It has been determined by the United States and European Union (EU) that a number of Russian banks will be shut off from the key international payment gateway, SWIFT, as part of economic sanctions on Russia. For Russia’s central bank, the assets will be frozen, limiting Moscow’s access to its international reserves.
According to a joint statement, the goal of the actions is to “further isolate Russia from the international financial system.”
Because of the country’s heavy reliance on the SWIFT platform for its vital natural resource transactions, including payments for its oil and gas exports, these joint sanctions are expected to have a significant impact on Russia. In the financial industry, cutting off a country from SWIFT is similar to restricting the nation’s Internet connection.
Iran was the only country to have been cut off from SWIFT before this incident. One-third of the country’s exports were impacted as a result. Only a few Russian banks have been included in the sanctions against Russia so far. In order to avoid escalating the situation, the US and its allies have decided not to extend the ban to cover the entire country.
What is SWIFT?
Money transfers, such as international wire transfers, are made possible by the SWIFT system. SWIFT is an acronym for the Society for Worldwide Interbank Financial Telecommunication.
It is true that SWIFT does not transport money, but rather provides secure financial messaging services to more than 11,000 banks in more than 200 countries to verify transaction details. Central banks from eleven industrial countries, including the United States and the European Union (EU), are in charge of overseeing it.
What does the move aim to achieve?
Withdrawing Russian banks from SWIFT is likely to have a significant impact on the country’s economy, forcing it to rely on “the telephone or a fax machine,” as the White House put it.
Sergei Aleksashenko, a former deputy chairman of the Russian Central Bank, predicted a “catastrophe” on the Russian currency market for Monday. EU President Ursula von der Leyen claimed that paralyzing Russia’s central bank’s assets would prevent the Kremlin from deploying its “war chest,” which she referred to as the country’s FX reserves.
Some of the institutions affected include “all those previously sanctioned by the international community” and “additional institutions, as appropriate,” according to an official German spokesperson reported on the BBC. Some Russian banks have been targeted in order to preserve the prospect of further penalties open, while also making sure that the sanctions have as big an impact on Moscow as possible while avoiding a significant impact on European corporations who use Russian banks to pay for their gas imports. Additionally, Russia’s central bank will be unable to use its foreign reserves to mitigate the impact of sanctions as a result of the restrictions placed on it.
Since the previous round of sanctions in 2014, Moscow has been building up a reserve of foreign currency, which reached a record level of $630 billion in January 2022. Experts predict that the new policies will drastically reduce the country’s central bank’s available reserves.
Efforts to circumvent SWIFT have been made, however, none have been successful. Russian financial institutions have been working on SWIFT alternatives over the last seven years, notably SPFS (System for Transfer of Financial Messages), designed by the Central Bank of Russia. The Russians and the Chinese are reportedly working together on a project that could challenge SWIFT.
Is it possible for Moscow to take advantage of the partial ban, which could soon be expanded to a full one, on this platform?
While it may take some time for the embargo to have an effect, it is crucial that Western nations demonstrate a firm stance. Denys Shmyhal, Ukraine’s Prime Minister, described the fresh economic penalties as a “great aid during this dark moment” in response to the sanctions.