In a dramatic turnaround, European nations put their differences and national interests aside to do what was formerly unthinkable.
As fighting between Russian and Ukrainian forces entered its fourth day, countries finally bit the bullet and agreed to ban selected Russian banks from the global interbank financial messaging system, Swift.
EU countries like Germany, Italy and Hungary, initally expressed reservations about cutting Russian banks off from Swift because of their close economic and financial ties with Russia. But as international pressure mounted over the weekend—specifically from Ukrainian president Volodymr Zelenskyy, who called on EU countries to do more—on Saturday, the EU, US, Canada and the UK agreed to remove a certain number of Russian banks from Swift.
Announcing the ban, European Commission president Ursula von der Leyen said, “Cutting banks off will stop them from conducting most of their financial transactions worldwide and effectively block Russian exports and imports.” The EU will also freeze the transactions of Russia's Central Bank, von der Leyen stated, to try and prevent it from liquidiating its war chest of assets. “All of these measures will significantly harm Putin's ability to finance his war,” von der Leyen stated. ”They will have an eroding impact on the economy.”
One of the sharpest U-turns over the weekend came from Germany, which relies on Russia for 55% of its gas supplies. It not only agreed to the SWIFT ban, but in an extraordinary session of German parliament on Sunday, German chancellor Olaf Scholz announced that Germany would dramatically increase defense spending by €100 billion ($112.7bn) or more than 2% of GDP, an unprecedented move by a country, having only allocated 1.2%–1.3% of its GDP to defence in recent years.
Details of how the Swift ban on selected Russian banks will work in practice were still being sketched out on Sunday. Technically speaking, it is unlikely to be easy as more than 300 Russian financial institutions are connected to Swift, which processes an average of 40 million financial messages a day relating to payments and other transactions. However, Swift has no involvement in or control over the underlying financial transactions that are contained in the messages of its member banks.
For that reason, some believe Swift may not be the most effective option when it comes to hitting Russia where it hurts the most, economically.
“Oh, how the great & the good have got it oh so wrong on the topic of SWIFT,” Olaf Ransome, who describes himself as a long-time banking operations veteran and the founder of Zurich-based 3C Advisory, opined on LinkedIn. “SWIFT does not make payments, it delivers messages securely from one place to another, like FedEx delivers packages and like Jason Statham in the Transporter, it never opens the package. SWIFT is the wrong lever to pull on. Sanctions lists will be more effective.”
Nonetheless, the impact of the announcement is already being felt by some Russian businesses and their customers regardless of who their banks are. "My hotel in Moscow asked me to settle the bill early because they aren’t sure if credit cards are going to work once SWIFT sanctions kick in," tweeted NBC News foreign correspondent Raf Sanchez.
Despite being at the center of an international media storm, the Brussels-headquartered Swift has remained tight lipped thus far. On Friday, its PR agency issued a short statement saying it is a neutral global cooperative set up and operated for the collective benefit of its community of more than 11,000 financial institutions in 200 countries. “Any decision to impose sanctions on countries or individual entities rests solely with the competent government bodies and applicable legislators,” the statement read.
Swift has been here before. In 2012, as a result of global action to intensify sanctions against Iran, it was prohibited from providing financial services to EU-sanctioned Iranian banks, which are said to have caused the country to lose oil export revenues and 30% of its trade.
The Iranian example demonstrates that cutting Russian banks off from Swift will also likely impact non-Russian banks as well as companies outside of Russia. Philippe Tissot, a Swiss-based expert in strategy and international business development, says banning Russian banks will prevent any other bank from transferring money to Russia, especially to pay for purchases of gas and other raw materials. “Russia supplies gas to several European countries, which cannot afford to no longer benefit from Russian gas,” he says. “This decision would also have the impact of dramatically increasing the cost of gas worldwide.”
For those transactions not included in the current list of sanctions imposed by the West on Russia, Tissot says suppliers will still expect to be paid by the Russian Federation. “Disconnecting Russia from Swift could therefore penalize the various suppliers working with Russia more than Russia itself,” he explains.
On Twitter, one member of the German parliament, Norbert Röttgen, described SWIFT as “...our sharpest sword to hit in case of an attack [by Russia on Ukraine].” However, following its annexation of Crime in 2014, the Russian central bank built an alternative financial messaging network, the System for transfer of financial messages, or SPFS, to bypass Swift.
SPFS allows members to send electronic messages on financial transactions. There have been discussions to link SPFS with the China-based Cross-Border Inter-Bank Payments System. The cost of transactions on SPFS is higher than Swift, says Tissot, but partnership agreements have already been discussed with India, Iran and the Eurasian Economic Union. “Accelerating the implementation of this platform could provide Russia with an alternative solution,” says Tissot.
In addition, many are afraid that shutting down Swift would strongly encourage Russia, like other countries, to accelerate the implementation of central bank digital currencies and cryptocurrency exchanges. “The digital transformation underway in digital currencies would be stimulated globally, and ultimately the big loser could well be Swift and the US government,” says Tissot, “which would lose its current capacity to weaponize Swift.”
In other words, Swift itself may become an economic casualty of the effort to remove some Russian banks from Swift.