SWIFT ban sends a political message, but the economic consequences are unclear

Academics at Bayes Business School and City, University of London believe excluding Russia’s leading banks from the SWIFT messaging system may not have as damaging an economic impact as expected.

The European Union’s move to ban the banks, including VTB, the country’s second-largest bank, from 12 March are among the latest sanctions dealt on Russia following its invasion of Ukraine.

SWIFT (the Society for Worldwide Interbank Financial Telecommunication) is the main system that banks use to make rapid and secure cross-border payments in more than 200 countries.

Professor Barbara Casu is Professor of Banking and Finance & Director of Centre for Banking Research. While Professor Casu believes the ban is a powerful political message, she says the direct impact will not be sizeably detrimental for several reasons.

“Despite being described in the press as “one of the most powerful tools Western authorities have used to punish Russia”, disconnecting Russian banks from the SWIFT messaging system might send a clear political message, but its economic impact might not be as relevant.

“There are several reasons the ban’s impact on Russian banks might not be as relevant as expected. First, SWIFT is a messaging system, and it has no role in payment execution. Messaging regarding fund transfers can be done using several other, albeit potentially less secure, networks, including instant messaging or the old-fashioned fax machine. Second, exclusion from SWIFT does not impact the domestic banking sector; most sanctioned Russian banks’ international business volumes are limited. Third, it does not stop Russian banks from making or receiving international transfers from third parties. Finally, business-to-business payments are also currently unaffected. This is not to say that there will not be any impact, there will be disruptions and delays in international payments.”

Two banks, Sberbank, Russia's largest lender, and Gazprombank, have escaped sanctions because they are the main outlets for payments for Russian oil and gas, which EU countries are still buying despite the conflict in Ukraine.

“The decision of including some banks but excluding others is also political," added Professor Casu. "The closer economic ties a country has with Russia – such as those economies dependent on Russian exports, for example in terms of energy supply – the bigger the burden of impaired or delayed payments on their domestic economy. The uncomfortable truth is that economic sanctions, while powerful and necessary, impose costs on both sides. There are other, economically more powerful, ways to impose sanctions, than disconnecting banks from the SWIFT network.”

Digital currencies in the time of war

Dr Andrea Baronchelli, Associate Professor at City, University of London, and Token Economy theme lead at The Alan Turing Institute, says the crisis meant it was the first time that digital currencies had entered the geopolitical stage.

It has been reported that Ukraine has already received around $33 million worth of bitcoin and other cryptocurrencies after making an appeal over the weekend via social media. The donations will “contribute to the Ukrainian victory as well as support civil people” following Russia’s invasion.

“On the one hand, Bitcoin and other cryptocurrencies allow Ukrainians to receive funding under the nose of their invaders, because nobody can stop transactions in permissionless blockchains. 

“On the other hand, digital currencies, such as Central Bank Digital Currencies or CBDC, make global digital-payment systems alternative to SWIFT viable for the first time in history.  

“Since reliance on the US-centric financial order is strategically unsustainable for the ambitions of China, Russia, and others to occupy a primary role in the future world order, it seems natural that they will seek to implement such alternative payment systems as soon as possible.”

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