The decision to exclude seven Russian banks and their subsidiaries from the SWIFT financial messaging system is hitting the ruble hard —but Russia's economy isn't the only one feeling the impact. And the ripple effects are likely to continue.
On March 12, the seven major banks, including VTB Bank PJSC and Bank Rossiya, will be shut out of the Society for Worldwide Interbank Financial Telecommunications system, better known as SWIFT. It's a move that Western leaders didn't take lightly; French Finance Minister Bruno Le Maire called the prospect of fully excluding Russia a "financial nuclear weapon."
To allay the potential effects on the global economy, including energy markets, Western leaders opted to shut out only seven Russian banks, allowing key players such as Sberbank PJSC to continue using SWIFT because of the role they play in receiving payments for Russian oil and gas.
Still, even before the sanctions take effect, their impact is already being felt in Russia, the European Union and to a lesser extent, the United States.
What is SWIFT?
The SWIFT system is a crucial component in global financial transactions because it is the leading provider of secure financial messages, experts say.
"It allows banks around the globe to securely and quickly communicate regarding cross-border payments," explained Andy Krider, manager of international operations for BOK Financial®.
SWIFT serves about 11,000 member banks in 200 countries and territories. In 2021, an average of 42 million messages were sent—per day, he noted.
And it's not just payments that rely on SWIFT, Krider said. Those secure financial messages also include trade-related transactions, letters of credit, items regarding collection and securities confirmations, he said.
The messages are in template-based formats, so people know what each field means even if they are in different countries and speak different languages.
Sanction hits Russia hard
After the EU's March 2 statement that it would bar the seven Russian banks from using SWIFT, the news rippled through the global economy. Russia, of course, experienced the bulk of the short-term negative effects: Moody's Investors Service dropped Russia's credit rating six notches to "junk" status. Meanwhile, the ruble plummeted to a record low against the U.S. dollar.
Although Russia prepared for potential sanctions by moving their currency reserves out of the U.S. dollar and the euro as much as it could, even the partial exclusion from SWIFT makes it difficult to access funds, said David Maher, manager of international sales and trading for BOK Financial.
For one, it devalued the ruble, which limits Russia's ability to trade in international markets, he said. Russia has $630 billion in foreign exchange reserves, held to ensure that it has backup funds if the ruble devalues quickly. "Basically, the SWIFT sanction froze their access to those reserves to protect the currency and it devalued more than 50 percent," he explained. "Additionally, it ties up their cash and their ability to finance the war."
Outside of Russia, most of the negative impact is being experienced in the EU, which depends on Russia for goods, particularly energy, Maher said. The U.S. has less direct trade with Russia than the EU, but it is still experiencing some inflationary effects in an already high-inflationary period, he said.
Long-term effects remain unclear
For the U.S., the biggest effect might not be the more immediate impacts of the SWIFT sanction itself but rather how quickly Western leaders were able to shut out Russia from using much of its currency reserves, according to Maher and Krider.
Following World War II, countries started pegging their currency exchange rates to the U.S. dollar, adopting it as the official reserve currency. Today, the recent economic sanctions on Russia have effectively stopped the Central Bank of Russia from conducting any transactions in U.S. dollars and accessing any of its reserves that are held in dollars or in the U.S.
"To be able to do that—to ostracize and cut off a nation completely from the rest of the world at such a quick pace—is pretty incredible. It shows that there's a lot of leverage in the dollar being the reserve currency," Maher said.
As a result, other nations, especially those that are not U.S. allies, likely are questioning their dependency on the dollar and the euro, he continued. One key figure going forward will be China, which has $1 trillion in U.S. Treasuries. Given how swiftly the U.S. was able to immobilize Russian central bank assets that are held in the U.S., China may fear that the U.S. someday will put a lock on their Treasury assets, Maher explained.
China and other nations may look at alternatives to having the majority of their central bank reserves in the U.S. dollar—such as holding it in gold or "stablecoin," which is cryptocurrency backed by a reserve asset. "However, these are things that are going to take years to happen," Maher said.
More immediately, the recent economic sanctions on Russia are likely sending a message to other nations considering acts similar to Russia's invasion of Ukraine, he said. "Maybe they will think twice before doing something like this," he said.