How much have the West's SWIFT sanctions affected Russia?
Published: May 16, 2022 02:44 PM Updated: May 16, 2022 02:38 PM

In February 2022, the conflict between Russia and Ukraine further escalated. In order to put pressure on Russia, the US and Europe imposed more than 10,000 sanctions on Moscow. Among them, the most extreme measures included cutting off the connection between SWIFT and some Russian banks. In this way, the US and Europe tried to restrict Russia's financing capacity, and cause domestic financial, or even political turmoil in Russia.

On March 2, 2022, Western countries announced the sanctions list, cutting off seven of Russia's 359 banks from the SWIFT system from March 12. Meanwhile, the SWIFT ban also applies to some of the subsidiaries owned by these seven banks. The SWIFT sanctions immediately had a multilayered impact on Russia:

First, the sanctions caused a run on the sanctioned banks. Due to being cut off from the SWIFT system, the financial transactions required by the customers of the seven Russian banks for normal economic activities were unable to be carried out through foreign exchange, and the financial communication required for economic activities could only be done in cash. In particular, many small and medium-sized enterprises did not have enough liquidity as a buffer, leading to the interruption of cash flow. The demand for cash in Russian society has increased significantly over the short term, and the seven Russian banks that have been sanctioned have suffered different degrees of pressure from customers seeking withdrawal of funds.

Second, the sanctions triggered turmoil in Russian capital markets. Demand for foreign exchange surged, and the ruble plummeted; investors sold stocks, and the Moscow stock market crashed, forcing a stop on trading. On the one hand, Russian residents and enterprises were worried about the instability of the ruble exchange rate, and the demand for foreign exchange has surged in a short period of time; on the other hand, Western financial institutions took the opportunity to suppress the Russian capital market.

Third, domestic and international payments of Russian banks have been paralyzed, and economic and financial activities became restricted. The flow of funds for customers of the sanctioned Russian banks was also restricted, leading to supply chain disruptions in related areas. The slowdown in domestic and international payments and the increase in transaction costs led to a shortage of goods, rising prices, and further boosted inflation expectations, resulting in a decline in income and living standards, with serious consequences for Russia's economy and society. The international trade, investment, and debt repayments for Russian companies have also been affected, forcing Russia to default on its debts, and a large number of foreign companies withdrawing their capital and exiting the country.

The Russian government was forced to take a variety of emergency measures, including raising the deposit rate to 20 percent, asking companies to sell 80 percent of foreign exchange to the central bank, prohibiting the carrying of foreign currency out of the country, and implementing controls on overseas payments.

At the beginning of the sanctions, the blow to Russia was indeed significant. However, after two months, the effect of the sanctions has failed to meet the expectations set by Western countries. The exchange rate of the Russian ruble has returned to or even exceeded the level before the sanctions, the bank run has basically disappeared, and the performance of the Russian capital market has stabilized. Although the domestic and foreign economic activities of various Russian institutions have been affected to some extent, they are still operating normally.

Why did the "financial nuclear strike" fail to achieve the desired effect? It's believed that there are multiple specific reasons. First, Russia has prepared and responded to SWIFT sanctions well. Second, due to the constraints on the interests of the EU and other parties, the scope of the SWIFT sanctions against Russia this time was limited. Third, the strong demand for Russian energy constrained the effect of Western sanctions.

This is the first time that SWIFT sanctions have been applied to a major economy, and it is also a major event in the history of international finance. Unlike Iran, North Korea and other countries, Russia has a larger economy, more complex trade structure, closer financial ties with European and American countries, and deeper integration into the global financial system. After being sanctioned by SWIFT, Russia's own resistance is strong, limiting the impact of Western actions.

The SWIFT sanctions were a "double-edged sword." Although the impact on Russia is serious, Russia has made certain preparations. Therefore, the impact of the sanctions on Russia is far less than expected by Western countries. Not only that, but also caused certain losses to Western countries that have economic relations with Russia.

The US and European countries are planning a new round of stronger SWIFT sanctions. The new sanctions list is likely to include more financial institutions. In addition, there are plans to add a section on energy sanctions. In this way, the sanctions against Russia will have multiple superimposed effects, which will in turn cause a more serious blow to Russia's economic and financial development.

Russia is well aware of the predicament it is facing, and is trying to build its own financial system and financial infrastructure and take various active measures to break the Western sanctions and end its dependence on the international financial system dominated by the US, and finally achieves the goal of "changing the world order dominated by the US."

Western countries take advantage of SWIFT's dominant position in the international financial system, weaponize it, and abuse the public good in the international financial field to attack other countries, resulting in falling trust in SWIFT and the emergence of more alternatives. At present, some countries have developed several alternative systems similar to SWIFT. In the future, the international payment system may be built on multi-system coexistence and regionalization, which will also accelerate the process of "de-dollarization" on a global scale.

The author is an associate research fellow of the Institute of Russian, Eastern European and Central Asian Studies under the Chinese Academy of Social Sciences.