The crisis in Ukraine has led to multiple European and U.S.-led economic sanctions against the Russian Federation, resulting in profound damage to the Russian economy, reports Al Jazeera. According to ABC News, Russia is facing the sharp devaluation of the ruble, increasing inflation, heightened interest rates, and a frozen stock market. To further disrupt the Russian economy, The Wall Street Journal reports that Western countries have removed several Russian banking entities from the Society for Worldwide Interbank Financial Telecommunication, or SWIFT. SWIFT is a Belgian financial cooperative that plays a vital role in the secure communications required for international financial transactions. The consequences of this action may be far-reaching and drastically impair Russia’s ability to conduct international trade, further complicating its economic future.
Al Jazeera describes SWIFT as “a network used by banks to send secure messages about transfers of money and other transactions” and further labels SWIFT as the “backbone of the international financial transfer system.” It is used by over 11,000 financial institutions worldwide to ensure that communications involving attempted transfers of money between banks are completed in a safe, efficient, and reliable fashion. Alan Rappeport of The New York Times reports that “blocking Russia from SWIFT would curb its ability to conduct international financial transactions by forcing importers, exporters, and banks to find new ways to transmit payment instructions.”
Some European nations, including Germany, Austria, and Italy, initially voiced opposition to the removal of Russia from SWIFT. In the case of Germany, which purchases 55 percent of its gas imports from Russia, Politico reports that government officials had previously raised concerns that SWIFT sanctions would impair Germany’s ability to pay for crucial energy deliveries from Russia. The states in early opposition appear to have relented to an initial round of SWIFT bans. However, the reported bans are not a comprehensive quarantine of the Russian financial institutions from SWIFT.
On March 3, Reuters published the list of the 7 banks that will be removed from SWIFT participation. These seven banks are drawn from a pool of an estimated 300 financial entities in Russia currently using SWIFT. Absent from current SWIFT sanctions is Russia’s largest bank, Sberbank, and Gazprombank, a significant channel for energy-related payments. These prominent omissions maintain an avenue for EU nations to continue buying Russian oil and gas and preclude complete isolation of the Russian economy from global trade for the time being.
The concept of expelling Russian banks from SWIFT is not novel. Russia has been preparing for such an action by the EU since the UK first proposed SWIFT-based sanctions in 2014 following the annexation of Crimea. The proposed SWIFT expulsion did not proceed at that time, as BBC News reports that Russian officials declared that such a measure could be taken as a declaration of war.
An analysis published by Dr. Maria Shagina of the Carnegie Moscow Center explains that the steps Russia has taken to mitigate the effects that the loss of SWIFT access would have on its economy. For domestic transactions, Russia could employ the National Payment Card System, operated by Russia’s central bank, in place of the Visa and MasterCard payment systems, both of which CNBC reports recently blocked Russian financial institutions from their networks. Established in 2014 in response to sanctions, the system only accounted for 24 percent of domestic card transactions in 2021. Additionally, the National Payment Card System is accepted by few countries internationally, making the system ineffective for most international transactions.
Shagina goes on to describe the System for Transfer of Financial Messages (SPFS), which is also run by Russia’s central bank and was created to serve as an alternative to SWIFT. However, as of 2020, the system accounted for only 20 percent of financial transfer messaging, with a goal of 30 percent by 2023. Shagina further details internal issues with SPFS, including limited working hours compared to SWIFT, limited message size, and difficulties persuading foreign banking entities to join SPFS.
There are doubts within US financial institutions about the true efficacy of SWIFT-based sanctions. Jamie Dimon of JPMorgan Chase voiced concerns to Bloomberg that expelling Russian banks from SWIFT could have “unintended consequences” that could hurt the global economy. Dimon additionally notes that sanctioned Russian banks may easily find “workarounds” to continue to carry out business internationally. According to Bloomberg, JPMorgan was among multiple U.S. financial firms which advised the U.S. Government against suspending SWIFT access to Russian banks.
While the lasting effects of the SWIFT ban on Russia and the global economy will take time to fully manifest, these measures signal an escalation in sanctions against Russia.
The statements expressed in this commentary are solely those of the author in his private capacity and do not in any way represent the views of the United States Navy or any other United States Government entity.