The hidden costs of cutting Russia off from SWIFT

FOR WEEKS Russia has been massing troops and tanks near the Ukrainian border. Neither talks with nor threats from the West have stemmed the flow. With America and its allies loth to commit forces, another option is gaining prominence: cutting Russia off from SWIFT, the messaging network used by 11,000 banks in 200 countries to make cross-border payments. Flicking a switch seems safer than putting boots on the ground. But it could have dangerous consequences.

A first hurdle would be getting SWIFT to comply. The co-operative of banks, based in Belgium, vows to be politically neutral. Many European countries, such as Germany, do a lot of business with Russia, and may oppose the plan. But there is a precedent. In 2018 America managed to force SWIFT to ditch Iranian banks even in the face of European resistance. America would probably have its way again. It could threaten to pull its own banks from SWIFT, or to seize infrastructure vital to the network, such as a data centre in Virginia. In 2020 it used similar threats to force SITA, a network of global airlines based in Switzerland, to disconnect carriers from countries facing American sanctions.

But would excluding Russia from SWIFT actually be worthwhile? There are three reasons to think that it might not. It would harm but not cripple Russia; it would impose costs on the West; and it would be counterproductive in the long run.

Start with the impact on Russia. The no-SWIFT scenario is not new to Moscow. It has been bracing itself since 2014, when America first raised the idea of unplugging it from the network to punish it for invading Crimea (cooler heads eventually prevailed). If Russia were excluded today, capital flight and a run on firms and banks reliant on foreign funding would ensue. But coping mechanisms would then kick in. Russian banks and their foreign partners would use other means of communication, such as telex, phone and email. Transactions would migrate en masse to SPFS, a Russian alternative to SWIFT that is not nearly as ubiquitous and sophisticated, but still usable. As the payments infrastructure struggled at first to cope, Russia would suffer some disruption—but not disaster. Over time, investment in SPFS would make the system speedier.

Meanwhile, the West would suffer blowback. Until now America has aimed its financial firepower at small or isolated countries such as Cuba, Iran and Myanmar. Russia is twice the combined size of any economy America has ever embargoed. Any disruption in Russia would spill over to the countries that have business dealings with it. It is the EU’s fifth-largest trading partner, for instance. And European banks have $56bn-worth of claims on Russian residents. There would also be indirect damage through retaliation. Iran in 2018 had a weak hand. But Russia is the source of 35% of Europe’s gas supply and is home to €310bn ($350bn) of EU assets.

In the long run America, too, would bear costs. It holds sway over international finance thanks to the dollar’s dominance and its pre-eminent role in global settlement systems. Any country with uneasy relations with America would seek alternatives to SWIFT, while Europe might redouble its efforts to develop a more independent payments network. Weaponising SWIFT against Russia would be seen by China as a “dress rehearsal”, says Adam Smith, a former American sanctions official now at Gibson Dunn, a law firm. It would provide China with the impetus to bolster CIPS, its rival to SWIFT, just as America’s other foes look for alternatives. The network, which already counts some big foreign banks as members, allows messages to be transmitted in both Chinese and English. Its daily average volume of transactions of 310bn yuan ($50bn) remains well behind SWIFT’s estimated $400bn, but it has nearly doubled in the past year. Should it reach scale, America’s financial dominance would be threatened.

Other weapons of economic disruption exist. America could, for example, blacklist big Russian financial institutions, preventing its own banks from dealing with them. That would probably be as disruptive for Russia as a disconnection from SWIFT, without undermining the global financial architecture as much. Yet the risk of immediate blowback would remain. That highlights a long-standing dilemma of wielding economic sanctions: although they are cheap when aimed at puny states, bigger targets can hit back, says Tom Keatinge of the Royal United Services Institute, a think-tank. The West still has powder left. But it must choose its battles wisely. ■

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This article appeared in the Finance & economics section of the print edition under the headline “SWIFT thinking”