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How restrictions on Russia using SWIFT system can affect economy of country, rest of Europe

SWIFT messaging system is backbone for financing global trade. US, European Commission, France, Germany, Italy, UK & Canada have excluded Russia’s central bank & some other banks from SWIFT.

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New Delhi: In a joint statement Saturday, a group of Western nations imposed another set of sanctions, perceived to be stricter than those imposed earlier, on Russia’s central bank, and some other banks in the country, to exclude them from the SWIFT messaging system. The move is being seen as one which could potentially isolate Russia in international trade.

The countries — which included the United States, European Commission, France, Germany, Italy, United Kingdom, and Canada — agreed on restrictive measures that will prevent the Russian central bank from using its foreign exchange reserves to undermine the impact of the sanctions imposed by the West, so far.

“As a result of Putin’s war on Ukraine, we join with leaders of EU, France, Germany, Italy, UK and Canada to ensure key sanctioned Russian banks are disconnected from SWIFT, impose restrictions on Russian Central Bank, and further identify and freeze assets of sanctioned Russians,” US Secretary of State Anthony Blinken tweeted.

The agreement made Saturday also included forming a task force to identify and freeze assets of Russian oligarchs that includes yachts, jets, cars, and luxury apartments in the West.

But what do these measures mean for Russia’s economy?


Also read: Sanctions imposed on Russia likely to impact bilateral ties, India studying them, says Shringla


What is the SWIFT system?

SWIFT, which stands for Society for Worldwide Interbank Financial Telecommunication, is a messaging system that ensures fast cross-border payments, and has become a backbone for financing global trade.

Founded in 1973, the system is a member-owned cooperative, overseen by National Bank of Belgium and representatives from the U.S. Federal Reserve, the Bank of England, and the European Central Bank, among other major central banks, based in Belgium. According to reports, the system handled a message traffic of 42 million per day last year.

As of today, more than half of all high-value cross-border payment networks use the SWIFT, with linkage to more than 11,000 financial institutions in over 200 countries and territories.

The last time a country was cut off from SWIFT was in 2012. Back then it was Iran against whom the European Union had approved sanctions. The country was later reconnected to SWIFT after the sanctions were removed in 2016.

How will these restrictions affect Russia?

In 2014, former Russian finance minister, Alexei Kudrin, had estimated that the country’s gross domestic product would reduce by five per cent if sanctions were imposed on it because of its annexation of Crimea. Implications of imposing these sanctions spread beyond Russia, as it is a key supplier of energy to Europe and countries rely on the SWIFT system for payments of the fuel.

As of now, there is no estimate that quantifies the impact of the restrictions for Russia’s central bank, but they may limit its ability to use its credit lines with the International Monetary Fund and potentially cut it off from financing of about $20 billion at the Bank for International Settlements, popularly known as the central bank of central banks.

Russian banks that will be affected by the SWIFT restrictions include five lenders that have already been under sanctions. Two of these lenders — Sberbank and VTB Group — account for about half of the country’s banking assets.

Russia has been building its foreign exchange reserves to face such an eventuality. It has reduced its reliance on foreign currency, but its central bank still had over 16 per cent of its holdings in dollars at the end of June 2021, down from 22 per cent a year earlier.

It is expected that these sanctions may not have a lasting impact, as Russian banks may route their payments through China, which has its own payment system and has not imposed sanctions on Russia.

Why it took so long to restrict SWIFT transactions for Russia

The decision to cut off Russian banks from SWIFT seemed unanimous among US and its allies initially, but some member nations like Cyprus and Germany were reluctant to be party to the decision.

The resolve became stronger after the Russian forces launched an assault on Kyiv, fading the hopes of a diplomatic resolution.

The fear was that removing Russia from SWIFT would hurt companies that supply goods to and buy from Russia, especially German companies. Moreover, the country is a major supplier of oil and natural gas to the EU, and finding alternative supplies will not be easy. The US on its part has sought to exempt the energy sector from these restrictions, to prevent surging of oil prices.

(Edited by Poulomi Banerjee)


Also read: Why Indian defence is concerned about Russia-Ukraine crisis — project delivery, lessons China draws


 

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