What exclusion from the SWIFT banking system means for Russia

If Russian President Vladimir Putin had any doubts about the West’s seriousness about imposing tough sanctions against its invasion of Ukraine, he got a nasty surprise this weekend.

The UK, US, EU and Canada banned some Russian banks from accessing SWIFT over the weekend, a move that sent the Russian ruble down nearly 30% against the dollar American on Monday and prompted the Russian central bank to more than double its interest rate. at 20%.

A statement from the EU, US and UK said the ban “will ensure that these banks are disconnected from the international financial system and will harm their ability to operate globally”.

According to Ursula von der Leyen, President of the European Commission, banning SWIFT will effectively prevent exports and imports from Russia.

What is SWIFT?

SWIFT was founded in 1973 and stands for Society for Worldwide Interbank Financial Telecommunication. It is a network used by financial institutions to send secure messages relating to transactions and money transfers.

It connects banks when a transaction is made; if the two organizations performing the transaction are not already partners, then SWIFT can connect them through an intermediary.

More than 11,000 financial institutions worldwide use the system to send more than five billion messages per year, making it an integral part of the global financial transfer system.

It is supervised by the central banks of the G10 countries (in fact 11: Belgium, France, Canada, Germany, Italy, Japan, United Kingdom, United States, Switzerland, Sweden and the Netherlands) with the National Bank of Belgium as leader. supervisor.

It is owned by its shareholders (financial institutions) and represents around 3,500 companies around the world.

How will the SWIFT ban affect Russia?

It is still unclear how much this decision will affect Russia, as it is not yet known which banks will be excluded from SWIFT. But around 70% of the country’s banking market will be affected, according to Reuters.

If Russia’s biggest banks, including Sberbank and Gazprombank, are targeted, it could be a blow to the economy.

SWIFT is important for Russia because, of the 40 million messages sent per day via SWIFT, an estimated 1% involve Russian payments, according to the BBC.

Zoltan Pozsar, strategist at Credit Suisse, believes that “SWIFT exclusions will lead to missed payments and giant overdrafts similar to the missed payments and giant overdrafts we saw in March 2020.”

“The banks’ inability to make payments due to their exclusion from SWIFT is identical to Lehman’s inability to make payments due to its clearing bank’s reluctance to send payments on its behalf. History does not repeat itself, but it rhymes,” he added.

The bankruptcy of Lehman Brothers is widely seen as the start of the Great Financial Crisis of 2008.

According to estimates by Alexei Kudrin, Russia’s former finance minister, excluding Russia from SWIFT could reduce Russia’s GDP by 5%.

This is not the first time that Russia has been threatened with expulsion from SWIFT. Russia was threatened with similar action in 2014 when it annexed Crimea. This expulsion did not take place and Russia implemented an alternative, albeit smaller, system called the Financial Message Transfer System (STFM).

While it’s hard to see STFM as a serious competitor to SWIFT today, it could still help Russia cushion some of the economic blow. And it is also possible that Russian banks “route payments through countries that have not imposed sanctions, such as China, which has its own payment system”, explains the BBC.

What other sanctions were imposed?

Along with the SWIFT ban for Russia, Russia’s central bank has also been barred from using its $630 billion in foreign exchange reserves, making it harder for the country to prop up its economy against the wave of sanctions, reports the Financial Times.

“With the assets of CBR [the Central Bank of the Russian Federation] about to be frozen around the world, it will severely limit Moscow’s ability to access its foreign exchange reserves, part of the war chest it had built up, in an attempt to protect the country from the worst economic sanctions. says Susannah Streeter, investment and market analyst at Hargreaves Lansdown.

The EU also froze foreign assets held by Putin and Russian Foreign Minister Sergei Lavrov.

Switzerland, a nation known for its neutrality, broke with tradition and said it would also sanction Russia. “In view of Russia’s continued military intervention in Ukraine, the Federal Council took the decision on February 28 to adopt the sanctions packages imposed by the EU on February 23 and 25,” the Federal Council said on Monday. country’s government in a statement.

Aircraft and airlines registered in Russia have also been banned from most of European airspace.

How has the ruble reacted?

As my colleague John pointed out, it would be an understatement to say that the Russian ruble was in freefall. Just a fortnight ago, a pound would fetch you just under 104 roubles, but as of this morning it’ll fetch you 140, a jump of more than 30%.

Russians were making efforts to withdraw foreign cash such as dollars from ATMs on Monday, according to multiple reports.

How does the SWIFT ban affect the Russian energy sector?

The move also has ramifications for the energy sector, through higher inflation, given that Russia is the world’s second largest exporter of oil and natural gas and supplies Europe with 40% of natural gas.

There could also be further turbulence caused by missed payments for Russia’s agricultural and energy sectors.

According to Rick Joswick, head of global oil analysis at S&P Global Platts, the SWIFT ban will make Russian oil less attractive: “It will likely make many buyers more hesitant to buy Russian oil. This will tend to lower the price of Russian crude. oil even more until it finally drains away from its traditional markets in Europe”.

However, the price of oil is expected to continue to rise as sanctions threaten further supply disruptions. On Monday, Brent crude was trading above $100 a barrel, a level that was breached last week for the first time since 2014.

About Ruben V. Albin

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