THE FINANCIAL NUCLEAR WEAPON
Author: Vayam Chauhan Date: 22-03-2022
As I begin writing this blog, we have entered the eighth day of Russia's appalling invasion of Ukraine. In response to this despicable war, one of the economic sanctions on Russia proposed by leading Western Nations is a pledge to prohibit several Russian banks from using the SWIFT system. Bruno Le Maire, France's Finance Minister, dubbed this ploy a "financial nuclear weapon". Let's try to see and understand why it could be so.
Firstly, what is SWIFT? SWIFT stands for the Society of Worldwide Interbank Financial Telecommunication. The goal of this cooperative society is to be mediators and stewards of cross-border payments, ensuring that they occur smoothly and in the process fulfilling one of the paramount needs of today’s commerce. A SWIFT code, also known as a BIC code, is used to identify the country, bank, and branch to which an account is registered. When you send money overseas, you will need this code to ensure that your money is going to the right place. In order to receive a SWIFT code, a bank must join SWIFT and become part of its network. This vast system/network is electronic and uses a cloud platform to ensure that codes get quickly transferred between banks. An example of the working of SWIFT codes (as provided by EBANX) is as follows: when a person transfers money individually, they will go to their bank with the recipient's SWIFT code and an international account number. The local bank will then send a SWIFT message to the recipient's bank to accept the transfer. Upon the recipient's bank's approval, the payment is posted, and the transfer is complete. The SWIFT code, thus, has expedited and aided the international transfer process.
On February 26th, 2022, the leaders of the European Commission, France, Germany, Italy, the United Kingdom, Canada, and the United States, issued a joint statement detailing restrictive economic measures to be implemented against Russia in response to the invasion of Ukraine. They sought to "hold Russia to account and collectively ensure that this war is a strategic failure for Putin". One of the measures they committed to was "ensuring that select Russian banks are removed from the SWIFT messaging system", the reason being that this would "ensure that these banks are disconnected from the international financial system and harm their ability to operate globally". Ursula von der Leyen, president of the European Commission, said that this would stop Russian banks from "operating worldwide" and "effectively block Russian exports and imports". In particular, Russian banks wouldn't be able to make and receive payments for economic activities, severely hindering exports of commodities like oil, coal, and natural gas and imports of essential technologies like semiconductors and industrial machinery. Access to the system is thus necessary for Russian banks to conduct business overseas, and barring their access to it and, by extension, the international market will undoubtedly put the Russian economy in a precarious position.
Presently, only seven Russian banks are under the purview of the SWIFT ban, those with supposed Kremlin connections and implicit relations to the war effort. Notably, the country's most prominent financial institutions, Gazprombank and Sberbank, have been exempted from the ban as they are the primary channels for Russian oil and gas payments, which EU countries are still buying despite the conflict in Ukraine. Foreign leaders were possibly hesitant to include these two banks in the list of those to be barred from SWIFT due to the ensuing disruption of vital Russian oil and gas exports (the EU relies on Russia for 40% of its natural gas imports). However, these two banks have been subject to other measures. It can be seen, though, that a blanket SWIFT ban, which means barring all the financial institutions in Russia, including Sberbank and Gazprombank, can be a "financial nuclear weapon", as it would isolate Russia from the rest of the world and leave the global markets reeling.
Yet, there are specific ways by which Russia can circumvent the issue. The banks could use other messaging channels, such as apps or emails, but those transactions will presumably not be as secure and could end up being slower and more costly. Russia could also access the Chinese alternative to SWIFT, called the Cross-Border Interbank Payment System (CIPS). Still, CIPS is much smaller, with 1,300 financial institutions participating, mostly indirectly, compared to 11,000 in SWIFT. Only time will tell which road Russia decides to go down.