Cutting off Russia from the international messaging system was both the most draconian action possible while simultaneously being overstated, former SWIFT head of corporate affairs told the UK Treasury Committee.
Speaking at a Treasury Committee hearing examining the effectiveness of Russian economic sanctions, Natasha De Terán, former head of corporate affairs at SWIFT, told MPs that ousting Russia from the SWIFT network was both “really impactful and not impactful at all”.
Western societies announced on February 26 the cutting off of seven Russian banks from the international messaging system that connects 9,000 to 11,000 banks around the world, in a coordinated effort.
The move was described by some as the most draconian form of sanction possible that has paralysed Russia’s economy, whereas others have claimed the SWIFT ban does not have any real impact and that there are ways to work around it.
De Terán told the committee “they are both right”.
There are around 25,000 banks in the world, of which SWIFT connects around 9,000 to 11,000, she said, emphasising that there are many banks that are not connected to the messaging system.
These banks, some of which have been banned in Iran, North Korea and now in Russia, can still send money to any bank in any part of the world, she stressed.
It works because the bigger banks work on behalf of the smaller banks.
If the sanctions target a small bank, the SWIFT ban is not particularly consequential, but taking off a big international clearing bank, or a bank with big domestic capabilities or international clearing, is “very consequential,” she explained.
Although the list of the Russian banks included a systemically important state-owned bank as well as the third-largest privately-owned financial institution in Russia, it left Sberbank off the hook to enable energy trade between Russia and European countries.
Sberbank Europe, which has since declared that it is pulling out of the European market as a result of the sanctions, was the largest bank in Russia and Eastern Europe in 2014, and the third largest bank in Europe.
Although letting Sberbank on SWIFT could bear the risk that it could help sanctioned Russian institutions evade the measures, De Terán stated that if banks “were trying to do something away from the glare of the West, [they] might not want to do it on SWIFT in the first place.”
Banks have been moving money even before SWIFT existed and there are various ways to communicate about payments.
In the historic case of Iran, the only other country ever banned from SWIFT, financial institutions set up bilateral corridors to be able to transact, she explained.
Those not connected to SWIFT can use fax to send payment messages or alternative systems, such as China’s Cross-Border Interbank Payment System (CIPS) which, as small as it is, is seeking to promote the use of yuan in international payments.
With that said, SWIFT, CIPS, or faxes are only the technology that connects the endpoints: the banks.
“You need to be a bank that is willing to [switch to those alternative methods],” De Terán stressed.
“I do not believe there is an awful lot of connectivity to those systems.”
“But if you are an internationally active non-Chinese bank connected to CIPS, are you going to throw in your lot right now into Russian sanctions evasion with all that risk that it might bear for you?”
Although it might not be a significant risk at the moment, if more banks are taken off SWIFT and trade is allowed to continue, it could facilitate the Chinese system or the Russian system to be more intertwined with the global financial system.
“The substitutability of any network doesn’t just lie in the technological platform, it’s also the endpoints.”
“One of the things that the West will have to grapple with at the moment is how much the measures they put in place now encourage the development of these alternatives,” she stressed.
The committee hearing was arranged to investigate the effectiveness and economic impact of the UK sanctions.
“With the world shocked and appalled by Russia’s illegal invasion of Ukraine, time is of the essence to impose meaningful sanctions on the Russian state, businesses and oligarchs. As a Committee, we want to ensure that the economic sanctions already proposed bite hard and we will be looking to identify further effective measures that can be taken.” Hon. Mel Stride MP, chair of the Treasury Committee, said.
Since the large-scale invasion started, the UK, in collaboration with Western allies, has imposed a number of sanctions to discourage Russia from further expansion of its military activities in Ukraine.
These include the asset freeze of individuals and companies belonging to Vladimir Putin’s inner circle, or imposing sectoral financial sanctions which prohibit and restrict specified activities.
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