As the conflict between Russia and Ukraine escalates, the United States and European Union countries are discussing possible economic sanctions for Russia. But one of the ideas raised could do more harm than good.
The European Union plans to introduce the “ toughest set of sanctions ever implemented against Russia, announced Josep Borrell, the Union’s High Representative for Foreign Affairs. Following Vladimir Putin’s announcement of a military operation in Ukraine, which was condemned by Emmanuel Macron, the European Union is planning a whole series of retaliation measures. And for this, Ursula von der Leyen, the President of the European Commission has announced that she wants to “ weaken Russia’s economic base “, and “ its ability to modernize “.
For now, Ursula von der Leyen has announced that she wants to freeze Russian assets in the European Union and revoke Russian banks’ access to the European market. Another measure, even more severe, has been discussed for several days by the United States: banning Russia from Swift, an international banking network. But this decision could well be a bad idea, with harmful consequences for Russia as for other countries.
What is Swift?
The Swift (for Society for Worldwide Interbank Financial Telecommunication, or company for interbank financial transfers) is a Belgian banking company that brings together many international financial institutions. Swift is a network that manages payment orders and allows banks to communicate with each other.
Thus, during a transaction between two banks, Swift acts as an intermediary and messenger. For example, if a French consumer buys a product sold by an English company, his bank will debit the amount of his purchase from his account. The French bank will then send a message to the English bank to warn it of the transaction: it is through Swift that the message will be sent, and it is also Swift that ensures its security. Once the message is received by the English bank, it in turn proceeds to deposit the money into the company’s account.
Swift does not only work for commercial or international transactions: messages are sent for transfers between individuals, or when a person withdraws money from an ATM operated by a bank that is not his own. And although payment instructions still represent the majority of messages relayed on Swift, the network also transfers corporate actions or cash transactions. A huge part of the banking business therefore relies very heavily on Swift.
What would it mean to ban Russia from the Swift network?
Given the importance of the Swift network, removing Russia from it would be an extremely severe sanction and a blow to its economy – such a measure is moreover considered a “ nuclear weapon by former U.S. representative to Ukraine Kurt Volker, who was interviewed by Le Monde on the subject in December 2021.
Concretely, this would mean that Russian banks may no longer be able to send or receive messages and instructions from other banks. Institutions would therefore be obliged to use other communication channels: Le Monde mentions “ manual modes of transaction processing”, or the deployment of their own communication channels “, such as e-mail or encrypted software.
Russian banks would technically still be able to trade with others. However, transactions would be much slower. Above all, business partners of Russian institutions might worry and find them less secure, with Swift usually taking care of message security.
The slow processing of transactions, as well as the use of other means of communication, could have a very strong impact on the Russian economy. In 2014, following the invasion of Crimea by Russia, the banning of Russia from the Swift network had already been suggested, and the Russian Minister of Finance at the time calculated that such a decision would lead to a decrease of 5 % of the country’s GDP. To this must be added the impact that Russian military operations in Ukraine are already having on the Russian financial sector: on the morning of February 24, the Moscow Stock Exchange was down more than 14%.
Is it possible,; technically speaking?
For such a sanction to be applied, several factors would have to be met. The Swift is a company governed by Belgian law: it is therefore not an international body. The company is also a cooperative: it is run by 25 independent directors, who are from countries that contribute financially to the Swift service “, specifies BFMTV. At least 13 administrators would therefore have to agree to banish Russia.
But, if it is officially apolitical, the Swift still executes international sanctions, as it explains on its site. The administrators could thus exclude Russian banks if the European Union or the United States decided to sanction the country.
Above all, the United States could choose the hard way: if the country decides to pass economic sanctions against Russia, it could also say that the Swift network would be in violation of these sanctions if it continued to transmit the messages to Russian banks. – and Swift could therefore find himself targeted by economic sanctions, if he did not follow the United States.
What are the long term consequences?
For Russia, the immediate economic consequences would be very strong. But, in the long term, the European Union and particularly France could have a lot to lose.
First, Russia could still trade with foreign banks, even without Swift, because there are now alternatives to the network. There are now 5 different systems:
- Instex, a network created by France, England and Germany;
- CIPS, developed by China;
- the SPFS, a Russian system;
- and Ripple and Stellar, two networks operated by American companies.
Russia would certainly not go through Instex if the countries of the European Union adopted sanctions, but it could rely on its own network to communicate with other banks. And above all, it could join the Chinese network.
There are already many cooperation agreements between China and Russia, and Vladimir Putin also raised the subject in December 2021 during discussions with Xi Jinping. It was in particular a question of the development of a system, still at the project stage, which would allow Russian and Chinese banks to no longer go through Swift. If, as La Tribune explains, ” the main Russian and Chinese banks are integrating a new system, the main banks of countries that trade with China (or Russia) could quickly follow suit “. In the end, more than destabilizing Russia, banishing the country from the network could ultimately isolate the countries and institutions that use Swift.
Above all, since 2014 and the first threat of such a sanction, Russia has had time to prepare for this eventuality – and the situation could quickly become difficult for the European Union. Last week, Nikolay Zhuravlev, the deputy spokesman for Russia’s Federation Council (the equivalent of the Senate), announced that banning Russia from Swift would have economic consequences. European countries could thus be deprived of Russian oil, gas and metals. However, the EU is Russia’s leading trading partner, and the majority of imports concern hydrocarbons.
France could also be particularly affected: as Le Monde points out, “ France is the second largest foreign investor and the largest foreign employer in Russia, with 160,000 employees. The four major French banks are present there, and Société Générale even owns Rosbank, one of the main Russian private banks.. »
It is again Dmitry Medvedev, the vice-president of the Russian security council, who best shows that the government is not worried about the potential consequences of a dismissal of Swift. A few days before the start of Russian operations, he declared that the payment system developed by Russia was now functional and explained that ” [être écarté de Swift] would be difficult, yes, but it would not be a disaster “recalls the New York Times.