It’s official: the United States and major Western powers have decided to partially disconnect Russia from the SWIFT international payment platform, in an aggressive move against Moscow after President Vladimir Putin ordered the invasion of Ukraine on February 23.
As Russian troops advance on several fronts and the Ukrainian army stoically resists Russian onslaughts on Kiev, the West made the decision to heavily sanction Moscow.
“As a result of Putin’s ongoing assault on Ukraine, Joe Biden and the leaders of the European Commission, France, Germany, Italy, the UK, and Canada decided to take specific measures to further isolate Russia from the international financial system,” read the statement. “Continuing our lock step, historic coordination, the Leaders decided disconnect key sanctioned Russian banks from SWIFT, target the Russian central bank, and launch a joint task force to hunt down assets of sanctioned Russian companies and oligarchs.”
The SWIFT system (Society for Worldwide Interbank Financial Telecommunication) is a platform used as the main connector of international financial entities. With it, international transfers can be made securely, but one should not mistakenly consider SWIFT as a payment system, but rather as a system for interbank communications. It was founded in 1973, is headquartered in Belgium and currently connects 11,000 financial institutions around the world, facilitating some 42 million transactions a day.
The consequences of this sanction are diverse and dire for Russia. Europe will also be affected. That is why experts speak of “a nuclear financial bomb.” Here are some of the results that the measure will bring:
Russian financial institutions will not be able to pay or receive money through SWIFT
Certain Russian banks will not be able to access the SWIFT system and this will hit the Russian economy hard, which right now is going through an economic crisis according to Jake Cordell, a journalist for the Moscow Times. For example, it is estimated that its GDP will fall, just because of this sanction, by 5%.
The value of the ruble will fall, affecting the purchasing power of the Russian consumer, who is now suffering the consequences of the highest inflation seen in six years on Russian territory, with an increase of more than 8.7% annually. With the collapse of the Russian currency, imports will increase their costs. To illustrate this fact, 75% of the raw materials and capital goods needed to manufacture consumer goods in the market basket in Russia are imported.
Inflationary rates will probably increase, as Russian banks will not be able to leverage on Western banks; this will create a sort of barrier to credit access for Russian financial institutions and the population. Of course, investments would also fall and capital disinvestment would be calamitous for a Russia that will not be able to expand its productive capacity quickly.
In short, this is a very harsh measure for the Russian economy, especially in times of war.
Would only Russia face consequences?
The answer is a resounding no. The decision to disconnect Russia from SWIFT, albeit partially, would also affect much of Europe dependent on Russian gas and energy. Russians and their companies will find it almost impossible to conduct electronic business with banks or companies in other countries, they will not be able to receive payments for natural gas shipments to Europe, and the old continent has no way to replace Russia as a supplier in the short term. For this reason, several European countries were reluctant to apply this harsh sanction against Russia.
Does Russia have alternatives to mitigate damages?
It does, but they are unknown. It is not known how effective they are to mitigate the damage.
First, Russia has SFPS, its own payments system, created in 2014 when the Putin-led country feared being disconnected from SWIFT for invading Crimea, the problem is that this system has few users and foreign members.
There is also the Chinese alternative, CIPS, founded in 2015 by the Asian giant to boost the internationalization of the yuan. With this Russia could trade with China and, despite being a much more limited system than SWIFT (it only has about 80 banks), it also represents a risk for the West, as it can be pushed to implement alternative systems to SWIFT.
The big bet would be related to cryptocurrencies. If Russia uses cryptos to capture foreign currencies, it could circumvent Western sanctions. In fact, in early February, Moscow decided to regulate cryptocurrencies rather than ban them.
The Russian government estimates that there are approximately 12 million cryptocurrency accounts in the country in which approximately 2 trillion rubles or $26.7 billion in crypto assets are circulating.
However, it is also a clear risk, considering the volatility of cryptocurrencies.
An unprecedented move
Iran was one of the countries that, for example, was disconnected from the SWIFT system. First in 2012 and then in 2018. However, Russia is a much more important international economic player than the Islamic Republic and the consequences on international trade and daily life of countries that have relations and trade treaties with Moscow, remain to be seen.