Ban on Russian banks “selected” by SWIFT: consequences

Disconnecting a bank from SWIFT is like disconnecting a person from the internet. While monetary flows are theoretically possible, a bank would be unable to operate without additional information (where the money comes from, what it is used and where it goes). And, as we saw with Russia Ukraine war leading to a country’s banks ban from SWIFT, whether partially or wholly, has significant economic ramifications.

What exactly is SWIFT?

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a messaging system that enables banks worldwide to safely and swiftly communicate about cross-border payments. The system does not store or move money. It’s trendy. SWIFT is used by approximately 11,000 member institutions in 200 countries and territories.

The G10 (the United States, the United Kingdom, Canada, Germany, Switzerland, France, Sweden, Japan, Italy, and the Netherlands) central banks, the European Central Bank, and the National Bank of Belgium are in charge of SWIFT. There is also a SWIFT supervision forum, including central banks from several other major economies. One of them is the Reserve Bank of India. 

Preet Banerjee, in this video, explains in detail how the SWIFT network facilitates cross-border payments and the disastrous consequences for Russia. 

How do SWIFT works?

SWIFT is a communications network that connects over 10,000 financial institutions to send and receive orders. Participating banks can use this messaging service to settle commercial, financial, and foreign-exchange payments. The SWIFT code is an integral part of the SWIFT communications system. This code is assigned to each bank that joins the system, and it identifies the bank, the country it’s in, where it’s located within the country, and, optionally, the branch.

According to Reuters, SWIFT is used for 70% of transfers in Russia.

Which Russian banks have been dropped from the SWIFT network?

VTB, VEB,  Novikombank, Sovcombank, Promsvyazbank, Bank Otkritie, and Bank Rossiya are the European Commission’s banks barred from the system. SWIFT has given banks ten days to complete transactions already in the works.

More banks are anticipated to join the list, bringing the total number of institutions prohibited to over 25, including subsidiaries. However, it is now evident that some banks will be allowed to continue routing transactions.

“We will hold Russia to account and collectively ensure that this war is a strategic failure for Putin,” announced the leaders of the European Commission, France, Germany, Italy, Great Britain, Canada, and the US on Saturday.

Why is it so essential to ban Russia from staying in SWIFT?

The UK has also imposed the following sanctions:

Central Russian banks have been barred from accessing sterling and processing payments in the UK financial system. Major Russian corporations and the government will benefit from soliciting funds or borrowing money on British exchanges.

The amount of money that Russians can deposit in UK banks will be limited. The EU has stated that it would target 70% of the Russian banking system and critical state-owned companies, including defense companies.

Which other countries are prohibited from utilizing SWIFT? 

North Korea has been barred from using SWIFT, and Iran is also isolated. These countries are subjected to their own set of Western sanctions: Iran for allegedly pursuing nuclear weapons, North Korea for obtaining them, and SWIFT is one of many mechanisms used to impose worldwide financial isolation. After the United Nations said that companies transacting with blocked North Korean banks would violate its sanctions, North Korea was banned entirely from SWIFT in 2017 – a year in which it conducted multiple missile tests. 

Canada, The United States, and European allies agreed to withdraw a handful of Russian banks from SWIFT, the Society for Worldwide Interbank Financial Telecommunication, two days after Russia launched an attack on Ukraine. These “de-SWIFTed” Russian banks would no longer send money over the financial interface.

The long-standing and contentious threat to cut Russia off from the SWIFT network has been portrayed as a centerpiece of the West’s retaliatory measures.

Humphrey Yang, in this video, explains in detail what will happen after Russia is banned from SWIFT.

De-Boundaries SWIFTing’s

Banks cut off from SWIFT cannot use the network to share information. However, some claim that preventing banks from using SWIFT is hardly a financial nuclear weapon. Denying banks access to SWIFT has no impact on their capacity to communicate or trade with the 11,000 financial institutions that are not part of the SWIFT network. Alternative messaging networks can settle payments by disconnected banks that are not subject to sanctions.

In reality, restricting countries’ access to SWIFT might damage the messaging service by encouraging users to rely on other financial communication networks in the absence of prohibitions on actual money transactions.

Major US financial institutions dominate SWIFT, with US dollar transactions accounting for 40% of all reported transactions. Making the US-centered financial order less appealing is precisely the kind of collateral damage the US wants to avoid.

Sanctions, not SWIFT, are harming Russia’s economy.

By the time the West blocked five Russian banks from SWIFT — Sberbank, VTB, Otkritie, Novikom, and Sovcom — the threat of sanctions was already wreaking havoc on the Russian economy.

Speculation that Russian bank stocks might be placed on the sanctions list of Specially Designated Nationals (SDNs) barred from processing US-dollar transactions through the US financial system sparked a sell-off. President Biden warned in mid-February, as Russian military forces massed in Ukraine, that the US would respond “swiftly and firmly” to an invasion — and that threat alone sent the Russian stock market and the currency down. The chance of the Russian government defaulting on its debt, known as sovereign default risk, has increased.

What are the sanctions imposed on Russia’s central bank?

Among the measures adopted by the US and its allies, sanctioned Russian institutions have been disconnected from SWIFT, the global interbank payment settlement mechanism. Furthermore, the Russian Central Bank’s ability to protect the Rouble against the sanctions is limited.

Is the prohibition already in effect?

Proposed laws on Cryptocurrency investment and usage

According to Russian news sources, during the ongoing conflict with Ukraine, Russia’s central bank has again urged the government to impose a blanket ban on cryptocurrencies.

The stance of the Central Bank on cryptocurrencies has not changed. The Central Bank has stated that cryptocurrencies are hazardous, threatening regular Russians’ financial well-being.

In January, the Russian Central Bank recommended an outright ban on cryptocurrency trade, mining, and payment for goods and services. As a result, cryptocurrencies have plummeted to new lows, with Bitcoin dropping near $35,000 and shattering support levels.

According to government data, Russian residents’ crypto assets are valued at almost 2 trillion roubles ($26 billion approx).

Moscow currently prohibits using cryptocurrencies as a form of payment, but is developing a legal framework to govern them. The government is currently reviewing Russia’s draught law “On Digital Currency,” filed by the Ministry of Finance in February.

Like the rest of the federal government, the Russian Treasury Department views cryptocurrencies differently than the Central Bank of Russia. They believe that cryptocurrency should be legalized and regulated more strictly.

President Vladimir Putin has already asked Elvira Nabiullina, the head of the Bank of Russia, Finance Minister Anton Siluanov, and Deputy Prime Minister Dmitry Grigorenko to agree on the issue that would be most beneficial to the Russian economy. Putin has repeatedly boasted about Russia’s cryptocurrency mining advantage.

Furthermore, with the Russian rouble plummeting to record lows due to international sanctions imposed in response to the Ukrainian incursion, Russian citizens are increasingly reliant on cryptocurrencies.

Will Russia’s $600 billion in reserves assist Rouble’s rescue?

Because of the sanctions, Russia’s massive stock of forex reserves is rendered useless; in other words, the Russian central bank will not sell the reserves and buy roubles to meet domestic cash and currency demand. If the Central Bank loses its power to counteract the impact of US sanctions, the Rouble will continue to decline, inflation will rise, and the central bank will be left defenseless.

Has the decision had an impact on global bond markets?

Though the market reacted emotionally, Russia, for example, does not have significant exposure to US government bonds, the most widely traded instrument that determines global rates. Since 2018, Russia has been absent from the list of large foreign investors in US Treasury securities, meaning that it may hold less than $30 billion in such assets. Most of Russia’s foreign exchange reserves are held in the United States.

How has the embargo affected the Russian economy?

The Russian stock market has had its worst week on record. The Russian Rouble has had its worst week since March 2020, with the currency hitting an all-time low versus the US Dollar earlier this week. The cost of borrowing for Russia’s government has nearly doubled to about 17%. According to reports, Russia’s credit rating has been lowered to junk status by S&P. Demand for cash in Russia increased 58-fold within 24 hours of our activities.

According to a White House press briefing, the Russian government hurried to drain its resources to shore up its banks and currency.

Sanctions and the exclusion of Russian banks from the SWIFT system, the most critical international payment network, will limit the ability of Indian state-owned companies to repatriate dividends from Russian oilfields. And, prevent investments in the massive Vostok project, according to people familiar with the situation. According to them, the steep depreciation of the rouble will lower dividends for Indian companies in dollar terms.