After the Russian attack on Ukraine, the western world wants to adopt tough sanctions against the Russian financial sector. This should also include the ban on doing business with Russian banks in the future. As a result, the Russian credit institutions with branches all over the world would lose their business base in the USA and the EU. There is even talk of excluding Russia from the Swift international payment system. The consequences for Russia would be devastating. But the West could also suffer economic damage. The SZ answers the most important questions.
The USA and the EU now want to sanction further Russian banks. How does this work?
So far, the West has only put a handful of Russian banks on the sanctions list. This list should now be greatly expanded. The goal is clear: exclude Russia’s banking sector from all transactions in the western financial system: the institutes there should not be able to grant or take out new loans, trade in securities or make deals with other – western – banks. As a result, the Russian financial sector is also losing access to the US dollar. That’s a sharp sword, because most international trade is still done in dollars: without dollar access, no international returns. For the rating agency Fitch, this step would have “the greatest impact” on the creditworthiness of Russian banks. In addition, the assets of the Russian institutes that have a branch in the West are to be frozen. Russia can no longer get the capital.
Can the West take action against oligarchs?
Lisandra Flach from the Ifo Institute considers steps against people and organizations to be more effective than economic sanctions: “The pressure on the government is greater when you meet oligarchs, companies and other actors who have ties to the Kremlin.” Freezing the assets of wealthy Russians abroad does a lot, because it also increases the political costs of the war for Vladimir Putin.
How effective is the crackdown on banks?
The measures are aimed at certain banks and can have their full effect there. At the same time, the immediate negative consequences for the rest of the financial world should remain manageable. However, the authorities must strictly review the ownership structure of the institutions: The US Office of Foreign Assets Control (OFAC) imposed financial sanctions on 44 Russian state-controlled banks between 2014 and 2019 in response to Russia’s occupation of Crimea. But then the authority found that there were Russian institutes that were formally privately owned but were still under Putin’s thumb. These banks were not covered by the sanctions at the time, like that Center for Economic Policy Research reported. In general, it is effective to hit the financial sector, says Ifo expert Flach. “That would severely damage Russian companies and would therefore be more effective than other sanctions.”
Then there is the proposal to completely disconnect Russia’s financial sector from the Swift payment system?
That’s right, some are talking about the nuclear option here because the global financial system as a whole could be damaged. But the proposal has its supporters. “The West should exclude Russia from Swift and the international financial system,” says financial economist Moritz Schularick. You have seen in the case of Iran how effective that is. The country can no longer sell its oil. “Decoupling from the Swift system would isolate Russia almost completely from large parts of the world economy,” agrees Stefan Kooths, vice president of the Institute for the World Economy. “That would be the sharpest sword economically.”
What is the Swift payment system?
Swift is an acronym for Society for Worldwide Interbank Financial Telecommunication. Owned by major private banks and based in Brussels, the cooperative has been providing a secure communication system for bank transfers since 1973. Example: Customer A wants to transfer money to Customer B abroad. Customer A’s bank then sends a standardized Swift message to customer B’s bank, noting the sender, the amount, the account number and the bank’s Swift code (BIC code). Bank B uses this information to credit the account. More than 11,000 banks, stock exchanges and financial service providers in 210 countries use the network, through which around five trillion dollars are transferred to bank accounts every day.
If Russia loses access to Swift, will no money flow to Russia at all?
At least not in a matter of seconds, and not as well secured. Of course, institutes could dust off their fax machines or simply write e-mails. In addition, in recent years Russia has set up its own payment system SPFS, to which banks in many neighboring countries such as Kazakhstan, Armenia and Kyrgyzstan are also connected. For example, banks could use Swift to send payments to Kazakhstan and from there to Russia using the Moscow payment system – at least as long as the banks involved are not sanctioned themselves. “It was done in a similar way back in Soviet times,” said expert Sergei Hestanov from the Russian broker Otkritie Investizii on the Russian business broadcaster RBK.
Why is the West reluctant to separate Russia from Swift?
Without Swift, you’re “practically in a world where you’re flying around the world again with suitcases full of cash,” says one banker. “If all payment flows come to a standstill, there will also be no more flow of goods.” In addition, there are fears that the Swift exclusion could give Russia and China even more encouragement to set up their own payment systems. In the end, the global economy is threatened with de-dollarization and with it a further loss of power in the West.
What consequences would the Swift sanction against Russia have for German companies?
Companies like the refrigerator manufacturer BSH Hausgeräte or VW – both produce locally in Russia – would pose considerable problems if the country were separated from Swift. Imports, exports, purchasing components locally – none of this would be possible anymore, payment transactions would be blocked. Even a wholesaler like Metro would hardly be able to work on site without participating in the international system and the corresponding Swift codes. Demands from European companies on Russian partner companies? Would then be difficult to claim. The manager of a large German company, who does not want to be quoted by name, puts it in a nutshell: “I’ve already checked off Russia for myself,” he says. “In extreme cases, we won’t get any more money and can write off our Russian company and everything that goes with it.”