The business of war: Russia-Ukraine conflict will impact spending and behaviours, and how SWIFT exclusion could backfire on the West

Bayes Business School and City University academics say the economy could be boosted by war, and exclusion from SWIFT may benefit Russia and China’s long-term overseas payment plans.

Russia’s invasion of Ukraine could result in long-term increased innovation, depressed workforces, and the growth of a Russian-Chinese international payment system, amidst a dip in trade and economic activity, say leading academics at Bayes Business School and City, University of London.

The invasion of Ukraine and troops arrival into Kyiv this morning have escalated pressures for world leaders to impose stronger economic sanctions on Moscow.

Prime Minister Boris Johnson has already announced what he describes as the “largest set of sanctions ever imposed anywhere by the UK government", including measures against more than 100 businesses and individuals, and limiting the amount of deposits Russian nationals will be able to hold in UK bank accounts.

Professor Andre Spicer, Interim Dean at Bayes Business School, believes that, although war has a general negative impact on economies, the impact of the fighting on countries systems is often dwarfed by the wider impacts of economic disbalances. War can, however, benefit some sectors of the economy.

“There is a negative impact on the economy caused by war, in part through direct destruction of people and property, but a greater impact is through indirect disturbance to commerce. Often the disturbance to trade and economic activity is twice as great as the direct impact of the fighting. War also changes people’s everyday behaviours. People working in conflicted areas become much less committed to their jobs and employers, while consumers stop buying products which have even the faintest relationship with a perceived enemy. 

“War also often acts as a drag on a nation’s productivity – a key determinant of living standards. However, there are some sectors of the economy which benefit. For instance, spending on defence tends to rocket, even in countries which are not directly threatened but think there is a potential threat. Also, stock market prices tend to go down when war is threatened but they go up when war is announced.”

Professor Spicer, a Professor of Organisational Behaviour, adds that war can have longer-term effects on the economy and people, impacting behaviours, and wellbeing.

“Sometimes, war can lay the foundation for innovation which happens when peace is declared. Many of the technologies invented during World War Two for military purposes turned into the engines for economic development after the war. War also makes people less trusting of strangers and more likely to only rely on their own close contacts, which can be a barrier to all sorts of business activities which rely on trust to work.

“People who experience war tend to be more likely to have poor mental and physical health later in life. This means companies operating in ex-war zones are likely to have sicker and more depressed employees.”

Exclusion from SWIFT may benefit Russia and China in the long run

The UK government is also threatening to shut off Russia’s access to the SWIFT (the Society for Worldwide Interbank Financial Telecommunication) payment system, which is the main secure messaging system that banks use to make rapid and secure cross-border payments in more than 200 countries. Doing so would make it harder for the country to complete business deals and would mean simple transactions would instead need to be conducted directly between banks, or rival systems, which would be more costly and timely.

Professor Barbara Casu, Professor of Banking and Finance & Director of Centre for Banking Research, says that while de-platforming Russia would not affect their domestic payment system, it would impact international companies and supply chains and any business currently dealing with them.

“It is important to note that SWIFT is simply a secure messaging system. It does not handle payments or hold or transfer funds but enables secure messages relating to payments among its members. Actual payments are handled by banks, not by SWIFT.

“The closer economic ties a country has with Russia, the bigger the burden of this action on their domestic economy. Therefore, it is considered a very significant move, as the consequences will not only affect the Russian economy but all those economies dependent on Russian exports, for example in terms of energy supply.”

Dr Andrea Baronchelli, Associate Professor at City, University of London and Token Economy theme lead at The Alan Turing Institute, said de-platforming Russia could work in a ‘boomerang effect’ in the long term, to the detriment of the US Dollar.

“Such a move would in fact be a major push for China, Russia and other non-western countries to accelerate their efforts to build alternative payment systems that would protect their strategic interests.

“This is the first time we are seeing the geopolitical implications of digital currencies (such as Central Bank Digital Currencies), and more broadly of the blockchain technology, which today make alternative digital-payment systems viable for the first time in history.

“Removing Russia could lead to a diminished global reliance on the U.S.-centric international monetary system and, eventually, even mine the position of the US dollar as the world reserve currency.”

Professor Casu agrees with Dr Baronchelli, adding: “China has developed an alternative messaging infrastructure to SWIFT (CIPS) which could accelerate the process of de-dollarisation of international cross-border payments. Other unintended consequences could arise from the use of cryptocurrencies to circumvent potential sanctions.”


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