SWIFT ban on Russia and why this hurts

Vladimir Putin’s incursion into Ukraine has led to international outcry and condemnation – with China an isolated nation refusing to criticise Russia. The sanctions response has already been somewhat comprehensive from the US and Western allies, but a SWIFT ban for Russia – the veritable “mother of all sanctions” has not been imposed. There are very cogent reasons for this. If a SWIFT ban is imposed, it would halt the huge, regular payments for Russia’s energy supply, as SWIFT is the international payments system. Europe is hugely dependent on energy supply from Russia – which supplies 40% of Europe’s energy needs and cannot afford to be cut off from this supply, as there are few viable alternatives. $700M per day trade in Russian commodities would also be hit if a SWIFT ban were imposed.

Replacing this supply would not only be complex, but is actually not on the cards for now as replacement energy supplies are not adequate. The only solution – and this would be far more long term – would be to find alternative sources of energy. Or – as in the case of Italy – re-establishing coal plants previously closed for environmental reasons. The outcome of the Ukraine Russia crisis is therefore only negative, and Putin’s brinkmanship is looking like it might well have been a step too far. Inevitably, as the world is trying to recover from the COVID-19 pandemic, global recovery is going to be highly challenging in a world already suffering from record inflation levels and a need to increase productivity. Casualties will lead to international condemnation – and economic hardship – the inevitable outcome of the greater uncertainty caused by Russia’s invasion of Ukraine – will end up being easy to pin on Russia for its actions.

Economic sanctions by their very definition bring about economic hardship – and this will be an undoubted, unfortunate cost that ordinary folk in Ukraine, Europe and Russia have to pay. What is all the more worrying is that a SWIFT ban would also cut off Europeans from their winter energy supply – as Russia would not be able to keep up supply if payments via SWIFT were not guaranteed. In the US, which is far more insulated from Russian energy supply than Europe – both Democrats and Republicans are demanding a SWIFT ban for Russia. The UK is another nation not dependent on Russian energy, but it could easily be argued that coal could be re-introduced on a temporary basis – as Italy has proposed – to fill any energy gaps should Russia’s energy supply be cut off if a SWIFT ban is imposed.

One interesting scenario is that Germany has halted Russia’s $11BN Gazprom Nord Stream 2 gas pipeline which runs from Russia to Germany. Former Chancellor Angela Merkel negotiated preferential gas prices for Germany – but its pro-Russia policy engineered by former Chancellor Gerhard Schroder was rudely curtailed by her successor Olaf Scholz in response to the Ukraine crisis on February 22, 2022 when Germany halted the Nord Stream 2 gas pipeline after Russia’s “grave breach” of international law in recognising the Eastern Ukraine Russian-controlled territories of Lohansk and Donetsk. Germany’s move has been hailed a major foreign policy shift after decades of pro-Russia policy.

President Biden has prided himself on a multilateralist and diplomatic approach to foreign policy – in a deliberate departure from his predecessor, former President Trump. But it is precisely this multilateralism – otherwise a formidable policy – which is getting him into trouble now. The EU is finding it extremely difficult to find unanimity amongst its 27 Member States – many of whom have almost total dependence on Russian energy. So a SWIFT ban – effectively cutting off Russian energy from the EU – is highly controversial. Biden is already being criticised by Democrats and Republicans in US Congress for not taking decisive enough action on Russia – and they are calling for a SWIFT ban and sanctions to target Russia’s energy exports.

The problem for Russia is that a solution to a European Union energy crisis if a SWIFT ban is imposed can be found – likely in the form of waiving green constraints temporarily in extremis on coal or other alternatives while “cleaner” alternatives are urgently sought – which would have devastating economic consequences for Russia’s not-huge $1.7TRN economy, lead to a crash in its Ruble currency, economic isolation, and so on. As Mario Draghi, Italian Prime Minister, stated on 25 February 2022 – Europe can no longer leave itself so exposed to Russia energy supply again, and must diversify. After the 2014 Crimea sanctions, Putin has built up some $643BN in currency reserves, and has low levels of debt – but this will not sustain Russia indefinitely. If its trading partners China and Iran are further sanctioned by US secondary sanctions from dealing with Russia – a perfectly feasible and foreseeable outcome – Russia would need to rely on its renowned raw material self-sufficiency.

But without foreign direct investment and access to international financial system, US dollars and the international payments system (SWIFT), we would be back to the status quo of the Cold War – where sustained economic isolation for Russia led to dire economic consequences. Worse still, the inevitable humanitarian and environmental crisis that would inevitably follow Russia’s actions would be incredibly difficult for Vladimir Putin and his government to recover from internationally. Russian people on the ground – in a period of high inflation and – if this crisis is to further drag on economic growth and post-pandemic recovery – would suffer exponentially. Not to mention the humanitarian crisis in Ukraine, energy hardship in Europe and potential environmental crisis due to the need to replace gas with coal – which would always be a stain on Russia’s record.