U.S. And Allies To Remove Some Russian Banks From SWIFT, Sanction Central Bank

Topline

The Biden administration and Western allies committed Saturday to a series of tough new sanctions on Russia to choke its financial system, including cutting off “selected” Russian banks from the international financial-messaging system SWIFT, in retaliation for the invasion of Ukraine, they said in a statement.

Then-presidential candidate Joe Biden at a press conference on August 7, 2019 in Burlington, Iowa. … [+] (Photo by Tom Brenner/Getty Images)

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Key Facts

The Russian banks will be expelled from SWIFT to ensure that they “are disconnected from the international financial system and harm their ability to operate globally,” according to the statement from the U.S., European Union, France, Germany, Italy, the United Kingdom and Canada.

The Russian financial institutions that will be disconnected are those that have already been sanctioned by the international community, the German government said—the five Russian banks that have been sanctioned, including state-backed Sberbank and VTB, make up roughly half of Russia’s banking assets.

In addition, the Russian Central Bank will be targeted with measures to restrict its ability to use its international reserves, according to the statement, which did not go into detail on how this would be accomplished.

The U.S. and its allies agreed to limit the sale of so-called “golden passports” that allow wealthy Russians to become citizens of Western countries and move assets overseas.

They also said they are committed to levying sanctions and other financial penalties on more Russian elites and their family members, and would establish an international task force to find and freeze the assets of targeted companies and individuals.

Crucial Quote

“Sanctioning Russia’s central bank is likely to have a dramatic effect on the Russian economy and its banking system, similar to what we saw in 1991,” Elina Ribakova, deputy chief economist at the Institute of International Finance, told Bloomberg. “This would likely lead to massive bank runs and dollarization, with a sharp sell-off, drain on reserves — and, possibly, a full-on collapse of Russia’s financial system.”

Key Background

Cracking down on the Russian Central Bank would severely affect Moscow, which has $630 million in reserves ranging from gold to bonds to deposits. The Wall Street Journal reports Moscow needs the reserves to stop the sharp fall in the value of its currency since it invaded Ukraine. The decision to kick Russia out of SWIFT came after support grew for the move in Europe on Saturday, with Italy and Germany stating they were in favor. SWIFT is a Belgium-based international messaging system that connects 11,000 financial institutions in more than 200 countries and territories, delivering 42 million messages per day last year that coordinate transactions. Russia would still be able to conduct banking transactions with other countries without SWIFT, but it would be much more labor-intensive and expensive. It could also have negative consequences for key trading partners of Russia, including European countries, which could have difficulties paying for the imports of Russian oil and gas they rely on.

Contra

Major U.S. banks, including JPMorgan and Citigroup, had sought to persuade U.S. lawmakers and the Biden administration not to restrict Moscow’s access to SWIFT, Bloomberg reported. They warned that the measure could encourage the development of an alternative to SWIFT, reducing the dollar’s supremacy in the world economy. They also argued that encouraging the use of alternative systems would make it difficult for Western countries to track suspect financial transactions.

Tangent

The only other country blocked from SWIFT is Iran, which was cut off in 2012 as part of international sanctions over the country’s nuclear program.