The decision by Western allies on Saturday to restrict “selected” Russian banks from the SWIFT payments system would not only deal a catastrophic economic blow to Russia, but will also cause significant pain to their own businesses and institutions. And there is yet space for the allies to do more.

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a secure messaging system that has become the primary mechanism for financing international trade.

Russian banks that are refused access to SWIFT will find it more difficult to interact with peers around the world, even in friendly nations like China, delaying commerce and increasing transaction costs.

However, the allies, who have also promised limits on Russia’s central bank in order to limit its capacity to defend the rouble, have not yet specified which institutions will be targeted. According to sanctions and banking specialists, this would be critical to the measure’s effectiveness.

“The devil will be in the details,” said Edward Fishman, an expert on economic sanctions at the Eurasia Center of the Atlantic Council think tank. “Let’s see which banks they select.”

It would be “an incredibly massive problem” if the list included the largest Russian banks, such as Sberbank, VTB, and Gazprombank, he remarked on Twitter. Sberbank and VTB have already stated that they are ready for any changes.

The move to deactivate certain banks from SWIFT, but not all, may encourage “nesting,” in which Russian entities seek access to the global financial system through non-sanctioned banks and huge multinational corporations, according to one analyst.

Such a Russian workaround would cause compliance issues for worldwide banks.

“It really is a dagger into the heart of Russian banks,” said Kim Manchester, whose firm provides financial intelligence training programs to institutions.

The Biden administration’s sanctions were selective, allowing room to tighten further by banning additional institutions and finally imposing a blanket ban, Manchester said. “It’s a steady onslaught.”

The Russian economy and markets are expected to suffer as a result.

According to Sergey Aleksashenko, a former deputy chairman of the Russian central bank who now lives in the United States, the sanctions are expected to have a significant impact on the rouble when markets open on Monday, resulting in the disappearance of numerous imports to Russia.

“This is the end of a significant part of the economy,” Aleksashenko added. “Half the consumer market is going to disappear. These goods will disappear if payments can’t be made for them.”

However, the damage may be mitigated if the listed banks were confined to those that have already been sanctioned and Russia’s central bank was given time to transfer assets abroad, according to a former top Russian banker who spoke on the condition of anonymity.

“If it is the banks that are already sanctioned, it doesn’t really make a difference. But if it is the top 30 Russian banks then that is an entirely different matter,” he said.

“It all sounds very loud and everyone is very glad, but in reality it is a political statement.”

Sanctions previously declared by the United States against a few of Russian banks, notably Sberbank and VTB, targeted the vast bulk of around $46 billion in daily foreign exchange transactions by Russian financial institutions. These sanctions targeted approximately 80% of Russia’s banking assets.

Russia has established its own network, the System for Transfer of Financial Messages, as an alternative to SWIFT (SPFS).

According to the central bank, it despatched roughly 2 million messages in 2020, accounting for about a fifth of Russian domestic traffic, with a goal of increasing this proportion to 30 per cent by 2023.

However, SPFS, which limits message size and runs only on weekdays, has had difficulty attracting overseas members. 

(Adapted from Reuters.com)

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