As the US and its European allies continue to impose sanctions on Moscow aimed at isolating it economically, certain Russian banks are now excluded from SWIFT payments, meaning that its trade payments will certainly be interrupted. This move comes in conjunction with the US sanctioning Russian banks with assets over $1.4 billion, banning four major banks, and freezing their assets.
Moscow’s exclusion from SWIFT is expected to harm its trade partners in the West, as Russia is a key oil and gas provider for the EU. As European governments fear that the sanctions imposed on Russia will also have a negative impact on their economies, their unanimous support is required to ensure the validity of the sanctions. Germany, for example, abstained from imposing such sanctions, although it has expressed its willingness to impose "limited restrictions" on Russian interbank transactions. Russia and Germany share strong trade and investment ties, which makes Germany the most vulnerable EU country to such sanctions.
Global Financial System
The following is an overview of the SWIFT system and Russia’s effective position in it with regards to international transactions:
1. Global system for financial payments and transactions: SWIFT is an acronym for "Society for Worldwide Interbank Financial Telecommunications," and was established in 1973 in Belgium. It is a global system for payments and transactions between banks and financial institutions developed by a group of American and European banks to provide seamless communication between global financial institutions and enhance the flow of money overseas. SWIFT does not own a specific bank or financial institution, but it does have 2,000 shareholders from among various banks and financial institutions.
2. Russia is the second largest country in SWIFT: In terms of the number of users, Russia is the second largest country in this system, following the US. SWIFT connects more than 11,000 banks and institutions in 200 countries worldwide, including 300 in Russia. The system is used to pay financial dues on imports and exports between countries, with a daily volume of 42,000 transactions worth $140 billion according to 2021 figures. In this context, Russia shares 1.5% of these transactions.
3. Employing SWIFT against enemies of the West: SWIFT was established to protect the global financial system from monopoly by any single entity. One of its fundamental purposes is preventing bias towards any of its member states. However, Western powers threatened to isolate Russia from the system in 2014 after the annexation of Crimea. Iran was already banned from SWIFT between 2012-2016, which caused exorbitant financial losses of up to 30% of its foreign trade. Iran was then excluded once again from the system in 2018.
Threats to completely exclude Russia from SWIFT are not only limited to interbank transactions, but also individual transactions between Russian citizens and others abroad. This decision will take its toll not only on the Russian economy, but also its trade partners and the global economy at large:
1. Heightened economic losses in Russia: The Russian economy is expected to contract by 5% as a result of the ban and block of Russian revenues. Russia will also no longer receive any money for its services or products it sells. In this same vein, when Iran was banned from SWIFT in 2012 as part of the sanctions imposed on its nuclear program, it lost almost half of its oil export revenues and 30% of its foreign trade.
2. Reduced foreign trade in Russia: The new sanctions will devaluate the Russian ruble, which thus cuts into a large number of Russia’s imports and triggers the loss of half of its consumption market. Banned Russian banks will also find it difficult to communicate with other banks internationally, which will slow down trade flow and increase the cost of transactions.
3. Higher costs on Russia’s trade partners: Decoupling Russia from this global financial system would have a wide-reaching impact on European countries with strong financial and trade ties with Moscow. Russia is a key supplier of oil and natural gas to the EU, as 40% of their gas supplies come from Russia and are paid through SWIFT. The EU is especially wary of banning Russia from SWIFT, as it would consequently affect their payments. The prices of oil, gas, minerals, and food prices are also expected to soar as a result of this ban, thereby altering global trade trends and raising overall price levels and inflation worldwide.
4. Harm to international banks in Russia: Several European banks have branches and subsidiaries in Russia, most notably Société Générale of France, UniCredit of Italy, and Raiffeisen Bank of Austria. These banks will have to confront a devalued ruble and greater risks of spiking inflation, as well as drop some of their customers with frozen assets. Moreover, the ban on Russia will increase Western exposure to Russian banks. Italian and French banks have outstanding claims of $25 billion in Russia, while Austrian banks have $17.5 billion, and US banks have $14.7 billion. A potential large-scale banking crisis looms with the notion of Russia finding alternative means for receiving its funds.
5. Serious implications on the global financial order: The US and EU are not insulated from the negative repercussions of banning Russia from SWIFT. This is in part due to the large volume of foreign investments in Russia, 20% of which are made through SWIFT. Excluding some banks from SWIFT would prompt Russian entities to turn to other banks and institutions that are not under sanction, but which conduct major transactions in SWIFT-connected currencies and banks. These new partners will become the launch pad for Russian financial transactions abroad, a transition which would cause untold trouble for international banks.
Russia has previously prepared itself for Western economic sanctions through some precautionary measures meant to mitigate the fallout from its potential exclusion from the SWIFT:
1. Create a local system for financial transfers: Russia faced economic sanctions in 2014 following its annexation of Crimea, forcing it to create its own bank payment system called SPFS. This system includes about 400 users (i.e., banks and Russian and foreign companies), who have used this network to send around 2 million messages in 2020. The Central Bank of Russia aims to increase the system’s usage rate by 30% in 2023. Russia has also launched Mir for card payments, a local version of Visa and Mastercard. This enables Russia to use internal financial messaging systems and its allies’ infrastructure if it is ever blocked from SWIFT.
2. Strengthen ties with China: CIPS, the new interbank payment system in China, could represent an alternative to SWIFT. Integration between the Chinese and Russian financial systems was announced in 2019, and since then the two countries have agreed to use the ruble, instead of the US dollar, in some major energy deals between them. Moscow and Beijing also agreed to support one another economically if any financial crises occur, such as the one currently in play.
3. Increase and diversify Russia’s foreign reserves and sources: Russia has deliberately boosted its foreign reserves to an unprecedented level, exceeding $620 million. These reserves could be used to allay the adverse effects of a strong blow to the Russian economy. Moscow has also enhanced the Central Bank’s control over banks and regulated bank card usage to consistently provide customers with their money.
4. Gradual withdrawal from Western financial architecture: By promoting the Russian capitalist renaissance, Russia decided to manage its overseas payments through SPFS in non-Western currencies. In doing so, Russia hopes to break Western pressure in the medium and long term. Financial institutions and companies, especially those which depend on Russian gas, could find alternative ways to evade the SWIFT sanctions by resorting to conventional communications (telex, phone calls, and emails), no matter how unsafe and slow they are.
5. Cryptocurrency: The Russian government and Central Bank are developing its own cryptocurrency called the Digital Ruble, which could facilitate remote payments and settlements online. New tools developed in Russia could also help conceal the origin of these transactions, thereby enabling companies to trade with Russian parties without any inconvenient exposure or disclosure. Through cryptocurrency, Russian entities can interact with any countries interested in trading with it and outside the realm of the international banking system.
In conclusion, despite the significant damage to its economy, leveraging Russia’s access to SWIFT would largely prove ineffective as a means for deterring Russia. At worst, it would inspire Russia to find alternative methods for participating in the global economy. Moreover, Western powers could only ban 70% of Russian banks to avoid serious risks to their own economies and deal with the remaining banks to settle oil and gas payments. On the other hand, Russia could temporarily halt gas exports to pressure the EU into negotiations, as Europe gets 40% of its gas from Russia. The latter is also the largest exporter of grains and fertilizers in the world, which will allow it to break out of any economic isolation and easily reintegrate into the global economy.