Since Russia’s invasion of Ukraine, the world’s largest economies have not shied away from expressing their disapproval by imposing sanctions on them. One of the sanctions is that Russian banks are removed from the Society for Worldwide Interbank Financial Telecommunications (SWIFT).
Following lengthy deliberations, the United States, the European Union, and the United Kingdom finally agreed on Saturday to cut some Russian banks from the SWIFT messaging system. SWIFT is a Belgian messaging service that connects over 11,000 financial institutions around the world when they transfer money. It does not really keep or transmit funds, but it does enable banks and other financial institutions to alert one another of pending transactions. It notifies users when payments are sent and received.
Implications of unplugging Russia from SWIFT
Blocking Russian banks from using SWIFT would limit the country’s capacity to undertake foreign financial transactions, forcing importers, exporters, and banks to find alternative means to communicate payment instructions.
“Cutting some commercial banks from SWIFT will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally,” EU Commission President Ursula von der Leyen said in announcing the measures in Brussels. This is expected to hit Russia’s economy hard. Alexei Kudrin, Russia’s former finance minister, suggested being cut off from Swift could shrink Russia’s economy by 5%.
Although being cut-off would not prevent Russian banks from doing cross-border transactions, it would make them more expensive and time-consuming. Foreign transactions would rely on inefficient communication methods like email and telex. It would also interfere with Russia’s ability to recoup international profits from its oil and gas exports, which accounts for more than 40 percent of its revenue.
The removal from SWIFT would also mean that companies owed money by Russia would also have to find alternative ways to get paid. Russia developed its own financial messaging system, ‘Mir’, that could allow Russian financial firms carry out transactions globally, following the threats of escalating sanctions from the United States in 2014. However, only a few foreign countries currently use it.
However, experts are concerned about the sanction’s influence on Russia’s economy in the long run. Payments from Russian banks might be routed through countries that haven’t imposed sanctions, such as China, which has its own payment system. According to a European Union statement, Western powers promised to adopt stringent measures to prevent the Russian Central Bank from using its international reserves in ways that would weaken the impact of our sanctions.
The sanction could affect others in Europe
Getting the EU on board for sanctioning Russia through SWIFT had been a tough process. This is because EU trade with Russia amounted to 80 billion Euros, roughly ten times that of the United States, which had been an early proponent of such measures. Russia is also the European Union’s main provider of oil and natural gas, and finding alternative supplies will not be easy. With energy prices already soaring, further disruption is something many governments want to avoid.
The decision to target only a few Russian banks appears to be motivated by a desire to keep the possibility of further escalation open while also ensuring that the sanctions have the greatest possible impact on Moscow while avoiding a major impact on European companies that deal with Russian banks for payments for their gas imports.