HomePoliticsEU, UK, Canada, US plan to cut some Russian banks from swift

EU, UK, Canada, US plan to cut some Russian banks from swift


The joint statements in Washington and Brussels late Saturday—as Ukrainian and Russian forces fought for control of Ukraine’s capital, Kyiv—sent a powerful signal of how the West could flex its collective muscle, after debating how to respond to the Russian aggression. They marked a significant step-up in efforts by western capitals to punish Russia for its invasion of Ukraine and pressure Russian President Vladimir Putin to seek a diplomatic off-ramp to the crisis.

In announcing the steps, European Commission President Ursula von der Leyen said the EU would commit to knocking a number of Russian banks off the Swift network, a global payment system that connects international banks and facilitates cross border financial transfers.

“This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally,” she said.

The EU, U.S., Canada and the U.K. will also target Russia’s central bank to prevent it from deploying its war chest of reserves. According to a senior EU official, the idea would be to prevent it selling its foreign assets for local currency to prop up Russian banks and firms hit by sanctions. That could effectively freeze a large part of Russia’s reserves abroad.

Those reserves—composed of gold, bonds, deposits and securities denominated in foreign currencies—are critical for Russia’s efforts to halt the ruble’s depreciation and slow inflation from the currency’s weakness.

“We will paralyze the assets of Russia’s central bank,” Ms. von der Leyen said.

The moves announced also created a task force to go after the physical assets of sanctioned companies and Russian oligarchs—including their yachts, luxury cars and homes—as well as an effort to curb so-called golden passports that allow Russian elites to essentially buy citizenship in other countries.

The latest measures are the third set of Western sanctions issued in response to Russia’s invasion of Ukraine.

In recent days, the U.S., the U.K., the EU and some of its partners have announced measures to sanction some Russian banks, to ban Russia’s sale of debt and to ban some technology exports to Russia’s energy sector and other key companies. They have also targeted large numbers of Russian officials, lawmakers and Russian business executives.

Ukrainian President Volodymyr Zelensky has been lobbying western capitals to beef up the sanctions against Russia. Saturday’s announcements left open some loopholes. Most notably, by knocking some but not all Russian banks off Swift, the EU has kept open payment channels for the purchase of Russian natural gas, upon which it is heavily dependent for its energy needs. The U.S. measures have also created carve-outs for oil purchases.

Several capitals, including Berlin and Rome, have resisted the option of disconnecting Russian banks from Swift. Critics have worried it could have unintended consequences, including complicating energy payments to Russia and leaving European banks exposed to money owed to them by Russian financial firms. There have also been concerns it could encourage closer financial ties between Russia and China.

Germany and Italy had both been opposed to such a move. EU foreign-policy chief Josep Borrell said Friday, though, that cutting banks off Swift was a possibility for further sanctions. Ukrainian Foreign Minister Dmytro Kuleba and Mr. Zelensky have ratcheted up the pressure on the EU, lobbying governments to do so. On Saturday, German and Italian officials said their governments’ positions were changing on the issue.

Under a compromise designed to keep a channel open for making energy payments and other vital transactions, the EU decided to instruct Swift to leave some Russian banks on the system, diplomats said.

Swift, or the Society for Worldwide Interbank Financial Telecommunication, is a global messaging system for financial transactions that connects more than 11,000 banks and other organizations in more than 200 countries and territories.

The Swift network, based in Belgium, is a bank-owned consortium that handles millions of daily payment instructions. Money moving from one account to another often passes by multiple banks before landing in the final destination, particularly if it involves a foreign currency. Swift routes messages with instructions from one bank to another, allowing them to know where the money should ultimately land.

Swift said it is engaged with European authorities to understand the details of the sanctions and is preparing to comply.

Getting excluded from Swift would significantly complicate Russian trade, foreign investment, remittances and the central bank’s management of the economy. Iranian banks sanctioned by the EU were cut off in 2012.

Part of the debate about whether to OK a Swift cutoff of Russia is how to keep open some financial channels to buy Russian oil and natural gas. The EU imports 40% of its gas from Russia. There is also the issue of Western bank exposure to Russia—money owed that would be difficult to collect if Swift is unplugged. Foreign banks have about $121 billion in assets owed to them by Russian-based entities, according to the Bank for International Settlements. Of those, about $14.7 billion were owed to U.S. banks. A larger chunk—$25 billion—were each owed to Italian and French banks.

There are workarounds to Swift that could allow payments even after disconnecting Russia from Swift. Fitch Ratings said banks could use other—albeit less efficient and more expensive—messaging systems such as telex. Russia also has developed its own payment system. While it currently has only 23 foreign banks connected to it, more could join if Swift is no longer an option.

China is another alternative. Beijing has its own payment system, too, with more take-up by international banks than Russia’s. By driving Russia and China together, critics say, a Swift cutoff could erode the supremacy of the dollar-denominated global financial system.

Cutting Russian banks off Swift altogether “would have an immediate big impact that Russia would quickly mitigate with other messaging vehicles,” said Richard Nephew, a former senior U.S. State Department sanctions official. “It would cause the Russians a lot of headaches, but I think its value has been dramatically overstated.”

Russia’s central bank had also begun to shift away from reserves in the western-denominated currencies that comprise most global trade and finance, in an effort to guard against renewed sanctions after U.S. firms were barred from buying its debt following Russia’s 2014 invasion of Crimea.

The Treasury Department on Tuesday expanded those sanctions to include central bank debt traded in the secondary markets, where intermediary institutions sell central bank bonds.

U.S. officials said they are still finalizing the central bank actions. “This will show that Russia’s supposed sanction-proofing of its economy is a myth,” a senior Biden administration official said.

The composition of Russia’s foreign exchange reserves is unusual by global standards. According to the International Monetary Fund, across all 149 countries that give details of their reserves, the U.S. dollar accounted for 59% in the three months through September, while China’s yuan accounted for just 2.7%. Reserves of gold, which are held inside Russia, now account for 21.7% of the total, up from 17.2% in the early months of 2018.

By contrast, Russia’s central bank holds just 6.6% of its reserves in U.S. assets, with Chinese assets accounting for 13.8%, French assets for 12.2%, Japanese assets for 10% and German assets for 9.5%. Before it moved away from dollar assets in mid-2018, the 2018 U.S. assets accounted for just under 30% of reserves, and Chinese assets just 4.7%.

Even with Russia’s attempts to safeguard its economy from sanctions, the U.S. can levy powerful financial tools on the Russian central bank that sidestep the bank’s move.

Among its options to expand sanctions on the Russian central bank, the administration could ban any dollar transactions—and allies might complement with similar action against euro, pound and yen trading. Such a step could hobble the central bank’s ability to sell its foreign-currency reserves. Another option could be a full blacklisting that freezes any assets held in U.S. jurisdictions—and other countries’ jurisdictions where allies join Washington in the move—and prohibit any transactions. That could hit not only the bank’s currency-stabilization operations but also the transactions critical for the country’s international trade.

 



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