A Russian ruble with the spires of the Kremlin in the background. As Russia's war on Ukraine continues, default rates are likely to rise. Photo: AFP

Sanctions and countersanctions are the new norm in the escalating Cold War pitting the United States and Russia. While Western-backed Ukraine prepares for a potential Russian invasion, Moscow now awaits Washington and Brussels to introduce new restrictions on its financial institutions.

While Russia masses troops near the Ukrainian border, and Kiev conducts inspections of the capital’s bomb shelters, it is still highly doubtful a major war will break out this winter.

Still, the US and EU are expected to continue imposing sanctions on Russia, not least a possible block on Russia’s access to SWIFT – the vast messaging network used by banks and other financial institutions to make fast money transfer instructions worldwide.

Ukraine’s President Volodymyr Zelensky has called on the United States to impose “preemptive sanctions” on Moscow, while American officials have recently announced new measures against the Kremlin will be “extremely significant and isolating for Russia, Russian business and the Russian people.”

Punitive Western calls to exclude Russia from SWIFT are not new, with threats to block its access first made in 2015. Moscow thus started making preparations through an alternative to SWIFT known as the System for Transfer of Financial Messages (SPFS), but even so Russia remains heavily linked with global financial institutions and thus SWIFT.

In 2019, then-Russian Prime Minister Dmitry Medvedev said that Moscow would consider the blockage of SWIFT an act of war. Since then, the Kremlin seems to have made certain peace with the threat: Russian officials now openly speak about the need to deviate from the use of West-controlled international payment systems.

Moscow has said it would consider blocking its SWIFT access an act of war. Image: AFP via Anadolu Agency

Even Belarusian banks are reportedly preparing for tougher Western sanctions by signing up to Russia’s SPFS. In 2020, around 20% of all Russian domestic bank transfers were done through SPFS, though the system is not yet a fully-fledged replacement for SWIFT for international payments. SWIFT connects over 11,000 banks in more than 200 countries, and close to 32 million transactions per day flow through the system.

SPFS, on the other hand, has more than 400 Russian users and as of the end of 2020 only 23 foreign banks from Armenia, Belarus, Germany, Kazakhstan, Kyrgyzstan and Switzerland were connected to the SWIFT alternative.

Russia’s disconnection from the world’s financial transactions, whenever it may come, would inevitably have serious consequences for the economy. For one, the cutoff would automatically terminate all international transactions, and once Russia’s banks are banned from using SWIFT, the country will not be able to pay for imports and receive payment for exports.

Major Russian exporters, including from the crucial energy, agriculture or military sectors, will suffer the most in such a scenario. A SWIFT ban would also isolate Russian banks from Europe’s market, and there are questions about how European countries would be able to continue to purchase Russian gas.

Moreover, it is also questionable if the Russian Federation could keep doing business as usual with China given that Chinese banks are so far not so keen to join SPFS. Hypothetically, Russian banks could become part of China’s Cross-Border Interbank Payment System (CIPS), a Chinese version of SWIFT established in 2015.

Following talks between Russian President Vladimir Putin and his Chinese counterpart Xi Jinping on December 15, the Kremlin announced that Russia and China plan to develop shared financial structures to enable them to deepen economic ties in a way that foreign states will not be able to influence.

Once and if the Russian Federation is kicked out of SWIFT, intermediaries that help to bypass the restrictions will inevitably pop up, but the fact that Russia is no longer linked into the global banking system will be a shock the domestic financial sector.

Chinese banks have been reluctant to join Russia’s alternative SPFS transfer system. Photo: AFP / Demyanchuk / Sputnik

That, however, does not necessarily mean that Moscow would face a financial Armageddon, though Russian citizens will likely have to learn to live without Visa and Mastercard. At the same time, the Kremlin could be expected to expand SPFS internationally, and nations that intend to keep importing Russian oil and natural gas will likely have to join Russia’s new banking transaction system.

The EU Parliament has already adopted a recommendation to exclude Russia from the international payments system, and the US is also expected to pressure its European partners to break financial ties with the Kremlin. Those calls, however, could be counterproductive since they will de facto force many countries to use SWIFT competitors, be it SPFS or CIPS, to continue trading with Russia.

There is a geopolitical precedent. In March 2012, under US pressure, Iranian banks were disconnected from SWIFT as international sanctions tightened against Tehran over its disputed nuclear program. As a result, Iran’s oil exports plunged from around 2.5 million barrels per day in 2011 to around one million by 2014.  

In 2016, Tehran’s access was restored as part of the Iran nuclear deal, known as JCPOA, but two years later the global financial service again blacklisted Iranian banks. Unlike Russia, Iran was already isolated prior to the SWIFT ban, which means that the geographically largest country in the world will have a harder time adjusting to the new financial reality.

The expulsion of Russian banks from SWIFT is certainly not the most painful financial measure the US can impose against the Kremlin. If Washington decides to target sanctions against Russia’s state-owned and private financial institutions, the consequences for the Russian economy would arguably be even more severe than losing SWIFT.  

Nikola Mikovic

Nikola Mikovic is a political analyst in Serbia. His work focuses mostly on the foreign policies of Russia, Belarus and Ukraine, with special attention on energy and “pipeline politics.”