Sionic Partner Ushir Patel from our specialist Banking & Markets team looks at the implications of current calls for economic sanctions on Russia and on “some” Russian banks.
What is SWIFT?
SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. It is not a bank as such, but without its existence, international banking as we know it just would not be possible.
SWIFT was originally set up in 1973 as an independent co-operative, wholly owned by its members, as a means for international banks to communicate with each other in an authenticated, secure, and near real-time basis. It has a library of hundreds of messages, covering things like payment instructions, confirmation of securities transaction settlements, to end of day statements. It is used by 11,000 banks globally, with close to 50 million messages per day, covering the cash equivalent of trillions of US dollars.
Can Russian banks operate without access to SWIFT?
Yes and no.
- Following the threat of previous SWIFT sanctions in 2014, Russia set up its own domestic card processing platform, known as MIR, so cash can still transfer within Russian borders, with limited cross border capability. Where this potentially impacts the Russian banks is in their ability to transfer the vast majority of cross border funds requests, as their primary messaging protocol with the international banks would be removed. All banks will have contingency measures to communicate with each other in the event the SWIFT network is temporarily unavailable, these primarily being via authenticated telex or fax.
- This, however, will have a significant impact on turnaround times given the manual nature of these methods, thereby extending payment processing from near-real-time to potentially days. Additionally, this medium would not have been used on a scale such as this ever before, as the contingency measures are almost exclusively invoked when there is an outage to individual bank connections to SWIFT, so the actual practical usage is uncertain, given contingency measures are only designed for short term usage. In reality, the contingency measures could be a non-starter for the majority of Western banks if their national governments deploy sanctions against Russian banks themselves, as they will then be unable to accept any form of instruction from them.
- Russian banks will have options to interact with banks domiciled in some Asian countries, notably China, given sanctions may not be in place from those countries. But given the vast majority of their foreign payment flow will be in US dollars, Euros, and Sterling, the impact will be significant.
What does this mean in practice?
This will harm Russian ministry and industrial companies, as they will be unable to access any funds they hold overseas.
- It will prevent them from purchasing any imports, as they will have no infrastructure available to make payments.
- Conversely, it also means international governments and businesses will be unable to pay for any Russian exports, with the largest question mark being how governments will pay for the oil and gas they import from Russia.
This is why it is not a straightforward decision for governments to take. In addition:
- Russia also holds huge amounts of debt to international nations and will likely say that any repayments must stop, given they no longer have the means to make them.
- And there will be some international investment firms who have invested in Russian companies over the Moscow exchange. If sanctions are applied against specific Russian companies or government bonds, then these positions will have to be liquidated as soon as possible, leaving the open question of how the investment companies can receive their (heavily devalued) proceeds, if international payments are blocked out of Russia.
What happens next?
This all depends on the specifics of how the SWIFT sanctions are structured:
- SWIFT will need to assess how they can meet the request. Whereas they previously imposed sanctions on Iran, there were only a handful of low volume banks based in Iran. Russian activity and SWIFT usage is significantly higher than Iran, so the mechanics of any SWIFT sanctions will need to be carefully assessed for operational application.
- The international banks will need to assess what they can and can’t do in line with broader sanctions directives they are subject to, for example, an overseas branch of a US registered banking entity is subject to US mandated laws and regulations. So if the US government mandates sanctions against Russian individuals/banks, then US branches, including those based in Russia, will not be allowed to accept any instructions, even via telex or fax.
- Finally, it is unclear which specific banks will be subject to SWIFT sanctions, as no list has been produced at time of writing, therefore the operational application could become a logistical nightmare if a case-by-case approach is required.
All of which means firms need to pay close attention to what happens next.
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