Why SWIFT is the nuclear option of Russia’s financial sanctions
The United States and its NATO allies have imposed an unprecedented number of sanctions against Russia as punishment for last week’s invasion of Ukraine, including a ban on the export of cutting – edge technology to Russia.
One move by which Ukraine and some of its allies have pleaded is to cut Russia off from SWIFT, the world’s largest network of financial transactions. It is an option that would separate Russia from most international banking transactions, and potentially overwhelm its economy for some time.
Saturday, the US and its allies moved forward with plans to do just that. “We promise to ensure the removal of Russia’s selected banks from the SWIFT messaging system,” the leaders of the European Commission, France, Germany, Italy, the United Kingdom, Canada and the US said in a joint statement. “This will ensure that these banks are disconnected from the international financial system and undermine their ability to operate globally.”
SWIFT (World Association of Interbank Financial Telecommunications) is a financial messaging network used by more than 11,000 financial institutions in 209 countries. Supervised by G10 central banks, the SWIFT payment network uses standardized secure codes that allow financial institutions to send and receive information, such as instructions for transferring money across borders.
The SWIFT network is crucial for cross – border trade, as it enables businesses in one country to guarantee payment in another. For example, an EU firm that buys Russian products must use SWIFT to transfer funds from a local bank to the Russian seller’s bank account using SWIFT banking codes.
Once Russia is unplugged from the network, its government and businesses would no longer be able to pay 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 the Center for Innovation of the FutureToronto-based consulting firm.
The consequences of banning SWIFT could be felt quickly. Saturday night, for example, an MSNBC reporter tweeted he was asked to pay his hotel bill in Moscow immediately. “My hotel in Moscow asked me to settle the bill soon because they are not sure whether credit cards will work as soon as SWIFT sanctions begin.”
However, the use of the world financial network as a weapon of sanctions outside Russia ‘s borders could have long – term consequences. In one case, it could undermine confidence in the US dollar and SWIFT itself as an apolitical network. It could accelerate the creation of alternatives such as trading in local currencies, using cryptocurrency, and forming new bilateral free trade agreements, Prakash said. China, Iran, and India, for example, are already trading in local currency.
“The more [the] The US armed its currency… or if it cuts countries from SWIFT, how many countries will be forced to create or find alternatives. It’s already happening. And, presumably, Russia would have looked at those options, “Prakash said before the move was announced on Saturday.
In 2014, Russia created its own banking network – Financial Messaging Transfer (SPFS) – in response to the threats of SWIFT sanctions at the time. Russia could also opt for China instead of SWIFT – known as CiPS – Cross – Border Interbank Payment System. There are plans Integrate SPFS with China Cross Border Interbank Payment System.
Russian President Vladimir Putin may not be worried about the economic hardship caused by sanctions. But Russia’s targeted banks are largely controlled by Russian oligarchs, and Putin probably cares. That’s one of the main reasons why the first round of multinational sanctions imposed last week focused on the country’s gleptococcus.
The United States and key allies in the European Union, the UK, Canada, Japan and Australia announced on Tuesday that those sanctions included a “full block” on two of Russia’s biggest financial intuitions – VEB and bank Russian military, Promsvyazbank, defends. Deals, US President Joe Biden said.
A Treasury statement said VEB is “crucial” to Russia’s ability to raise money, and that Promsvyazbank is a vital part of Russia’s defense sector. The two institutions and their 42 subsidiaries have combined assets worth $ 80 billion, the release said. The Biden Administration has stated that it has also blocked financial transactions from five major Russian oligarchs believed to be “participating in the Russian regime’s cliché.”
However, cries for cutting Russia out of SWIFT grew as Russian troops and hardware entered Ukraine and Kiev, the capital. The Ukrainian government called for the expulsion of Russia from the banking system, but the move was seen as such a big step that some nations urged caution.
On Thursday, the European Central Bank, UK Prime Minister Boris Johnson, Canadian Prime Minister Justin Trudeau and Czech President Milos Zeman called for Russia to be expelled from SWIFT. However, Germany warned it, while other EU nations had reservations. G7 officials said some members were reluctant as it would be impossible to pay for Russia’s energy, which could indirectly lead to rises in international energy prices, which are also a concern for Washington.
“If the West overrides the Russian economy, Russia could shut down energy supply in retaliation. That will create complete chaos in Germany [gets] 65% of its natural gas comes from Russia, ”said Prakash. “The disruption of the German economy and society will have a huge negative impact on the rest of Europe (with Germany being the largest economy in Europe).
In addition, western banks already have hundreds of billions in dollars, especially in oil and gas futures. There are oil and gas tankers at sea whose cargo was purchased weeks and months ago. If Russia is cut from SWIFT those purchases could be unresolved, and U.S. and EU banks could be the backbone of that money, Prakash said.
It is not yet clear how these purchases would be settled following the latest sanctions.
Biden asked during a news conference on Thursday about the possibility of cutting off Russia’s access to SWIFT, saying that Europe was not yet comfortable doing so, which is why it was left out of sanctions. announced that day. Instead, the financial sanctions extended to the top 10 banks in Russia, its oligarchs, and high – tech sectors, Biden said.
“Unprecedented export control measures will cut more than half of Russia’s high-tech imports, restricting Russia’s access to critical technology inputs, undermining its industrial base, and undermining Russia’s strategic ambitions to influence the stage the world, ”Biden argued.
The President also acknowledged that removing Russia from SWIFT could have an impact on the EU. “It’s always an option, but at the moment that’s not the position that the rest of Europe wants to take,” Biden said Thursday.
EU President Ursula von der Leyen said the bloc intended to offer a package of “massive and targeted sanctions” to European leaders for approval. “We will focus on strategic sectors of the Russian economy by blocking access to technologies and markets that are crucial for Russia,” she said, adding that the EU will seek to limit “Russia’s modernization potential”.
(EU and US also he went after Putin more directly with sanctions targeted and high aids unveiled late Friday.)
The technology sanctions specifically aim to deny technology-sensitive export exports to Russia’s defense, aviation and maritime sectors.
In addition to severe restrictions on the Russian defense sector, Biden said the US government will impose restrictions across Russia on sensitive US technologies produced in foreign countries using software, technology or equipment of US 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 cutting – edge technology.
Prakash noted that U.S. sanctions on high-tech goods only include products manufactured by U.S. firms. The sanctions also prohibit any product made anywhere that uses any type of US technology (software, sensors, etc).
“Yes, China will be able to fill some gaps. However, the sanctions will hurt Russian manufacturers who import all kinds of products from all over the world, “Prakash said.” They will have to rethink everything – supply chain, payments and factory floor design. “
While semiconductors through supply chains are easier to control because a relatively small number of companies are producing them, sensor or software restriction is a different calculation.
“It will be difficult to meet and enforce sanctions, worldwide, for general high – tech products,” Prakash said.
In addition to financial sanctions, announced by the EU it would prevent the export of certain technologies as a movement to modernize Russia ‘s capacity and weaken its long – term economic growth.
“The wild card is foresight in all of this,” Prakash said. “How much and how far did Russia see all this and plan for it?”
Copyright © 2022 IDG Communications, Inc.
Why SWIFT is the nuclear option of Russia’s financial sanctions
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