By Manahil Habib
Shortly after Russia had carried out its first military invasion on Ukraine in late February, many countries had imposed financial sanctions and export controls against the country. One of them is the removal of key Russian banks from the global financial messaging service; SWIFT. However, Russia has not been completely removed from the system, and it seems that the chances of it happening are unlikely due to many reasons.
What is SWIFT?
The Society for Interbank Financial Telecommunication is a system used by financial intuitions worldwide to communicate payment information and transactions. Central banks of countries mostly use it to facilitate the communication of cross-border payments such as external debt and commodity exports. It is worth noting that while SWIFT is a financial transaction system, it is not used to transfer or hold funds directly. Even if Russia were to be completely cut off from the system, it could still process transactions using other means of communication, but they would be more costly, slow, and inefficient.
Why isn't Russia removed from SWIFT?
As stated by CNBC, Russia is the world's third-largest oil producer, behind the U.S and Saudi Arabia, and the world's largest exporter of crude to global markets. If removed, it will result in higher oil and gas prices worldwide due to decreased supply. This consequence is evident today as fuel prices have gone up substantially, given that more countries are backing away from Russia as an exporter of crude oil.
Even countries that are not reliant on Russia for oil, its role at a global scale will affect them due to its volatility. A recent tweet by senior German journalist Holger Zscheapitz also noted that Russia and Ukraine combined account for 25% of global wheat exports and Ukraine for 13% of corn exports, indicating that food prices soon are likely to go up as well.
Additionally, damage to the Russian economy caused by removal from SWIFT will lead to disruptions in energy supply within the E.U. (Russia is a key energy supplier to E.U. countries), which were already high due to the COVID-19 outbreak, all of which can raise living costs for E.U. residents. Another reason why Russia has not been cut off from SWIFT yet is the probability of the sanction affecting
the financial system of other countries, including the U.S.
According to Trading Economics, Russia has an estimated $478.2 billion in external debt and $643200 million in foreign reserves. Even though Removal from SWIFT will most likely cause Russia to default on its payments and result in limited financing options from international investors, it may lead to liquidity shocks to both the U.S. and European interbank markets. Russian entities owe more than $100 billion, according to IMF estimates.
Alternatives
Although Russia has been sanctioned by most of the economically powerful nations globally, it can be argued that its downfall can be prevented due to its key ally, China. After Russia annexed Crimea in 2014, it had pulled back on U.S. foreign reserves into the Chinese yuan. Since then, China has been a strong trading partner with Russia. Transactions between both countries have been predominantly made through the Chinese Cross-Border Interbank Payment System (CIPS), an international messaging system equivalent to SWIFT, developed after China's dispute with the U.S.
Alternatively, Russia has also developed its communication system, SPFS; however, its primary purpose is to facilitate domestic financial transactions and not include any international banks.
Disclaimer: The opinions expressed in this article are those of the author and do not necessarily represent the views of Mettis Link News (MLN).
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