Will Russia be cut off from Swift if Moscow invades Ukraine?

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With its small but crucial role in the global financial system, international payment network Swift has featured prominently in discussions of possible sanctions against Russia should it invade Ukraine.

The Belgian non-profit cooperative provides secure messaging services for billions of dollars in bank-to-bank payments. He has repeatedly found himself in the spotlight during international crises – including tensions over Iran’s nuclear program, when in 2012 and then in 2018 he was pressured to block Iranian banks targeted by his services’ sanctions.

Western allies are currently discussing whether Swift – the Corporation for Global Interbank Financial Telecommunications – should be pressured to cut off Russian banks‘ access to its networks if Vladimir Putin, the Russian President, orders an attack on the Ukraine. But many officials and experts say such a move would not be the most effective way to pressure Moscow.

Why is Swift so important?

Swift operates a messaging system for banks around the world, transmitting payment requests and keeping track of them on servers in Europe and the United States. Owned by more than 2,000 banks and financial institutions, it processes 42 million such messages per day.

Although other cross-border payment services exist, Swift plays an outsized role. Swift’s cut of some Iranian banks in 2012 was one of the factors behind the sharp decline in Iranian oil exports, which fell from over 3 million barrels per day in 2011 to around 1 million b/d a few years later.

US politicians called for cutting Russia off from Swift after Moscow annexed Crimea in 2014, although the idea never materialized. Alexei Kudrin, Russia’s former finance minister, warned at the time that such a move could lead to a contraction in its gross domestic product of up to 5%.

Russia, which accounted for 1.5% of total transactions on Swift in 2020, has itself developed an alternative messaging system called SPFS that handles around a fifth of domestic payments, but it’s still less capable and more limited than Swift.

Pedestrians in Red Square, Moscow. The EU, Britain and the US have agreed financial sanctions which can be increased or reduced depending on the scale of any Russian attack on Ukraine © Andrey Rudakov/Bloomberg

How likely is Russia to be cut off from Swift?

Swift took part in the discussion among Western allies on sanctions in response to the buildup of Russian troops on the Ukrainian border.

The EU, Britain and the US have agreed on the use of financial sanctions, as part of a basic package that can be upgraded or downgraded depending on the scale of any Russian attack on Ukraine. European officials stressed that “everything is on the table”, but Swift’s exclusion is not seen as the most likely punishment in the basic package.

Swift said he was “neutral” and that “any decision to impose sanctions on countries or individual entities rests solely with the relevant government bodies and applicable lawmakers.”

Gottfried Leibbrandt, former chief executive of Swift, told a Financial Times forum last year that although the system is technically independent, more than 40% of its payment flows are in US dollars and Washington therefore has an effective power of sanction over him.

A more likely path is to impose targeted sanctions on Russian banks and their ability to convert rubles into hard currency. The EU is also coordinating with third countries such as Switzerland to ensure that the sanctions do not simply lead to the diversion of Russian financial transactions to other countries.

Some experts say Swift is getting more punishment attention than it deserves. Cutting Russian banks from Swift would pose a “significant operational problem” for them but would not in itself prevent them from dealing with their American or European counterparts, said Nicolas Véron of the Bruegel think tank.

What are the alternatives for Western allies?

Directly targeting major Russian lenders would potentially have a bigger impact on Russia than cutting them off from Swift. If major banks such as Sberbank or VTB were blacklisted by the United States, they would effectively be cut off from the global financial system. Banks elsewhere would be forced to avoid them or risk falling foul of US authorities.

Edward Fishman, associate researcher at the Center for a New American Security, a think tank, said all of the targeted banks would experience “significant liquidity problems” and a “dramatic loss of confidence”, meaning they could have need to be bailed out by the Kremlin. By contrast, simply cutting Swift’s banks would be a “headache” rather than an existential threat, he said.

Sanctions targeting Russian banks and downgrading Russian oil sector exports would be the most effective tools, he said.

Dmitry Dolgin, chief economist for Russia at Dutch bank ING, said “being cut off from Swift does not mean a ban on cross-border transactions”. Instead, he believed that the possibility of the United States imposing heavy sanctions on one of Russia’s three largest state-owned banks – Sberbank, VTB and Gazprombank – would be “the most serious scenario” due to their key role in managing currency flows.

He added that smaller banks could survive US sanctions, as Bank Rossiya did in 2014 thanks to support from Moscow, which made it the main lender for annexed Crimea and for the wholesale electricity market in Russia.

Could Europe pay for Russian gas without Swift?

It would be more difficult. Russian politicians have warned that without payment, the flow of gas – on which Europe depends for 40% of its supplies – and oil would quickly stop. It would come at a time when Europe is experiencing record gas prices and supply shortages, and with oil above $90 a barrel for the first time since 2014.

“If Russia is disconnected from Swift, we will not receive [foreign] currency, but buyers . . . will not receive our goods – oil, gas, metals,” said Nikolay Zhuravlev, deputy speaker of the upper house of the Russian parliament.

A senior European banker said a possible alternative would be for Europe to pay for Russian gas by placing euros in an escrow account with a European bank on behalf of Russian suppliers, accessible after sanctions are lifted. However, this was unlikely given the sums involved and the risks for suppliers.

Daniel Tannebaum, a former head of the U.S. Office of Foreign Assets Control, which administers the sanctions, and sanctions chief at management consultant Oliver Wyman, said fear of disrupting gas exports, in particular, would likely compel states US and EU to proceed with caution. . Cutting Swift’s Russian banks “would be like using a bazooka when perhaps a rifle could be almost as effective,” he said.

“It is arguably best to designate a handful of specific Russian financial institutions in a way that essentially cuts them off from the global economy,” he added. “You are leaving a number of smaller institutions to enable funding for trade that has not been banned, likely to include energy exports, thereby limiting any potential collateral economic damage.”

Additional reporting by Henry Foy in Brussels

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