With Russia’s invasion of Ukraine, the world is at war. Ukraine is the focal point of the violence, but the response is global, with much of the world focused on forcing Russia to abandon its aggression by attacking its economy. In this sense Russia is under siege. Sanctions are being imposed on every sector of Russia’s economy in the expectation of forcing it to capitulate. One key sector targeted is Russia’s financial system, with the goal of destroying its ability to conduct business internationally and causing a major financial crisis and collapse.
Most recently, the U.S. and its allies in Europe and Asia have banned Russia from access to the Society for Worldwide International Financial Telecommunications (SWIFT) messaging system. SWIFT provides a secure communications system for thousands of banks that conduct commerce across borders. While SWIFT does not execute transactions, it provides a highly secure means to initiate and monitor payments across the globe—much like a nervous system that coordinates banking movements. A German bank, for example, might pay for a client’s purchase of Russian goods by contacting a SWIFT correspondent bank in Russia, with whom it has a deposit balance. The message would instruct the Russian bank to pay the seller of the Russian goods in rubles, thus enabling the transaction to occur easily and securely.
Multiply this by thousands of transactions per day, and the importance of the SWIFT system becomes apparent. SWIFT allows banks to communicate so that payment for goods denominated in one currency can be settled in another currency. Excluding Russian banks from access to SWIFT diminishes their access to thousands of banks globally and to a convenient, low-cost means of conducting international business.
Sanctions, to be successful, require the rest of the world also to cease all transactions with Russian businesses, banks and individuals. Sanctions represent a form of siege on the Russian economy, and depriving Russia of access to SWIFT is an essential part of that siege. However, denying access to SWIFT interferes with Russia’s ability to conduct international business but does not stop it. Russian banks can set up direct correspondent relationships with foreign banks willing to ignore the sanctions, for a price. They can complete transactions by directly contacting a willing third-party bank or through messaging systems other than SWIFT.
Therefore, effective sanctions require discipline among those imposing them. Moreover, they require compliance from nations not directly involved in the siege. China, for example, holds sizable international reserves. Russia could turn to China as an intermediary, allowing its banks to communicate with Chinese banks to conduct and complete payments across the globe. And President Xi has reportedly ordered his government to find opportunities to trade directly with Russia in the face of Western measures. If China is convinced that the benefits from enabling Russia to circumvent sanctions are greater than the risks, this would open a significant payments loophole for Russia and undermine the effectiveness of the sanctions.
Excluding Russian banks from SWIFT is but one link in the chain of sanctions intended to isolate Russia and strengthen the siege on the Russian economy. Other financial sanctions include freezing its central bank’s access to foreign currency reserves to undermine the exchange value of the ruble. The siege also involves freezing or confiscating Russian assets held outside the country to assure they hold no value to those in power.
In any war, there will be casualties among all combatants. Sanctions stop the flow of goods in both directions, raising prices and lowering quality of goods available to consumers globally. Many countries will feel the effects, and success will require paying the necessary price in the form of shortages, inflation and economic fragility. The goal is for Russia to capitulate and leave Ukraine. If the siege is lifted before the goal is met, it will be Russia’s victory.