SWIFT (Society for Worldwide Interbank Financial Telecommunication) is the global financial system that allows immediate and secure transfers of money across borders. It’s the web that verifies all financial transactions, linking 11,000 banks and institutions in more than 200 countries, with 40 million messages per day.
As part of the West’s sanctions against Russia, some of its banks have been banned from the SWIFT system. Additionally, the United States and the European Union have announced restrictions on the Russian central bank that block access to more than $600 billion in reserves. The Bank of Russia reports that only 22 percent of its international reserves are in U.S. dollars, while gold accounts for 23 percent.
What does this mean? On the one hand, the move aims to block all options of the central bank to defend its currency from plummeting even more against the U.S. dollar or the euro. In recent years, the Russian central bank has been reducing its exposure to U.S. Treasurys and shifting from U.S. dollar reserves to the euro and the yuan, as well as gold. Access to those reserves is more difficult now, and in the case of the euro and yen, probably close to impossible.
For Russian banks, the ban from the SWIFT system increases the risk of a bank run as citizens fear the loss of their deposits and a collapse in daily operations, even if they start to use alternatives.
However, we can’t forget there’s an important impact on European banks as well. According to JPMorgan, European banks have up to $80 billion in claims with Russian banks. Being banned from SWIFT doesn’t make these claims disappear, but if Russian banks fall into a de-capitalization process, the risk of defaults multiplies.
Only three countries have been banned from SWIFT: Iran, since 2012, North Korea, and now Russia, albeit partially. Oil and gas exports as well as other key commodities remain in the system.
Without SWIFT, Russian banks and the central bank are effectively blocked from operating on a global scale, which means an added risk of a domino of defaults from issuers and the impossibility to conduct the most basic international operations.
However, Russian banks may bypass the SWIFT system and use other alternatives, mainly through a parallel system in China called CIPS (Cross-Border Interbank Payment System), which facilitates transactions in yuan. According to CIPS, at least 25 Russian banks conduct yuan transactions through the system.
Using CIPS and other direct or indirect tools to bypass SWIFT has been an alternative for Iran and North Korea but doesn’t solve the problem of access to reserves of the central bank nor does it truly mitigate the impossibility of conducting global transactions. The yuan is only used in 4 percent of global currency transactions, according to the Bank for International Settlements.
Russian banks and the central bank may moderate the financial blow using alternative systems, but the negative impact can’t be underestimated.
There may be a backlash for the United States as well. If other countries find that there’s a valid alternative to SWIFT, they might feel compelled to strengthen ties with China.
Banning Russian banks from SWIFT may cripple many Latin American and Middle East economies that have deep financial connections with Russia, but there’s a risk for the United States that the CIPS alternative, which is marginal at best today, will grow rapidly.
The United States and Europe can’t fully ban SWIFT due to the importance of Russian oil, gas, metals, and wheat exports, and this may create numerous challenges that significantly limit the so-called “nuclear option.” The Russian central bank’s large gold reserves are also a differentiating factor compared to other economies.
No matter how we look at these sanctions, there’s no doubt there are unintended cross-border effects, and there may be unexpected negative consequences for everyone involved.
There’s no doubt the SWIFT ban is probably the most severe of financial sanctions possible and that there are no easy alternatives, but as time passes, it’s also clear that the widespread negative consequences of the Ukraine war will likely last for many years.
Will this measure accelerate a global financial shift toward China? Probably not in the short term, given the relatively modest use of the yuan compared to the importance of China in the global economy, but the ramifications of this measure in the global financial world are yet to be fully understood.
A global financial transaction system remains as the undisputed leader only if it’s truly global and far-reaching. The negative impact for Russia is unquestionable, but the long-term implications of this measure have yet to be seen.
