One of the main sanctions that were imposed on Russia is banning 10 of the country's largest financial institutions accounting for about 80% of the Russian banking sector’s total assets from using the Swift payment system… News that we read everywhere the past couple of days, but what does it mean? SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. It is a global cooperative network among 11,000 financial institutions across 210 countries that was founded in 1973 in Belgium. SWIFT acts as the intermediary between the financial parties involved in a transaction contains the payment instructions of the transaction in a secured and reliable network via 8-11 characters unique code for each institution, which is the widely known SWIFT Code. The National Bank of Belgium along with the G-10 Central Banks around the world; including the US Federal Reserves, the Bank of England, and others act as the overseers of the payment system.
It is not the first time for a country to be banned from using SWIFT; North Korea and Iran were sanctioned before for their activity in nuclear power. Iran, which was the second-largest OPEC crude oil producer, was sanctioned in 2012 to use the system causing a decrease of 1.5 million bbl/d in 2012 compared to a 2.5 million bbl/d in 2011 which is approximately a 39% drop in the country's exports of crude oil in only one year.
Therefore, banning the largest provider of oil and natural gas to the European Union from using the SWIFT payment system means that it will not be able to transfer money abroad; thus, excluding the economy from exporting and importing goods which accounted for 46.083% of its GDP in 2020 according to the latest data of the World Bank. The Russian exports of crude oil accounted for about 22.5 % of its total exports in 2021 of USD 110.2 billion.
One of the early seen consequences of the ban, the USD/ RUB pair, up to date, has moved to an all-time low from USD 84 to USD 104 which accounts for a 24 % decrease in value in less than 24 hours, as seen below in figure (2). The Moscow Exchange and composite index (MOEX) which shows the performance of the 50 largest and most liquid stocks in Russia, has seen a 50 % drop from RUB 3460 to RUB 1690, and closed at RUB 2470 in less than 24 hours before deciding to seize operations for the day, as seen below in figure (2).
Figure 1| Source: Trading View (2022)
Figure 2| Source: Trading View (2022)
Therefore, the Russian Central Bank has announced over the night a 10.5 % increase in interest rates from 9.5% to 20 %, as mitigation from an economic slowdown due to the sanctions that are being imposed on the country.
However, the Russian government can depend on the Chinese Cross-Border Interbank Payments System (CIPS) that was founded in 2015 in China. It enables money transfers using the Yuan. There are approximately 25 Russian banks that already use the CIPS; nevertheless, it is worth mentioning that the Yuan is only used in 4 % of global transactions, leaving the banned countries floundering.
Such a ban is a double-edged sword as it does not only affect Russia but also affects the EU and the US as well. For instance, European banks have around USD 80 billion in claims with banks in Russia; hence, portending a high risk of default if Russian banks decapitalize, besides the urge of finding an alternative source of crude oil and natural gas providers, as the EU imports one-third of its natural gas and more than one-quarter of its crude oil solely from Russia.
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