The decision to prohibit seven Russian banks and their subsidiaries from the SWIFT financial messaging system has had a significant effect on the ruble, but it isn’t the only one. And the repercussions will almost certainly endure.
The Society for Worldwide Interbank Financial Telecommunications system, popularly known as SWIFT, will be shut down on March 12 for seven large banks, including VTB Bank PJSC and Bank Rossiya. It’s a risky step for Western leaders; French Finance Minister Bruno Le Maire described the potential of completely isolating Russia as a “financial nuclear bomb.”
To mitigate the possible impact on the global economy, particularly energy markets, Western leaders chose to isolate just seven Russian banks, allowing crucial companies like Sberbank PJSC to continue using SWIFT due to their role in collecting payments for Russian oil and gas.
Even before the sanctions take effect, Russia, the European Union, and, to a lesser degree, the United States are already feeling the effects.
What exactly is SWIFT?
According to experts, the SWIFT system is a critical part of worldwide financial operations since it is the primary distributor of secure financial messaging.
“It enables banks all around the world to safely and swiftly communicate about cross-border payments,” said Andy Krider, BOK Financial’s manager of international operations.
SWIFT connects over 11,000 banks in over 200 countries and territories. According to him, 42 million texts were exchanged every day on average in 2021.
SWIFT is used for more than simply payments, according to Krider. Trade-related transactions, letters of credit, collection items, and securities confirmations are among the secure financial communications, he noted.
The messages are in template-based forms, so even if individuals are in various countries and speak different languages, they will understand what each field represents.
Russia has been hammered severely by sanctions.
The announcement that the EU will prohibit seven Russian banks from using SWIFT, which was announced on March 2, sent shockwaves throughout the world. Of course, Russia bore the brunt of the short-term consequences: Moody’s Investors Service downgraded Russia’s credit rating to “junk” level. In the meanwhile, the ruble fell to a new low versus the dollar.
Although Russia prepared for possible sanctions by shifting as much of its currency reserves out of the US dollar and euro as possible, even the partial exclusion from SWIFT makes it impossible to obtain cash, according to David Maher, BOK Financial’s manager of international sales and trading.
For one thing, it depreciated the currency, limiting Russia’s capacity to trade on global markets, he said. Russia has $630 billion in foreign currency reserves, which it keeps on hand in case the ruble devalues rapidly. He continued, “Basically, the SWIFT penalty stopped their access to those assets to safeguard the currency, and it depreciated more than 50%.” “It also locks up their funds and hinders their capacity to fund the fight.”
Outside of Russia, the EU, which relies on Russia for products, notably energy, is feeling the brunt of the bad effects, according to Maher. Although the United States has less direct commerce with Russia than the European Union, he claims that it is nonetheless having inflationary consequences in an already high-inflationary age.
The long-term consequences are yet unknown.
According to Maher and Krider, the most immediate consequence for the US may not be the SWIFT suspension itself, but rather how rapidly Western leaders were able to prevent Russia from accessing most of its currency reserves.
Following WWII, nations began pegging their currency exchange rates to the US dollar, establishing the dollar as the official reserve currency. The latest economic sanctions on Russia have virtually prevented the Central Bank of Russia from performing any transactions in dollars or accessing any of its reserves kept in dollars or in the United States.
“It’s fairly astounding to be able to achieve that—to isolate and isolate a country from the rest of the world in such a short period of time. It demonstrates that the dollar’s role as the world’s reserve currency has a lot of sway “Maher said.
As a consequence, other countries, particularly those that are not US allies, are likely to reconsider their reliance on the dollar and the euro, he said. China, which owns $1 trillion in US Treasury bonds, will be an important role in the future. Given how quickly the US was able to paralyze Russian central bank assets held in the US, China may be concerned that the US may place a lock on its Treasury assets in the future, according to Maher.
China and other countries may consider storing the bulk of their central bank reserves in gold or “stablecoin,” a cryptocurrency backed by a reserve asset, rather than the US dollar. “However,” Maher continued, “these are things that will take years to happen.”
More immediately, he believes that Russia’s recent economic penalties are sending a message to other countries contemplating conduct similar to Russia’s invasion of Ukraine. He speculated, “Perhaps they will think twice before attempting anything like this.”