Excluding Russia from the Swift system would not be surgical

Nuclear weapons are the only real – but unthinkable – nuclear option in a war. Some politicians and pundits nonetheless see Russia’s exclusion from the Swift payments alliance for banks as one in the West’s arsenal. It would fall short for more than definitional reasons.

Around 100,000 Russian troops are on the border with Ukraine. They could soon expand the creeping invasion that Russia began in 2014 when it annexed Crimea. The USA and the EU have little courage to oppose this militarily. Economic sanctions would be a safer punishment.

Throwing the bear out of Swift is a popular threat. Last week Boris Johnson, the ailing British Prime Minister, hailed this form of unfriending as “a powerful weapon”. The European Central Bank warned EU lenders to prepare a day later. US legislators have drafted legislation aimed at making that happen.

Swift’s full title is The Society for Worldwide Interbank Telecommunication. This underscores the satisfying ostracism associated with expelling Russia. But it also indicates mistakes in tactics. First, Swift is not a full-fledged payments network. Swift is also not, as is sometimes claimed, a pure messaging system. True, its core use lies in around 42 million encrypted instructions that 11,500 users in 200 countries exchange daily to coordinate payments. But these messages embody something bigger: mutual trust based on common standards.

Excluding Russia from Swift would not financially isolate Russia, as proponents suggest. It wouldn’t be as pointless as opponents imagine.

The sanction would have “a deterrent effect,” in the words of Harley Balzer, professor emeritus at Georgetown University in the US, and discouraged some western banks from doing business with Russia. Others would continue to send and receive payments with Russian counterparties.

Russia’s own payments system remains largely domestic. Cross-border deals would likely involve e-mails or anachronistic telexes or faxes. Russian businessmen say it would be fiddly, slow and insecure, but works most of the time.

The second issue, underscored by Swift’s full name, is that it is a Belgian-based cooperative, not a US bank or government entity. It obeys EU law and its own members, not Joe Biden or Congress. The US would have to pry Russia out of Swift by pressuring the EU and Swift’s non-Russian members.

This is how Iran was largely expelled in 2012. Other sanctions had already financially isolated the Middle East state by then, making the move seem more damaging than it really was. Russia is much more connected.

European enthusiasm for driving Russia out of Swift would depend on how ambitious and bloody another Russian invasion would be. Germany has little interest in disrupting payments for imported Russian gas. In 2020, the Russian energy giant Gazprom pumped gas with an estimated value of around 18 billion euros to Europe.

If the US wanted to curb this trade, it could do so unilaterally and directly through sanctions on banks. Five large state-owned banks are already subject to “low-intensity sanctions,” as Maria Shagina, a visiting fellow at the Finnish Institute of International Affairs, describes them. These include Sberbank and VTB, which have combined assets of over $800 billion. Individuals and companies with ties to the US are prohibited from investing in the quintet beyond a 14-day lending period.

The US could include private banks in sanctions and expand their scope. It could ban global banks from exchanging dollars for other currencies, including rubles, at select Russian institutions.

Although Russia has deliberately reduced its dollar exchange deals, they still accounted for more than half of the total in 2020, Shagina says. Dollars are best traded in New York. Banks trying to break US sanctions there should be careful.

“Because so many cross-border transactions have a dollar leg, unilateral US sanctions would reach 75 percent of combined US-European sanctions,” estimates Brian O’Toole, senior fellow at the Atlantic Council, a Washington think tank.

If a sanction were comparable to a nuclear option, it would ban Russian transactions in the almighty dollar through US-linked institutions. That would cause serious economic damage despite Russia’s $630 billion in gold and foreign exchange reserves. Ordinary Russians would suffer more than Vladimir Putin. Unfortunately, there can be no surgical financial strike against him and his associates. In the sanctions war, the only financial bombs are dirty ones.

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