manufacture them, limiting sensors or software involves a different calculation.

“Global compliance and enforcement of sanctions will be difficult for general-purpose high-tech products,” Prakash said.

Along with financial sanctions, EU announced it would ban the export of certain technologies as a move that would undermine Russia’s ability to modernize and impede its long-term economic growth.

“The wild sign in all of this is foresight,” says Prakash. “How far and how far has Russia seen all of this and planned it?”