First calls for Russia to be excluded from the Swift payment system

Brussels, Frankfurt, Berlin, Stockholm The West’s punitive measures are said to hit Russia harder than ever before. The EU and its allies have been preparing for weeks how this is supposed to work.

But one measure has not yet been on the table: decoupling Russia from the payment service provider Swift. But there are now calls to change that.

The three Baltic EU states of Estonia, Latvia and Lithuania demanded that the international community “impose the toughest sanctions, including the exclusion of Russian banks from the Society for Worldwide Interbank Financial Telecommunication (Swift)”. A joint statement by the three foreign ministers goes on to say: “In addition, Russia must be politically isolated.”

The three ministers were in Ukraine on Thursday morning and originally intended to travel to the border with Russia. They have been calling for a tougher approach to Russia for weeks. Fears of a Russian invasion of Ukraine had grown steadily in the Baltic states in recent weeks.

Even in the European Parliament, a Swift exclusion is no longer taboo: “Putin’s invasion of Ukraine represents such a serious breach of all international law and undermines Europe’s security architecture so fundamentally that the EU has to measure its economic sanctions very harshly,” said Reinhard Bütikofer (Greens) the Handelsblatt. “In my opinion, this also includes the exclusion of Russia from the Swift payment system,” said the deputy.

“Putin’s Russia must now be completely isolated economically,” said the chairman of the CDU/CSU group in the European Parliament, Daniel Caspary (CDU). “This also includes a restriction in payment transactions, for example with Swift.” The head of the FDP group, Nicola Beer, said: “Russia must be excluded from the Swift international payment system and also be comprehensively isolated in energy and technology trading.”

Without Swift, Russia would be barred from international payments

Banks use Swift to conduct their financial transactions with each other. If the system were to be switched off for Russian banks, they would no longer be able to do many transactions with foreign countries. Trade with countries that have not imposed any sanctions themselves would also be made more difficult – for example with China, which even expresses great understanding for Russia’s invasion.

Even payment transactions within Russia could be disrupted. Practically every company would be affected and possibly also the supply of the population. “The exclusion from Swift could severely affect payment transactions or even bring them to a standstill,” says Hella Engerer, economist for Eastern Europe at DIW Berlin. Therefore, a shutdown is very controversial. It could provoke Russia further, and at the same time the West would then have little opportunity for further deterrence.

In addition, Europeans who have claims on Russian companies would also be hit. The question arises as to how Europe would pay for its necessary gas imports from Russia without Swift, says Ifo President Clemens Fuest. “It will only be convincing if we can replace Russian gas,” says the economist. “It would be bad if the EU had to grovel at Putin in the fall and beg for gas supplies that had been cut off beforehand.”

So far, a Swift exclusion has not appeared in the prepared sanctions packages. It is unrealistic that this will be passed on Thursday. Instead of a long discussion, the EU wants a quick decision on those measures for which there is consensus.

More on the Ukraine conflict:

Swift is a cooperative payment service provider that connects more than 11,000 banks and financial groups in over 200 countries. It is owned by its users and has its headquarters in Belgium. It is therefore subject to Belgian and European law. In the event of corresponding EU sanctions, Swift would exclude Russian banks from the network – just as the organization did with Iranian banks in 2012.

By decoupling from Swift, Russian banks would be largely cut off from global financial flows. Many Western banks would then have to find alternative ways to conduct their business with Russia. “Any intervention affecting the Swift payments system would have the greatest impact,” Andrea Enria, the ECB’s chief banking supervisor, said recently.

According to the rating agency Fitch, excluding Russian banks from the Swift system and from dollar transactions would not jeopardize the institutions’ ability to survive, but would pose major challenges. “The banks would then have to find alternative ways to process their transactions and pay their creditors,” says Moscow-based Fitch banking analyst Anton Lopatin.

Alternatives from Russia and China

Fitch assumes that Russian banks will adapt to a Swift exclusion over time and instead increasingly use other systems. An alternative is the SPFS payment system of the Russian central bank. In a recent study, the rating agency explained that around 20 percent of domestic payments have been processed in this way. However, the system is hardly ever used by international banks.

Another alternative would be the Chinese payment system Cips, which has also been used far less than Swift for international payments. However, banning Russian banks from Swift could speed up the development of cips and other Swift alternatives, Fitch points out – and ensure that the dollar’s role in processing international transactions decreases somewhat over time.

“All other sanctions manageable”

Vasily Astrov, Russia expert at the Vienna Institute for International Economic Comparisons (wiiw), sees the Swift exclusion as the sharpest threat: “All other sanctions are manageable for Russia, at least in the short term,” he said.

However, possible export restrictions on high-tech goods also had an impact: “Russia is very dependent on these imports,” he said. Whether electronics, semiconductor chips or consumer electronics: “It will be difficult to balance these volumes, imports from countries such as China or Taiwan cannot absorb it in the medium term.”

According to the Russia expert, simply denying Russian banks access to the European financial markets had no effect. “The resulting losses for the banks can be offset by the Russian central bank and the state budget.”

The economist Volker Wieland is skeptical about the effect of the sanctions: “Russia has a low level of debt and is only slightly dependent on imports from Europe.” In addition, the country has built up massive foreign exchange reserves. “This will certainly not stop Russia beyond the militarily relevant time horizon,” said Wieland. Ukraine’s military resilience will be decisive. “If you want to stop it, you would have to strengthen them.”

Ifo President Fuest expects Putin to be able to withstand the sanctions even longer: “Russia can certainly hold out until next winter, at the latest then Europe will need Russian gas.” There is little chance that even severe sanctions will make Putin give in.

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