The
main building of Bank of Russia in Moscow. Russian banks have been cut
off from the global payment system, limiting their ability to move money
in and out of the country. Photo: Xinhua
Greatly limiting Russia’s participation in the global payments system is a significant escalation of sanctions. Several nations agreed on February 26 that selected large Russian banks would no longer have access to Swift, the messaging cooperative based in Belgium that is owned by 11,000 institutions worldwide, including 300 in Russia. In addition, the Russian central bank’s foreign exchange reserves being held abroad were frozen.
Swift is an acronym for the Society for Worldwide Interbank Financial Telecommunication. It provides technology that speeds money transfers and facilitates trade. Without it, Russian banks will struggle to easily move money in and out of the country. Russian citizens face restrictions on credit cards linked to foreign entities such as Visa and Mastercard.
The biggest uncertainty now concerns Russian trade with Europe. Will European firms be able to pay for Russian oil and gas? The short answer is yes because, as with the earlier round of sanctions, there is an exemption for energy. That is to say that several nations specifically exempt energy transactions from their sanctions regime.
Germany depends heavily on Russia for its natural gas, used primarily for heating. Gas prices have surged in Europe in the past year, and ending imports from Russia would send them even higher. Russia earned more than US$200 billion last year from oil and gas exports.
On February 25, German Finance Minister Christian Lindner called attention to the payment problem, saying Europe had to consider whether a Swift suspension could “prompt Russia to stop its gas deliveries, because they can’t be paid any more”. The threat of a gas cut-off is why French Finance Minister Bruno Le Maire called Swift a “financial nuclear weapon” to be used only as a last resort.
Brussels-based analyst Jacob Kirkegaard of the Peterson Institute for International Economics rejected the possibility of Russia cutting off energy exports: the gas will continue to flow as the Russians will be paid because of the energy exemption.
And as JP Morgan Chase CEO Jamie Dimon said, many workarounds to the Swift restrictions exist. He also warned of unforeseen consequences to the financial system, a sentiment shared by Allianz adviser Mohamed El-Erian.
In announcing the initial set of sanctions cutting Russia off from US financial markets, the US Treasury Department’s Office of Foreign Asset Control was careful in how it worded the energy exemption. The sanctions package has been constructed to account for the challenges high energy prices pose to average citizens and does not prevent banks from processing payments for them.
This is not the first time a country’s banks have been suspended from Swift. Iran was banned from the network in 2012 and its banks faced obstacles in being paid for oil exports. Iran lost almost half of its export earnings during its suspension.
Similarly, when Russia annexed Crimea in 2014, there were calls for Russia to be removed from Swift. That did not happen, but the seriousness of the threat was reflected in then-Russian Prime Minister Dmitry Medvedev saying in 2019 that a suspension from Swift would be considered a declaration of war.
Collectively, the Western sanctions curtail Russia’s ability to access foreign currency and assets outside the country. The family of Russian President Vladimir Putin and oligarchs close to the Kremlin are banned from travelling to many countries. They are being cut off from their yachts, luxury flats and elite schools for their children. The European Union’s “golden passport” system, in which some member countries sell residency permits, is being curtailed.
The Russian invasion of Ukraine is uniting European and North American countries in ways not seen for many years. A transatlantic task force is being set up to coordinate financial sanctions.
Clay Lowery, a former US Treasury official who is now executive vice-president of the Institute of International Finance, an association of global banks, says the sanctions will do serious damage to the Russian economy. Even before the latest measures, the Russian rouble had lost 30 per cent of its value against the US dollar and now trades at record lows. Billions have been wiped out of equity prices on the Russian stock exchange.
Depending on the outcome of the war, it is possible that opposition to Swift and Western financial hegemony could prompt closer cooperation between Russia and China. Both countries have sought to create alternatives to Swift. Russia established its MIR system of financial messaging in 2014, but currently it handles only about a quarter of domestic card transactions.
China set up the Cross-Border Interbank Payment System, or CIPS in 2015, and 23 Russian banks are members. China is Russia’s biggest trading partner, and an ambitious programme of building new gas and oil pipelines to China is under way.
In announcing the sanctions limiting Russian participation in Swift, Western nations declared the sanctions will “collectively ensure that this war is a strategic failure for Putin”. Events in the coming days and weeks will determine whether that is true.
Barry D. Wood is a columnist and financial journalist based in Washington, DC