SWIFT is about to get real…
Russian banks get the boot from international payment system sparking bank runs across the country
Originally posted on my Power and Markets Substack, please feel free to share and subscribe to my newsletter to get these articles in your inbox!
“The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a secure messaging system to ensure rapid cross-border payments which has become the principal mechanism to finance international trade.”1
The Russia-Ukraine War is witnessing successive escalations of hostilities. Western countries have responded with economic sanctions as a hopeful deterrent. The goal: disrupt the Russian economy sapping Putin of political popularity in the Motherland. In what has the potential to blow open into a wider scale global conflict, one is left to wonder where is the competent diplomacy?
On February 26, 2022, the EU, U.S., UK, and Canada announced the first steps to severing Russia from global trade. The announcement would cut off “a certain number of banks” from the SWIFT system — likely the largest banks within the country.2Distinguishing punitive sanctions from political bluster is becoming exceedingly difficult. The West appears resolved in posturing against Putin’s invasion, yet their reactive policies leave deliberate gaping holes for wealthy Russians to navigate through. The carve outs challenge just how serious their intentions are.
The effects are cascading down to the average Russian, however. While oligarchs have the sophisticated means to evade half-hearted financial sanctions, the Russian middle class is left picking up the pieces. Bank runs across the country are underway as ATM lines drain physical cash from accounts. When markets open Monday, the Ruble is expected to plunge with official international channels having the appearance of closing.
I contend these moves will only amplify hostilities and risk spiraling out of control. World War I began with isolated conflict quickly escalating owing to entangled military alliances. The prospect of a repeated catastrophe is obviously here given NATO member country adjacencies.
Unfortunately, the Ukrainian people are the ones suffering. Putin’s aggressive invasion into Ukraine proper is excused by him as proactive measures guarding against imminent NATO expansion. Whether this is a convenient excuse or not we will never know as it wasn’t removed from the table.
“Again, without going into the specifics of the document, I can tell you that it reiterates what we said publicly for many weeks and in a sense for many, many years that we will uphold the principle of NATO’s open door and that’s — as I’ve said repeatedly in recent weeks, a commitment that that we’re bound to.”
- U.S. Secretary of State Antony Blinken, January 26, 20223
Leaving the door open to NATO expansion is the primary provocation, according to Putin. Where diplomacy needs to go next is challenging that assertion by Russian leadership. The sanctions currently lack seriousness and resolve, projecting to Putin general weakness and hesitation.
The uncertainty will roil financial markets. This has the potential of anteing up tensions and broadening the conflict. Let’s hope cooler heads prevail, but hope is not good stratagem. My concern is these measures will economically cripple Russia, but inevitably back a dog into a corner. Volatility looks to expand and I believe there’s not an appreciation for it. Decisiveness is what is needed, but no one seems eager to address the core issues. Offering piecemeal penalties that will create serious economic disruptions is not the solution.
In the meantime, SWIFT exclusions will spike inflation in Russia. Trade will begin to lock up and may grind to a halt. When goods don’t cross borders, armies will. We need better diplomacy before it’s too late and things expand beyond Ukraine.
