Why SWIFT is the nuclear option for Russian financial sanctions


The United States and its NATO allies have implemented an unprecedented number of sanctions against Russia as punishment for its invasion of Ukraine last week, including banning the export of advanced technologies to the Russia.

One measure Ukraine and some of its allies have advocated for is cutting Russia off from SWIFT, the world’s largest financial transaction network. It is an option that would cut Russia off from most international banking transactions and could cripple its economy for some time.

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

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

The SWIFT network is essential for cross-border trade, as it allows businesses in one country to guarantee payment in another country. For example, an EU company purchasing Russian products must use SWIFT to transfer funds from a local bank to the Russian supplier’s bank account using SWIFT bank codes.

Once Russia is disconnected from the grid, its government and businesses will no longer be able to receive payment for goods and services unless Russia establishes secondary measures. Forty percent of Russia’s revenue from oil and gas sales goes through the SWIFT network, according to Aseem Prakash, co-founder and Global Futurist at Future Innovation Centera Toronto-based consulting firm.

The ramifications of a SWIFT ban could be felt quickly. On Saturday evening, for example, an MSNBC reporter tweeted that he had been asked to pay his hotel bill in Moscow immediately. “My hotel in Moscow asked me to settle the bill early because they don’t know if credit cards will work once the SWIFT sanctions kick in.”

Using the global financial network as a weapon of sanctions, however, could have lasting repercussions outside Russia’s borders. On the one hand, it could undermine confidence in the US dollar and SWIFT itself as an apolitical network. This could accelerate the creation of alternatives such as trading in local currencies, the use of cryptocurrency and the conclusion of new bilateral free trade agreements, Prakash said. China, Iran and India, for example, already trade in local currencies.

“Most [the] The US weaponizes its currency… or cuts countries off from SWIFT, the more countries will be forced to create or find alternatives. It is already happening. And, most likely, Russia would have looked at those options,” Prakash said ahead of Saturday’s move announcement.

In 2014, Russia created its own banking network – Transfer of Financial Messages (SPFS) – in response to SWIFT sanctions threats at the time. Russia could also choose the Chinese alternative to SWIFT called CiPS – Cross-Border Inter-Bank Payment System. there are projects to integrate SPFS with China’s cross-border interbank payment system.

Russian President Vladimir Putin may not care about the economic hardship caused by the sanctions. But the Russian banks targeted by them are largely controlled by Russian oligarchs, and Putin probably cares about them. This is one of the main reasons why the first round of multinational sanctions launched last week targeted the country’s kleptocracy.

Announced on Tuesday by the United States and its main allies the European Union, the United Kingdom, Canada, Japan and Australia, these sanctions included the “total blockage” of two of the biggest financial hunches of the Russia – VEB and the Russian military bank, Promsvyazbank, which provides defense agreements, said US President Joe Biden.

A statement from the Treasury Department said the VEB is “crucial” to Russia’s ability to raise funds, while Promsvyazbank is an essential part of Russia’s defense sector. The two institutions and their 42 subsidiaries hold combined assets worth $80 billion, according to the statement. The Biden administration said it also blocked the financial transactions of five key Russian oligarchs suspected of “participating in the Russian regime’s kleptocracy.”

Despite this, cries to cut Russia off from SWIFT grew as Russian troops and equipment arrived in Ukraine and the capital Kyiv. The Ukrainian government had called for Russia’s expulsion from the banking system, but the move was seen as such a big step that several countries urged 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. Germany, however, warned him and other EU countries had reservations. G7 officials said some members were reluctant because it would make it impossible to pay for Russian energy, which could indirectly drive up international energy prices, a concern also for Washington.

“If the West crippled the Russian economy, Russia could cut off the energy supply in retaliation. This will create absolute chaos in Germany which [gets] 65% of its natural gas comes from Russia,” Prakash said. “If the German economy and society are disrupted, it will have a huge negative impact on the rest of Europe (since Germany is the largest economy in Europe).”

Moreover, Western banks already have hundreds of billions of dollars at stake, especially in oil and gas futures. There are offshore oil and gas tankers whose cargo was purchased weeks and months ago. Cutting Russia from SWIFT could leave those purchases hanging in the balance, and it’s US and European banks that could be responsible for the money, Prakash said.

How these purchases would be settled following the latest sanctions is not yet clear.

Biden asked at a press conference on Thursday about the possibility of cutting off Russia’s access to SWIFT, said Europe was not comfortable with it yet, which is why it was excluded from the penalties. announced that day. Instead, the sanctions extended financial sanctions to Russia’s 10 largest banks, its oligarchs and high-tech sectors, Biden said.

“Unprecedented export controls will cut off more than half of Russia’s high-tech imports, restricting Russia’s access to vital technology inputs, atrophying its industrial base and undermining Russia’s strategic ambitions to exercise influence on the world stage,” Biden explained.

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

EU President Ursula von der Leyen said the bloc still plans to propose a package of “massive and targeted sanctions” to EU leaders for approval. “We will target strategic sectors of the Russian economy by blocking their access to technologies and markets that are essential for Russia,” she said, adding that the EU will seek to limit Russia’s “modernization capacity”. Russia.

(EU and US also have went after Putin more directly with sanctions targeting him and his top aides that were unveiled on Friday evening.)

The technology sanctions are specifically aimed at preventing exports of sensitive technology for Russia’s defense, aviation and marine sectors.

In addition to sweeping restrictions on Russia’s defense sector, Biden said the US government will impose Russia-wide restrictions on sensitive US technology produced in foreign countries using software, technology, or equipment from Russia. American origin.

The restrictions affect semiconductors, telecommunications, encryption security, lasers, sensors, navigation, avionics and maritime technologies and are designed to cut off Russia’s access to advanced technologies.

Prakash noted that US sanctions on high-tech items don’t just include products made by US companies. The sanctions also ban any product made anywhere that uses any type of US technology (software, sensors, etc.).

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

While semiconductors are relatively easier to control through supply chains because there are a relatively small number of companies producing them, restricting sensors or software involves a different calculation.

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

In addition to financial penalties, the EU announced it would ban the export of certain technologies in an effort to weaken Russia’s ability to modernize and hamper its long-term economic growth.

“The wild card in all of this is of course forethought,” Prakash said. “How much and how far did Russia see all this and plan it?”

Copyright © 2022 IDG Communications, Inc.


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