With Russian forces massing on the Ukrainian border, the US and the EU have warned of tough economic sanctions. As we wait and watch this collapsing strategy unfold, it’s worth considering how businesses, and particularly banks, might prepare for what’s to come.

A number of proposed sanctions are being launched in Washington, but the two measures with the greatest impact would likely be: cutting Russia off from the SWIFT system and sanctioning major Russian financial institutions.

SWIFT is not the race

The Society for Worldwide Interbank Financial Telecommunications, or SWIFT, has been the cornerstone of global transactions since the 1970s. However, it is not the only means of international financial movement. If the United States pressures SWIFT to exclude Russia, as it did with Iran in 2012, the isolation effect might not be so severe. In Iran’s case, disconnecting from the SWIFT system was an almost final step in a long campaign to sever ties between the international financial system and Iranian financial institutions. In contrast, Russia is still an important participant in the global economy.

Additionally, Russia has developed its own payment system since it was threatened with a SWIFT shutdown in 2014 in retaliation for its invasion of Crimea. Russia’s Financial Message Transfer System (SPFS) is nowhere near as developed as SWIFT, but it already handles around 20% of all Russian domestic financial communications.[1]

Finally, Russian banks and multinationals looking for ways to transfer money may find a warm welcome in China’s Cross-Border Interbank Payment System (CIPS). Like the SPFS, the CIPS network is tiny compared to SWIFT.[2] However, CIPS has users in 100 countries, and it is likely that the People’s Bank of China, which administers the system, would be happy to expand its reach and be seen as an alternative to banking systems that other countries can. consider it too tightly controlled by US-led policy.

Cutting Russia off SWIFT would certainly have a jarring short-term effect on the Russian economy, as well as the companies that buy and sell in Russia. However, the sanctions will not stop trade with Russia in its tracks. They will simply move the Russian economy to less solid paths, still under construction, but still expanding.

Bring it to the bank (s)

Washington could aim for an even bigger sanctions pressure point by blocking major Russian banks. Law Project[3] suggests that the following banks can be targeted:

1. Sberbank
2. VTB
3. Gazprombank
4. VEB
5. Russian Direct Investment Fund (RDIF)
6. Promsvyazbank

This is quite a hefty list of Russian financial institutions, and the proposed sanction is not a minor restriction, it is a complete freeze on any property that comes into the possession or control of an American person. This would effectively prevent any designated bank from using the US dollar or any transaction involving the US banking system.

Blocking different combinations of these banks can have different effects on Russia. For example, VEB is a development bank for the Russian government and RDIF is a sovereign wealth fund that supports large government projects. Blocking these banks could thwart the plans of Russian leaders and their oligarch supporters. In contrast, a sanction against Russia’s largest national bank, Sberbank, could disrupt many small businesses and individual customers among the general Russian population.

What happens after

There is still a good chance that both sides in the deadlock on Ukraine will back down, or that the United States will take a path involving lesser or no sanctions (remember that there was talk in 2014 of a cut from SWIFT in response to Russia’s annexation of Crimea, but it never materialized). However, if your company is present in Russia or does business with Russia, maybe now is the time to consider the possible scenarios and how your company will react to them.

We cannot predict the future (although by reading this blog you may know that we are certainly trying!) To respond and be successful in the face of rapid international economic changes.

FOOTNOTES

[1] “The Russian platform had more than 400 member banks – including around 20 from former Soviet states – and handled a fifth of all national financial communications, at the end of 2020.: https://www.rferl.org/a/russia-swift-nuclear-option/31601868.html

[2] https://www.bofit.fi/en/monitoring/weekly/2021/vw202128_4/

[3] Proposed amendment to the National Defense Authorization Act (NDAA): https://www.documentcloud.org/documents/21114594-menendez-4832