With the rapid escalation of Russia’s invasion of Ukraine, a large coalition of states, including the EU, U.S., Canada, and the UK, among others, agreed on February 26th, 2022, to ban select Russian banks from the Society for Worldwide Interbank Financial Telecommunications (SWIFT) international payment messaging system. The move was the latest in a series of severe sanctions aimed at economically isolating Russia and crippling the Russian financial system in order to pressure the Putin regime to end its military operations in Ukraine.
Seven Russian banks were removed from SWIFT, effectively denying them access to international markets. However, the list of those targeted did not include Sberbank or Gazprombank, two of Russia’s largest banks by assets. The decision to impose a selective ban is primarily due to Europe’s continued reliance on Russia for energy, and concerns that removing all Russian banks would create further turmoil in global energy markets. Removing the selected Russian banks from SWIFT is already having a discernible negative impact on Russia’s economy, but determining the long-term impact is more complicated. Russia is intricately connected to the global economy, holds large quantities of critical resources, and has been strategically preparing to weather the long-term impacts of sanctions and a removal from SWIFT since 2014, when Putin annexed Crimea.
The global role of SWIFT, the implications of Russia’s removal, and the potential long-term impacts it will have on the global economy are broken down below.
A consortium of U.S. and European banks created the SWIFT system in 1973 to facilitate the exchange of interbank messages containing the secure payment and transfer information for settling international transactions. Today, SWIFT is the most widely used interbank messaging system in the world, with over 11,000 member banks and financial institutions in over 200 countries and territories. Based in Belgium, SWIFT is jointly owned by more than 2,000 banks and financial institutions and is overseen by the National Bank of Belgium, in partnership other major central banks, including the U.S. Federal Reserve and the Bank of England. In 2021, the SWIFT platform processed more than 10 billion messages and facilitated trillions of dollars in cross-border payments. Roughly one percent of these payment messages were linked to Russia.
Critically, SWIFT does not actually move or hold money or securities, nor does it function as a clearinghouse for settling transactions between banks. SWIFT’s main function is to enable banks to communicate transaction information, thereby facilitating payments for imports and exports. Although several Russian banks are now cut off from SWIFT, they can still execute international transactions with other banks. However, in lieu of SWIFT, they must use slower and less-secure methods of interbank communication, such as the outdated telex telegram network or phone calls and email.
In 2014, the U.S. and EU threatened to cut Russian access to SWIFT as part of the sanctions package they imposed after Russia’s annexation of Crimea. In response, Russia developed its own internal financial transaction messaging system, the System for Transfer of Financial Messages (SPFS), aimed at reducing its reliance on SWIFT. Today, the SPFS system is used as the primary messaging system in 20 percent of Russia’s domestic transactions, and its banking network includes 23 foreign banks. The SPFS is not as technically advanced as SWIFT, but it is widely used domestically and could serve as a functional alternative to execute foreign transactions.
Russian capacity to adjust to SWIFT removal is severely limited by additional Western sanctions
The removal of Russian banks from SWIFT, coupled with the other extensive Western sanctions being levied, has the potential to fundamentally restructure the Russian economy. In 2012, Iran lost nearly half its oil revenues and saw a 30 percent decline in foreign trade after being removed from the SWIFT system for ramping up its nuclear program. Additionally, in 2014, when the U.S. and EU initially threatened to disconnect Russia from SWIFT, Russia’s finance minister estimated that the move would lead to a 5 percent drop in Russian GDP. Two of Russia’s three largest banks are still connected to SWIFT, even if they were to be banned later, there are alternative methods for interacting internationally without reliance on SWIFT. Nevertheless, Russia’s economy is set to suffer severe setbacks.
In 2014, Western sanctions caused the value of the ruble to drop by over 50 percent against the dollar and led to a sustained decline in GDP growth over the next two years. Russia has since attempted to further sanction-proof its economy, through building up $600 billion in foreign reserves, diversifying those reserves to include more euros and renminbi, reducing the national debt, and limiting imports of some goods. Despite these efforts, Russia is still heavily reliant on the dollar system and Western markets. At the end of 2021, 16 percent of Russia’s foreign reserves were held in dollars, and 32 percent in euros, while Germany, the Netherlands, and the U.S. were all among its top trade partners. With these countries now enforcing strict sanctions, Russia’s economy is in a precarious position—one that is causing ripple effects across global markets including supply chain disruptions and higher prices on energy and agricultural goods.
U.S. sanctions against Russia will be particularly impactful, as the majority of global trade is conducted in dollars, and the U.S. can freeze any dollar transactions before they are settled. Since the U.S. sanctions went into effect, the value of the ruble has dropped nearly 30 percent against the dollar, and Russian bond prices have plummeted as investors fear they will be unable to meet outstanding debt obligations. Global supply chains, already stressed from the fallout of the COVID-19 pandemic, are now under further pressure. Russia is a key exporter of oil and gas, the world’s largest producer of palladium and the second-largest producer of platinum—key commodities used in semiconductor manufacturing—and a major exporter of other critical minerals, mining commodities, and agricultural goods. Limiting Russian exports has led to price spikes in these commodities globally, but with limited alternative suppliers it is likely that Russia will soon be able to find willing trade partners across Asia, Africa, and the Middle East.
Countries such as China, India, and Turkey have all signaled their initial willingness to continue doing business with Russia—potentially accelerating a global economic divide between Western-aligned and Russian-aligned economies. These countries will still need to contend with the limitations on trade from sanctions and the SWIFT ban, in addition to the of risk exposing themselves to secondary sanctions as a result of doing business with Russia. However, Russia’s abundant resource reserves, and a desire to break away from the current U.S.-dominated financial system, could drive them to continue economic relations with Russia and move further away from the West.
Russian banks’ removal from SWIFT will further contribute to global reorientation of economic relationships
With no clear end in sight, Russia’s invasion of Ukraine is already accelerating a broad global economic reorientation. Europe is set to shift away from its reliance on Russian oil and gas, while Russia will be forced to rely primarily on non-Western-aligned nations for trade markets for the foreseeable future. Mirroring Russia’s efforts to sanction-proof its economy, China has been working to create an alternative financial system beyond the reach of U.S. and EU sanctions. In 2015, China began developing its own alternative to SWIFT, the Cross-Border Interbank Payment System (CIPS). While adoption of CIPS has been slow, in 2021 CIPS processed around 80 trillion renminbi ($12.68 trillion) in transactions, a 75 percent increase from 2020, and now has 1,280 financial institutions in 103 countries and regions connected to the system. China has been promoting the international use of the renminbi as an alternative to the dollar with limited success since the 2008 financial crisis, but removing Russian banks from SWIFT could provide an opening for China to significantly expand the use of both the CIPS and the renminbi in international trade.
The extent to which China is willing to bring Russia into its economic sphere is still unclear, especially as the war in Ukraine drags on. China’s foreign ministry initially condemned Western sanctions on Russia and announced that it will continue normal trade relations. Russia is a major provider of key resources that are critical to China’s long-term development plans, including energy supplies and critical minerals used in semiconductor manufacturing, as well as rapidly opening trade routes through the Arctic. During the Beijing Olympics in early 2022, China and Russia agreed in principle to boost bilateral trade to $250 billion by 2024, and trade between the two countries has grown to its highest level ever since the start of 2021. Amidst deteriorating relations with the U.S., it is unlikely that China will reject the chance to increase its access to Russian resources and expand its sphere of economic influence.
India has also been increasingly turning to Russia for energy supplies and is now exploring setting up rupee-based trade accounts with Russia. Additionally, Russia has been working on extending its Eurasian Economic Union (EEU) free-trade zone, which grew to include Vietnam in 2015 in addition to existing members Russia, Armenia, Belarus, Kazakhstan, and Kyrgyzstan. As Western sanctions take effect, Russia will become largely isolated from U.S. and EU markets, but its large reserve of natural resources and strong ties to China and central Asia decrease the likelihood that it will become as economically isolated as countries like North Korea or Venezuela. Instead, if the conflict in Ukraine continues, and Western sanctions persist, economic relations with Russia could help accelerate the growth of a non-Western bloc in the global economy.
To help understand the full scope of this coming evolution, FP Analytics’ Future of Money Power Map series breaks down China and Russia’s threats to the existing dollar system, the coming impact of technology, and the key challenges that governments, businesses, and individuals need to be prepared to navigate.
Christian Perez is a Senior Policy & Quantitative Analyst with FP Analytics, Foreign Policy’s independent research and analysis division. His work focuses on trade and investment, emerging technologies, sustainability, and impact analysis. He is a graduate of the Johns Hopkins School of Advanced International Studies.