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Sanctioning Russia’s access to SWIFT: A cost worth paying?

The West is coming under increasing pressure from the Ukrainian Government to further sanctions against Russia by restricting SWIFT payments.

Western countries have come under increasing pressure from the Kyiv to further sanctions against Russia by ending their access to The Society for Worldwide Interbank Financial Telecommunication or SWIFT payment system. The aim of some Western Governments is to cause disruption to Russian energy companies getting paid for selling their oil or gas globally.

‘Blood on their hands’:

Ukraine’s Foreign Minister, Dmytro Kuleba, voiced his anger shortly before EU Heads of State and Government decided against blocking Russia from an international payments system through which it receives foreign currency.

“We have got more to do more.”

Ben Wallace MP, UK Defence Secretary

Kuleba warned that European and US politicians would have “blood on their hands” if they failed to impose the heaviest toll on Russia by cutting from the SWIFT payments system.

Most experts have said that without SWIFT, it would be near impossible for Russian companies or exporters to be paid in a timely or reliable way. SWIFT is used by over 11,000 financial institutions to send secure payment orders.

However, European nations are incredibly concerned that any restriction will affect gas supplies and push Russia towards China. Both Russia and China use their own payment systems and Russia has developed its own back up to SWIFT for many years. However, given that almost half of the world’s financial transactions are delivered in US dollars, it remains hard to contemplate how an alternative would be effective.

For example, when the Trump Administration reinstated financial sanctions on Iran that included access to SWIFT for some Iranian banks, the European Commission created an alternative, The Instrument in Support of Trade Exchanges, or INSTEX. Designed to enable European businesses to trade with Iran, it instead remained unused for an entire year. It was only used when medical supplies needed to be transported to Tehran due to the pandemic. Tensions between Iran and the US have not improved since.

The complex negotiations will be in the shadow of news today that oil prices today reached a second year high, surging past $100 (£74) a barrel.  Russia is the second biggest exporter of crude oil and the world’s largest natural gas exporter. Brent crude eased from $105 to $98 a barrel, but UK petrol prices had hit another record high, with the RAC warning the average petrol price could hit £1.55 a litre.

RAC fuel spokesman Simon Williams said: “Both petrol and diesel reached new record levels yesterday. Unleaded is nearly 149.5p a litre and diesel almost 153p.”

Although the UK only imports 6% of its crude oil and 5% of its gas from Russia, there are concerns that sanctions could further constrict supply and drive-up global prices. The price of UK natural gas futures soared nearly 60% on Thursday.

The UK would like to go further:

Talking to BBC Breakfast this morning, UK Defence Secretary, Ben Wallace said: “We would like to go further, we would like to do the SWIFT system, the financial system that allows Russians to move money around the world and allow payments for its gas. But, like so many things these are international organisations and if not every country wants them to be thrown out of the SWIFT system it becomes difficult, so we are going to work on that today and tomorrow.”

Ben Wallace
UK Defence Secretary, Ben Wallace said “we would like to go further, we would like to do the SWIFT system” Photo: BBC Breakfast

With the Prime Minister due to address leaders of NATO countries later today, the Defence Secretary admitted that the UK cannot make other countries agree to place further sanctions on Russia and said “we have got more to do.”  Commenting on sanctions announced earlier in the week, he said “the raft that we can unilaterally do is the strongest I’ve seen for many decades.”

Other NATO countries including Germany and Italy are likely to oppose the introduction of further sanctions on SWIFT payments as their banks have long standing relationships with Russian banks. Any change would place significant economic strain on banks where payments are made through Russia. Any change would require government compensation. Germany also believes the cancellation of Nord Stream 2 was a high price to pay and is concerned about further costs to its economy.

Following the European Union meeting last night, Mark Rutte, the Dutch Prime Minister told reporters “many colleagues pleaded for it”, but “more work needs to be done to assess what happens if Russia is cut off”.

Given the ongoing problems associated with gas and oil supply into Europe from Russia, any changes to SWIFT will affect the ability for Europe to pay for continued supply. Something that European countries are increasingly worried about.


Final Thought:

Making it tougher for creditors to get their money back will be difficult for the West. It is not surprising that the toughest of sanctions have not yet been dealt. The United States and Germany would stand to lose the most from such a move, as their banks are the most frequent SWIFT users with Russian banks. This would put a significant strain on both Governments and at a time when inflation and the cost of living is already spiralling as a result of the pandemic.

Putin knows this too. His timing is calculated to coincide with European dependence on gas lines into Europe. It is more than a little ironic that the West has condemned Putin and yet is paying for his war as gas pipelines through Ukraine remain untouched by the conflict.

It is not surprising that the UK has been pushing for further restrictions. The Bank of England Governor, Andrew Bailey has already told MPs this week that British banks had very limited exposure to Russia. However, we live in an interconnected world. If creditors in Germany do not get paid due to a closure in SWIFT, the ability for banks to lend during the crisis will become even more challenging. This could drive up further inflation and destabilise international economic markets.

When the cost-of-living pressures are already high in the UK, it is going to be incredibly difficult to see how British consumers are not going to be affected. The question for Western Leaders is whether the cost is too high a price?

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