The United States, Britain, Europe and Canada committed on Saturday to removing several key Russian banks from the SWIFT global payments system, deploying what analysts and diplomats say is a "financial nuclear weapon" because of the damage it would cause to Russia as well as its trading partners.
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SWIFT, or the Society for Worldwide Interbank Financial Telecommunication, is a secure messaging system to ensure rapid cross-border payments. Created in 1973 and based in Belgium, SWIFT is the principal mechanism to finance international trade, linking 11,000 banks and institutions in more than 200 countries, and processing upward of 42 million transactions a day.
SWIFT was created by American and European banks, which did not want a single institution developing their own system and having a monopoly. The Belgium-based network is now jointly owned by more than 2,000 financial institutions. It is supervised by the National Bank of Belgium, in partnership with major central banks around the world, including the US Federal Reserve and the Bank of England.
The latest round of sanctions came after the US Treasury Department said it was targeting the "core infrastructure" of Russia's financial system, sanctioning two of its largest banks: state-backed Sberbank SBER.MM and VTB VTBR.MM. Also on the sanctions list are Otkritie, Sovcombank and Novikombank and some senior executives at state-owned banks
US banks must sever their correspondent banking ties, which allow banks to make payments between one another and move money around the glob, with Russia's largest lender, Sberbank, within 30 days.
EU leaders have agreed on sanctions on Moscow that target 70% of the Russian banking market. The bloc imposed a ban on issuing bonds, shares or loans in the EU for refinancing Alfa Bank and Bank Otkritie, after freezing assets at Rossiya Bank, Promsvyazbank and VEB earlier in the week.
The top three Russian banks Sberbank, VTB and Gazprombank, however, do not face an EU asset freeze. The bloc also set a cap of €100,000 ($112,700.00) for EU bank accounts of Russian citizens, who will not be allowed to buy euro-denominated shares.
Refinancing in the EU of Russian state-owned enterprises is also forbidden, with the exception of some utilities. Securities settlement houses in the EU will not be allowed to serve Russian counterparties.
Russia's large banks are deeply integrated into the global financial system, meaning any sanctions on the biggest institutions could be felt far beyond its borders. Cutting them from SWIFT would make transactions more difficult and costlier. The move could therefore inflict a crippling economic blow on Moscow, but also cause much pain to their own companies and banks.
And the allies still have room to do more.
Russian banks denied access to SWIFT will find it harder to communicate with peers internationally, even in friendly countries such as China, slowing trade and making transactions costlier.
But the allies, who also vowed curbs on Russia's central bank to limit its ability to support the rouble, have not yet said which banks would be targeted. That would be crucial to the measure's impact, said sanctions and banking experts.
"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."
If the list covered the largest Russian banks, such as Sberbank, VTB, and Gazprombank, it would be "an absolutely huge deal," he wrote on Twitter.
Sberbank and VTB have previously said that they were prepared for any developments.
The decision to kick some banks off SWIFT, though not all, could encourage "nesting", in which Russian entities turn to non-sanctioned banks and large multinationals instead in a bid to access the global financial system, one expert said.
Such a workaround for the Russians would create compliance headaches for global banks.
"It really is a dagger into the heart of Russian banks," said Kim Manchester, whose firm provides financial intelligence training programs to institutions.
Manchester said the Biden administration had been selective in its sanctions, leaving room to tighten further by blocking more banks and eventually imposing a blanket ban. "It is a creeping barrage."
The impact is likely to be devastating for the Russian economy and markets.
The sanctions are likely to hit the rouble hard when markets open on Monday, said Sergey Aleksashenko, a former deputy chairman of the Russian central bank who now lives in the United States, leading to the disappearance of many 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."
But the impact could be blunted if the listed banks were limited to those already sanctioned and Russia's central bank was given time to transfer assets elsewhere, said one former senior Russian banker, who spoke on 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."
Previously announced US sanctions against a handful of Russian banks including Sberbank and VTB, took direct aim at the vast majority of about $46 billion worth of daily foreign exchange transactions by Russian financial institutions. Those sanctions targeted nearly 80% of all banking assets in Russia.
As an alternative to SWIFT, Russia has set up its own network, the System for Transfer of Financial Messages (SPFS).
It sent about 2 million messages in 2020, or about a fifth of Russian internal traffic, says the central bank, which aims to up this share to 30% in 2023.
But SPFS, which limits the size of messages and operates only on weekdays, has found it hard to add foreign members.
The decision to block Russian banks from SWIFT has been fraught.
Over the past few days, even as Ukraine urged Western nations to kick Russia off the payments system and was backed by countries such as Britain, others, such as Germany, worried about the possible impact on their economies and companies.
The SWIFT ban was a "financial nuclear weapon," French Finance Minister Bruno Le Maire said on Friday. "When you have a nuclear weapon in your hands, you think before using it," he told reporters.
The tide shifted, however, as Russian forces launched an assault on Kyiv and hopes of a diplomatic resolution faded.
Earlier on Saturday, Germany, which has the EU's biggest trade flows with Russia, softened its stance and suggested it was looking for a way to remove Russia from SWIFT while trying to limit the collateral damage.
Manchester, the financial intelligence trainer, said the partial ban would force Russian banks to get more creative in accessing the financial system.
Multinationals with large treasury operations and banks with SWIFT access could become the new hubs of financial transactions out of Russia.
Nesting, he said, was a massive concern for global banks, which would have to ensure that any transactions they support do not violate Western sanctions.
Manchester said he spoke on Friday to a contact in the financial crimes division of a global bank. Such banks could face heavy regulatory penalties if they dropped the ball on sanctions, he added. "They are burning the midnight oil to make sense of everything that's going on," Manchester said.
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