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Not So SWIFT: Amid Bombardment Of Sanctions On Russia, Why European Union Decided To Slow Down Its SWIFT Action?

As Russian troops wreak havoc in Ukraine, making their way to the capital city Kyiv, the western countries have imposed the heaviest possible sanctions on Moscow, targeting the big three – President Vladimir Putin, Foreign Minister Sergei Lavrov and Defense Minister Sergei Shoigu — among other top officials. 

According to reports, the European Union is even considering banning the Russia from SWIFT payment network, but a final decision is yet to be taken. However, some analysts believe these sanctions, including expelling it from SWIFT, may not have desired effects on Moscow, let alone halting its ongoing war in Ukraine. 

Does this mean the Ukraine invasion is a well-calculated move that Putin may have strategized months in advance, creating an all-encompassing “sanction-proof system” to frustrate Western nations’ attempts to isolate it internationally?

For the record, Russia does have an alternative payment system in place, but then, nobody knows what Putin is up to.

Decoding SWIFT Payment System

As the name suggests, swift and smooth transfer of money across borders is the hallmark of this payment system. 

Set up in 1973, the Belgium-based Society for Worldwide Interbank Financial Telecommunication or SWIFT links 11,000 banks and institutions in more than 200 countries, according to BBC.

It further says, more than 2,000 banks and financial institutions jointly own this payment network. It sends secure messages about transfers of money and other transactions. SWIFT itself has no influence over sanctions; only individual governments can take decisions on them.

Potential Impact On Russia

SWIFT is considered the backbone of the international financial transfer system. Russia is reportedly the second-largest user of SWIFT after the US, with some 300 Russian financial institutions linked to the network. The idea of banning Russia from this payment network is aimed at crippling its ability to transact with the rest of the world.

In 2012, Iran was expelled from this network as part of the western sanctions over its nuclear program. As a result, Tehran apparently lost almost half of its oil export revenues and 30 percent of foreign trade.

But the million-dollar question is – can the EU afford to throw Russia out of SWIFT? Before answering this question, one should look at the alternative payment system that Russia has in place. Moscow had created a homegrown cross-border money transfer system called, Mir, in 2014 when the western bloc issued a similar threat as the present one, in the wake of Russia’s military operation and subsequent annexation of Crimea. 

The EU Commission headquarters in Brussels was lit up with the colors of the Ukrainian flag to show solidarity following the Russian invasion of Ukraine, on February 25.

Although only a handful of countries currently use the Mir system, China, which is Moscow’s largest trading partner, could try this out if necessary, strategic affairs analyst Prakash Nanda wrote in an article for The EurAisan Times.

It is pertinent to note that both Russia and China have been working towards reducing bilateral trade denominated in US dollars, with Russia’s dollar-denominated exports to China falling to 61% in the first three quarters of 2020 from 90% for the total of 2013, Reuters had reported last year citing data from Russia’s central bank.

Like Russia, China is promoting its own payment system called CIPS, which reportedly processed 135.7 billion yuan ($19.4 billion) a day in 2019. 

EU Divided Over SWIFT

BBC quoted EU foreign affairs chief Josep Borrell as saying that banning Russia from SWIFT “was considered” by foreign ministers on February 26. But he added there was a lack of “necessary unanimity” on this move.

Even the UK, which is pushing for Russia’s expulsion from SWIFT pleaded helplessness. “Britain wants the SWIFT system to be turned off for Russia. But unfortunately, the SWIFT system is not in our control. It is not a unilateral decision,” UK Defense Secretary Ben Wallace told BBC.

Banning Russia from SWIFT is easier said than done. Several EU countries fear that such a move would cut them off from vital resources they are continuing to buy from Russia, such as oil and gas.

Ukraine’s President Volodymyr Zelenskyy (via Twitter)

Needless to say, Russia is the second-largest oil producer in the world. It was the largest supplier of natural gas and oil to the European Union last year. Cutting it off from SWIFT could dramatically increase the price of gas in EU countries as they have to import it from the US. It is clear that Russia is using gas as leverage to build pressure on the EU indirectly.

Moscow’s Defense

It seems Moscow had been preparing for the Western onslaught for quite some time. Sample this. Nikolay Zhuravlev, vice-speaker of the Federation Council, last month admitted to the possibility of Russia’s ejection from the SWIFT network. The Federation Council is the upper house of the Russian parliament.

“SWIFT is a settlement system, it is a service. Therefore, if Russia is disconnected from SWIFT, then we will not receive [foreign] currency, but buyers, European countries in the first place, will not receive our goods – oil, gas, metals and other important components of their imports. Do they need it? I am not sure,” Zhuravlev told TASS news agency.

Without mincing words, he had said the European countries would not be able to receive gas, oil, and metals from Russia if it barred from the SWIFT payment system.

Russian President Vladimir Putin (via Twitter)

“SWIFT is a European company, an association which involves a lot of countries. To make a decision on disconnection, a single decision of all participating countries is required. The decisions of the United States and the UK are definitely not enough. I’m not sure that other countries, especially those in which the share of trade with Russia is significant will support the shutdown,” Zhuravlev stressed.

Currently, Russia is in a sound financial position. Elina Ribakova, the deputy chief economist at the Institute of International Finance, recently said the US sanctions on sovereign debt were likely to have a limited economic impact.

“Russia’s fiscal position is in surplus and Russian authorities are overfunding,” Ribakova was quoted as saying by Reuters.

She said Moscow’s reserves are in excess of $630 billion, while Russian banks have surplus liquidity of about $11 billion that they could use to buy OFZ (Russia’s federal loan bonds) as foreign investors exit.

Given these scenarios, it seems that Putin’s government will be able to absorb the financial shocks arising out of the western sanctions, at least for now. How things pan out will be clearer, maybe in the next couple of days.

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