One important financial penalty against Russia is being held in reserve by US and European authorities, who have decided not to kick Russia off SWIFT, the leading system for global banking operations.
On Thursday, additional financial penalties were imposed in response to Russia’s invasion of Ukraine. Long-term, the sanctions are intended to isolate, punish, and impoverish Russia. President Joe Biden imposed export limits to Russia as well as penalties against Russian banks and state-owned businesses.
But, while excluding Russia from SWIFT is “always” a possibility, “for now that’s not the stance that the rest of Europe chooses to adopt,” Biden said. He also hinted that the consequences placed in place will be tougher.
In answer to a query on Thursday, Biden stated, “The sanctions we’ve imposed surpass SWIFT.” “Let’s talk again in a month or two to see whether they’re still functioning.”
Nonetheless, some European politicians, especially those in the United Kingdom, prefer going the extra step of barring Russia from SWIFT, the Belgium-based consortium used by banks and other financial institutions that serves as a critical communications line for global business. Last year, the SWIFT system processed 42 million communications each day to allow payments. The Society for Worldwide Interbank Financial Telecommunications is an abbreviation for the Society for Worldwide Interbank Financial Telecommunications, and it handles nearly half of all high-value transfers that transcend national boundaries.
Ukraine has requested that Russia be removed from SWIFT, but other European governments prefer to wait since a suspension would impede international commerce and harm their economy.
“A number of nations are apprehensive because it has major implications for them,” said Dutch Prime Minister Mark Rutte, who believes a ban should only be used as a last option.
According to the British government, Prime Minister Boris Johnson advocated for Russia to be thrown out of SWIFT during a virtual meeting of the Group of Seven international leaders on Thursday. There was “no resistance,” according to the report, although it was recognized that additional discussion was needed. Officials in the United Kingdom refused to clarify whether Germany was resisting.
Senate Republican Leader Mitch McConnell said Thursday that the United States should “ratchet up the sanctions all the way up.” Don’t be stingy with your words. Every available harsh penalty should be used, and it should be done soon.”
The SWIFT ban, however, would be hard and time-consuming, according to Idaho Senator Jim Risch, the senior Republican on the Senate Foreign Relations Committee, in part because the US does not have influence over the decision.
The concern is that blocking Russia from SWIFT may not be as effective in cutting it off from the global economy as proponents believe. There might also be repercussions in the shape of reduced international development. In addition, competitor messaging systems may acquire users in ways that weaken the value of the US currency, leaving SWIFT as a punishment ready to be used.
“It’s a communications platform, not a financial payments system,” Adam Smith, a former Obama administration lawyer, explained. “Removing Russia from SWIFT cuts them off from a vital financial artery, but they may still conduct bank-to-bank transactions using pre-SWIFT technologies like telephone, telex, or email.”
Another danger is that governments may shift their financial institutions to systems other than SWIFT, such as a Chinese-developed system. This would raise friction in global trade, stifling growth, and making it more difficult to track terrorist groups’ money.
“Politically politicizing SWIFT encourages others to find alternatives,” said Brian O’Toole, a senior fellow at the Atlantic Council and a former Treasury official. “SWIFT is also a crucial collaborator in counter-terrorism activities between the United States and Europe.” It shares counter-terrorism data with the US Treasury, which has proven to be quite useful.”
According to Clay Lowery of the Institute of International Finance, the penalties announced Thursday would still achieve most of what would happen if Russia lost access to SWIFT.
“It’s still a very major step to prevent these financial organizations from using the dollar, euro, or pound sterling,” Lowery said. “By imposing sanctions on some sectors of the Russian economy, you’re having the same effect.”
Because of its nuclear program, Iran was barred from using the SWIFT system in 2014. Dmitry Medvedev, then-Russian Prime Minister, warned in 2019 that losing access to SWIFT would be comparable to declaring war on Russia. Medvedev’s comment indicates that Russia saw the platform as a weakness and devised solutions to mitigate any economic harm.
“I believe it will be bad in the short term and psychologically, but I’m not convinced it will have a significant economic impact,” Smith added.
Experts believe Russia has already planned ways to circumvent sanctions, including those imposed this week.
Former Treasury senior adviser Ari Redbord predicts that Russia’s leadership will utilize cryptocurrencies to circumvent financial sanctions that limit the country’s capacity to participate in the global financial system.
This is a problem, according to Redbord, “particularly when there are actors like Iran, China, and North Korea” who will continue to trade with Russia outside the legitimate banking system.
“It will be tremendously detrimental to Russian banks and the Russian economy if they are completely shut off from the US and European financial systems,” he warned. However, “even if there are devastating” sanctions from the European Union and the United States, the Russian government would utilize alternate channels to trade with nations.