Russian banks’ disconnection from SWIFT is a hammer blow, but will it be fatal?

Removal from the global financial messaging network will strike at the heart of the Russian economy, but alternative methods to conduct trade do exist.

By Chris Lemmon

SWIFT made international headlines this week after leaders from the US, UK and Europe moved to restrict Russian banks from accessing and conducting business on the global financial messaging service. Global Custodian explains how the sanctions will affect Russian institutions, and the alternative avenues for business that are available.

Based in Belgium and subject to Belgian law, SWIFT enables more than 11,000 institutions across every global continent to securely transmit information and instructions with one another.

On 27 February, president of the European Commission, Ursula von der Leyen, outlined the decision to exclude “important Russian banks” from the SWIFT system. But what will a disconnection from SWIFT mean?

Well, the immediate impact will mean Russian banks are limited in how they are able to communicate with global counterparts, significantly hindering their ability to conduct international trade. As a result, corporate finance teams with accounts in Russia will predominantly be limited to domestic transactional trading or will be forced to seek alternative methods to moving money internationally.

Furthermore, SWIFT offers corporate-to-bank connectivity, offering global treasury centres connectivity to their Russian network for domestic and cross-border payment initiation, as well as cash visibility. Severing this link will render treasurers blind to their cash visibility and unable to initiate payments.

There is also precedent on the matter. Following the development of Iran’s nuclear programme, Iranian institutions were removed from the SWIFT network in 2012 in compliance with a specific EU regulation and reconnected in 2016, again in response to specific enabling regulation.

In 2018, access to a number of Iranian banks was again suspended, ostensibly following pressure from the US government, though this was never cited as the reason. Rather it was said by SWIFT at the time to be a “regrettable” step “taken in the interest of the stability and integrity of the wider global financial system.”

The disconnection in 2012 had a tremendous impact on the country, particularly on the Iranian oil sector, which saw export revenues plummet from $92.5 billion to $52 billion.

But removal of Russia from SWIFT is a different prospect altogether. Russian institutions on the network total 291, ranking 13th globally on all SWIFT messages sent and 6th on payment messages. The platform also plays an integral role in the trade of energy supplies to Europe, highlighted by German foreign minister Annalena Baerbock, who said on German television this week: “We buy 50% of our coal from Russia. If we exclude Russia from SWIFT, the lights in Germany will go out.”

What next?

While disconnection from SWIFT would certainly add complexity to international payments, it would not make them impossible. One source told Global Custodian: “While it sounds logical to disconnect certain banks, they could simply revert to older communication methods such as fax or tested Telex.”

This is true, but it will also require banks around the world to revert to these methods, which may be easier said than done. We must remember that the reason SWIFT was established in the first place was so institutions could escape the constraints placed on them by such processes. Those with pressing business to conduct with Russia could utilise fax or Telex in the short-term, but use of the legacy systems would not be logical in the medium to long term.

One potential solution to this could be to convince global institutions to sign up to the Russian equivalent of SWIFT – the System for Transfer of Financial Messages (SPFS), which replicates the functions of SWIFT on a domestic level. However, while membership and usage of the platform continues to grow, SPFS still lags far behind SWIFT in terms of scale and functionality. Namely, the network is only operational during weekday working hours and messages are limited to 20kb in size – compared with the 24/7 service and 10mb message capacity provided by SWIFT.

Again, convincing institutions to undertake such a costly process will be a real challenge for Russia, especially given the current circumstances in Ukraine.  

The Chinese Cross-Border Interbank Payment Systems (CIPS) has also been referenced as a potential destination for Russian trade should disconnection from SWIFT occur. The platform hosts around 1,280 financial institutions from 103 countries, including 23 Russian banks.

It seems investors in China believe this to be viable option; Chinese payment-related stocks saw increases this week in wake of rising tensions and the growing possibility of sanctions.

There is also potential for a future collaboration between CIPS and SPFS, but there does not appear to be any current plan in place for that. Washington and SWIFT will be keeping a close eye on developments here, as any alliance between the Chinese and Russian systems could potentially threaten the superiority of the US dollar on the global market.

The crypto route

Another avenue where Russian institutions may seek success in is the cryptocurrency and blockchain networks.

On 27 February, Mykhailo Federov, vice prime minister of Ukraine, took to Twitter to ask all major crypto exchanges to block the addresses of Russian users. “It’s crucial to freeze not only the addresses linked to Russian and Belarusian politicians, but also to sabotage ordinary users,” he said.

But crypto exchanges are standing firm against calls to disconnect Russia. A spokesperson from crypto trading platform Binance told Global Custodian: “Crypto is meant to provide greater financial freedom for people across the globe. To unilaterally decide to ban people’s access to their crypto would fly in the face of the reason why crypto exists.

“We are taking the steps necessary to ensure we take action against those that have had sanctions levied against them while minimising impact to innocent users. Should the international community widen those sanctions further, we will apply those aggressively as well.”

Other leading exchanges, including Coinbase and Kraken, have followed suit, blocking accounts of clients targeted by sanctions, but stopping short of a blanket ban on accounts from Russia.

However, while individuals could seek to convert their assets to crypto as a protection measure, it wouldn’t be viable at an institutional level. In a statement, Asheesh Birla, general manager at crypto settlement platform Ripple, explained that there simply isn’t enough global liquidity to support Russia’s needs.“As stated by the US treasury department, Russia conducts nearly $50 billion in FX transactions a day. As the largest crypto, Bitcoin’s volume is usually between about $20-50 billion a day. Russia’s needs would encompass BTC and more.”

Further restrictions ahead?

So, a disconnection from SWIFT would represent an initially crippling blow to the Russian economy, but there are routes to recovery – which have no doubt been explored ahead of Russia’s military action this week.

“The banks already have systems set up to manage the ongoing implementation of sanctions from different authorities and are used to adapting to changes,” a source told Global Custodian.

“Imposing sanctions [on institutions sending money in and out of Russia] is far more effective, as they must be legally enforced by banks, regardless of the method of communication used. It seems we are going to have a combination of both of these, which could be tricky for banks to manage.”