Europe and the US are ramping up sanctions against Russia in response to its attack on Ukraine. But many are questioning whether removing some Russian banks from the Swift messaging network will make a difference.

After the Russian invasion of Ukraine in late February, a huge debate sprang up about the impact of sanctions on the Russian banking system. The debate started around blocking Russian banks access to the Swift financial network which, it was hoped, would effectively stop the use of roughly $630bn of foreign reserves.

Swift is not a payments system — it’s a messaging system. It brings together a co-operative network of over 11,000 financial institutions across more than 200 countries, so that global trade can transact and settle seamlessly with trust through their secure network. If a bank is kicked out of that network, then it loses access to global trade.

Initial measures were aimed at seven domestic Russian banks. Former Russian finance minister Alexei Kudrin estimates that blocking these banks’ access to Swift would shrink Russia’s gross domestic product (GDP) by 5% per year. However, a complete block of the banking industry would have a much greater impact than this. It is estimated that there are 291 Russian members of the Swift network today, representing 1.5% of Swift messaging flows. That makes Russia the sixth-largest member country globally and equates to about $800bn worth of payments a year — or over half of Russian GDP, which was $1.5tn in 2020.

Russia’s largest and third-largest lenders, Sberbank and Gazprombank respectively, were not included in the banned list — not unsurprising as they are the main payment channels for the Russian oil and gas that EU countries are reliant upon. For example, half of Germany’s homes are heated with gas, with two-thirds of that coming from Russia. No wonder Germany is unenthusiastic about throwing Russia’s banks off the Swift network.

However, by not including all Russian banks in the ban, the excluded ones can still trade via Swift if they send messages through the ones that are included. This is what is popularly call ‘nested accounts’, where a second bank trades and transacts on behalf of the one that is sanctioned.

Domestic rails

Of course, Swift is not the only organisation involved in payments in Russia. For example, many celebrated Visa and Mastercard’s decision to halt card payments in and out of Russia. Many news headlines cited the fact that these two card processors handle 90% of all debit and credit card payments outside of China, and hailed their announcements as another significant blow to the Russian economy.

However, over the past seven years, Russian banks have built a very effective domestic payments network called Mir. Cards from Russian banks now cover the adult population — 100 million users — and allow card payments domestically. Mir does not issue cards, extend credit, or set rates and fees for consumers; rather, it provides financial institutions with Mir-branded payment products that they then use to offer credit, debit or other programmes to their customer.

More importantly, with a Mir card, you can send and accept payments from India via RuPay and China via WePay and Alipay.

So, the action of Visa and Mastercard only affects Russians who travel overseas which, in the current climate, is most likely to be wealthy Russians who have foreign bank accounts anyway. Even then, the day after the announcements of the US card operators, Russian banks announced an alliance with China UnionPay.

This should not comes as a surprise, as in 2014 the Mir payment system was formalised as a specific government programme, when Visa and Mastercard threatened to stop their cards being used by Russians after the Crimean occupation.

Do financial sanctions work?

In one of the most comprehensive studies on sanctions by the Petersen Institute of Economics, covering over 170 case studies through a century of sanctions, found that they are unsuccessful two-thirds of the time. Among the most notable failures was the US trade and travel embargo on Cuba, which lasted for more than five decades and achieved none of Washington’s policy objectives. It certainly hurts a country’s success, but it does not stop the actions directed by the leaders, as seen in Iraq, Iran and North Korea in recent years.

Furthermore, in light of the support of China and other Asian economies, Vladimir Putin sees the future of Russia as serving the East and not the West. If that’s the case, severing links to Swift and cutting off energy to Germany may be cards he can play. The worrying part of that is that it means he is not that concerned about threats from the US and Europe.

Finally, even if sanctions are implemented with hostility, Russia still has more cards to play, such as cryptocurrencies for asset movements and networks like Ripple for international trade.

The world is changing fast. Swift, Visa and Mastercard’s sanctions seem like strong things to wave at Russia but, in reality, it is just part of a mix. The challenge is to find the right mixture to stop a war.


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