Shutting out Russia from Swift system would not be a surgical strike

Nuclear weapons are the only real – but unimaginable – nuclear option in a war. Some politicians and experts nonetheless regard the expulsion of Russia from the Swift payment alliance for banks as one in the West’s arsenal. It would fall short for more than defining reasons.

About 100,000 Russian troops are gathered on the border with Ukraine. They may soon prolong the insidious invasion Russia started in 2014 when it annexed Crimea. The US and the EU have a little stomach to oppose it militarily. Financial sanctions would be a safer punishment.

Kicking the bear out of Swift is a popular threat. Last week, Boris Johnson, Britain’s besieged prime minister, praised this kind of unfriendliness as “a potent weapon”. The European Central Bank warned EU lenders to prepare a day later. U.S. lawmakers have drafted a law aimed at making that happen.

Swift’s full title is The Society for Worldwide Interbank Telecommunication. It underlines the satisfactory exclusion associated with the expulsion of Russia. But it also suggests flaws in tactics. First, Swift is not a thoroughbred payment network. Swift is also not, as sometimes claimed, just a messaging system. True, its core tool lies in some 42 million encrypted instructions that 11,500 users in 200 countries exchange daily to coordinate payments. But these messages hold something greater: mutual trust based on common standards.

Expelling Russia from Swift would not isolate Russia economically, as proponents suggest. Nor would it be as futile as opponents imagine.

The sanction would have “a relaxing effect,” in the words of Harley Balzer, professor emeritus at Georgetown University in the United States, and deter some Western banks from Russian trade. Others would continue to send and receive payments with Russian counterparties.

Russia’s own payment messaging system remains largely domestic. Cross-border trades are likely to involve emails or anachronistic telexes or faxes. Russian businessmen say this would be cumbersome, slow and uncertain, but it would work a lot of the time.

The second problem emphasized by Swift’s full name is that it is a cooperative based in Belgium, not a US bank or government entity. It is obedient to EU law and its own members, not to Joe Biden or Congress. The United States would have to lift Russia out of Swift through pressure on the EU and Swift’s non-Russian members.

That was broadly how Iran was expelled in 2012. Other sanctions had already at that time economically isolated the Middle East state, which made the move seem more damaging than it actually was. Russia is far more connected.

European enthusiasm to oust Russia from Swift would depend on how ambitious and bloody a further Russian invasion was. Germany has little interest in disrupting payments for the Russian gas it imports. Russian energy giant Gazprom pumped gas with an estimated value of around 18 billion euros to Europe by 2020.

If the United States wanted to curb that trade, it could do so unilaterally and directly through sanctions against banks. Five large state-owned banks are already subject to “low-intensity sanctions”, as Maria Shagina, a guest fellow at the Finnish Institute of International Affairs, describes them. These include Sberbank and VTB, which have total assets of over $ 800 billion. Individuals and companies with U.S. connections are prohibited from investing in the quintet, which extends beyond 14-day lending.

The United States could include privately owned banks in sanctions and expand their scope. It may prohibit global banks from exchanging dollars for other currencies, including rubles, with selected Russian institutions.

Although Russia has deliberately reduced its currency trading in dollars, they still represented over half of the total amount by 2020, Shagina says. Dollars are best traded in New York. Banks seeking to break US sanctions there should beware.

“Because so many cross-border transactions have a dollar leg, unilateral U.S. sanctions would achieve 75 percent of the combined U.S.-European sanctions,” said Brian O’Toole, a senior fellow at the Atlantic Council, a think tank in Washington.

If a sanction is analogous to a nuclear option, it would be to cut off Russian transactions in the almighty dollar through institutions with American connections. It would cause serious economic damage despite Russia’s $ 630 billion in gold and foreign exchange reserves. Ordinary Russians would suffer more than Vladimir Putin. Unfortunately, there can be no surgical financial strike against him and his staff. In the sanctions war, the only economic bombs are dirty.

jonathan.guthrie@ft.com

Leave a Comment