A new ban has been placed by the European Union on Wednesday that prohibits seven Russian banks access to SWIFT. This global messaging network that facilitates bank transactions and allows for the transfer of funds between countries, including Canada and the United States. The move is aimed at disrupting Russia’s ability to do business across borders.
The new ban follows an agreement forged on Saturday between Canada, the European Union, the United Kingdom and the U.S. to disconnect “selected Russian banks” from SWIFT. The severe economic sanction drew hesitation from some European countries due to its potential to cause energy flow disruptions in Europe and because it would hinder Russia’s ability to pay its outstanding debts. The coalition decided that Russia would impose a wider ban on SWIFT as a reprisal for its attacks in Ukraine.
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“We will hold Russia to account and collectively ensure that this war is a strategic failure for Putin,” leaders of the EU, U.K., U.S. and Canada said in a joint statement announcing the initial SWIFT ban over the weekend.
The country leaders did not specify the extent of the ban or the types of institutions that it would apply to at the time. So on Wednesday, the EU released the list of seven financial institutions that won’t be able to use SWIFT, including VTB, the country’s second-largest bank. Here’s what those blocks mean for Russia and the rest of the world.
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SWIFT: Why?
SWIFT is also known as the Society for Worldwide Interbank Financial Telecommunication. It’s a messaging service for financial institutions and banks around the globe. It doesn’t shuttle any money itself, but provides instruction messages for just how to give and receive specific funds.
SWIFT was established in 1973 and has been an integral part the global trade flow. SWIFT members receive their instructions as secure messages immediately. This allows transactions to occur quickly. According to 2020 data, SWIFT is used by more than 11,000 financial institutions around the world. They send approximately 38 million SWIFT messages per day.
The system’s access is crucial for overseas business. Therefore, the seven Russian banks barred from SWIFT cannot access international markets. This will make it more difficult for individuals and businesses to borrow or invest money beyond national borders and receive cash for exports as well as pay for imports.
There are workarounds—the banks could use other messaging systems, such as apps or email. But those transactions likely won’t be as secure, and could end up being slower and costing more. China has a cross-border interbank payment system (CIPS) that is an alternative to SWIFT. CIPS, however, is smaller with only around 1,300 participating financial institutions, the majority of which are indirectly.
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Why are these banks important?
These seven banks, which were identified by the EU, give an insight into the potential effects of the sanctions on the countries in the alliance.
VTB is not the only affected bank. The EU also stated that Bank Otkritie (Bank Otkritie), Novikombank/Promsvyazbank, Bank Rossiya, Sovcombank, and VEB are all other banks. The banks have 10 days from now to stop sending SWIFT message before being completely blocked.
Notably missing from that list are main banks that handle Russian oil and gas transactions, such as the country’s largest bank, Sberbank, or Gazprombank. Sberbank was included in the U.S. sanctions list by President Joe Biden last week. However, because EU countries continue to buy Russian oil and natural gas, the SWIFT ban doesn’t directly affect this.
Reuters reports that EU officials selected the seven specific banks due to their Kremlin connections. As a consequence, the SWIFT removal may frustrate state officials’ dealings with other countries.
Any entity in which more than half of the banks’ ownership is also exempted from this ban.
Continue reading: Why Sanctions on Russia Aren’t Targeting Oil and Gas
It is not enough to stop here
These seven banks may be just a start.
At a news conference on Wednesday, Ingrida Simonyte from Lithuania stated that the countries that have implemented the SWIFT ban are discussing expanding sanctions to include more Russian financial institutions.
The Ukrainian government demanded that Russia was completely banned from SWIFT immediately after the invasion. That has been called the “nuclear” option, as it would essentially sever the country’s ties to the rest of the world—and leave the global markets reeling.
When asked about banning Russia from SWIFT last week, Biden had said it was “always an option.”
