EU pulls trigger on Russia Swift ban

The European Union has announced it will exclude seven Russian banks from the Swift messaging system but stopped short of including those handling energy payments.

However, there are those questioning the impact of the measure.

Russia’s second-largest bank VTB, Bank Otrkitie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank and VEB will each be given 10 days to wind-down their Swift operations.

SWIFT is the dominant messaging system underpinning global financial transactions and the EU, the US, UK and Canada moved on Saturday to block certain Russian banks from it but had not said which would be hit.

The US and Britain had been pushing for the SWIFT ban, but some in the euro zone had taken some persuading given the region’s reliance on Russian energy exports.

Removing Russian banks from Swift, a measure seen as drastic and unlikely only a week ago, is one of the most powerful tools Western authorities have used to punish Russia for what Moscow describes as a “special operation” in Ukraine.

Will Removal from Swift Have an Impact?

However, as Alistair Milne, a payments expert and professor at Loughborough University, explains in an FT article it may not have an effective impact.

Swift is a messaging system, not a payment system. Unlike the payments themselves, messages can be sent by many different routes.

In the case of Russia, banks could use its own transfer system, the SPFS (Sistema Peredachi Finansovykh Soobscheniy), which was established after the 2014 invasion of Crimea by the Central Bank of Russia.

This system is increasingly used by domestic banks for cross currency payments within the Eurasian Economic Union – made up of Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan – and Russia claims it accounted for 17% of Russian international payments messages in 2020.

It is also used by some Russian bank subsidiaries in Germany and Switzerland.

Swift, SPFS, and CIPS

Russia could also use the Cross-Border Interbank Payment System, or CIPS, network created in 2015 by the People’s Bank of China for the purpose of cross-border payments in renminbi.

CIPS features indirect participants in many countries. All these systems – Swift, SPFS, and CIPS – have the same architecture based on the global payments messaging standard ISO20022.

Rerouting through these alternative systems is simply “plug and play”, provided you have a member bank willing to plug you in. Mastercard and Visa systems could also be used for payment transfers.

At a pinch they might even use WhatsApp if they are confident in its security from hacking.

A senior EU official said of the ban that the banks were chosen based on their connections to the Russian state, with public banks already sanctioned after Russia’s annexation of Crimea in 2014.

“All these banks that we have listed under Swift… they are all based on their connection to the state and the implicit connection to the war effort. We have not gone for a blanket ban across the whole banking system,” the official said.