SWIFT sanctions on Russia: Magic bullet or paper tiger?

Making it harder for Russia to use global banking system seen as vital, yet for years Moscow has weathered sanctions and prepared for the worst.

SWIFT sanctions on Russia: Magic bullet or paper tiger?

Amid growing international anger over Russia's war on Ukraine, economic sanctions have again become a favorite measure of leaders working to discourage war, including one particular banking mechanism that recently made headlines.

"I will not be diplomatic on this. Everyone who now doubts whether Russia should be banned from SWIFT has to understand that the blood of innocent Ukrainian men, women and children will be on their hands too. Ban Russia from SWIFT."

As can be clearly understood from the words of Ukraine's Foreign Minister Dmytro Kuleba, this SWIFT money transactions tool – standing for Society for Worldwide Interbank Financial Communications – has moved quickly to the heart of the sanctions debate, suggesting a possible full ban on Russian access to the international banking system.

Taking a step in this direction, the US, European Union, Britain, and Canada last weekend unveiled new sanctions, including blocking certain Russian lenders' access to the SWIFT international payment system.

‘Emphasis on SWIFT a bit misplaced’

But according to Daniel Treisman, a UCLA political scientist and founder/director of the Russia Political Insight Project, the stress on restricting access to SWIFT may be a lot of ado about nothing much.

"The SWIFT system is essentially a messaging system by which banks communicate about monetary transfers, rather than the system that actually makes the transfers," he told Anadolu Agency.

Although denying access to SWIFT creates problems for banks in the short run, in principle it is not so hard to work around these hurdles, he said.

"Russia has already created its own substitute system, which has been working for internal transactions and could potentially be extended to international transactions," he explained, referring to the System for Transfer of Financial Messages (SPFS), founded by Moscow in 2014.

"So I think the emphasis on SWIFT is a little misplaced."

Blocking particular banks, as the US has done for instance to state-controlled VTB, Russia’s second-largest bank, prevents them not just from communicating but from making transfers in foreign currencies.

According to Treisman, in fact the most serious elements in the recent package of sanctions are those aimed at the Bank of Russia, the country’s central bank.

These sanctions would entail "freezing the assets of Russia’s central bank in foreign deposits and bonds,” he said, calling it a step “that would immobilize a big part of Russia’s more than $630 billion in currency and gold reserves."

Hole in sanctions

Barry Eichengreen, an economist at the University of California, Berkeley, said cutting Russian banks off from SWIFT and prohibiting US and euro area banks from doing business in Russia could significantly strain the Russian economy.

"Not all Russian banks are barred from SWIFT, and not all financial transfers to and from Russian firms are prohibited, at least as yet," he said. "Payment from Western Europe to Russian natural gas exporters is still being made, and the banks and firms most intimately involved in the energy business have been exempted so far."

"That's a hole in the sanctions that will have to be closed, and closing it will be painful for both sides," he warned.

Freezing the foreign exchange reserves of the Russian central bank would prevent it from intervening to stabilize the ruble and from otherwise lending dollars and euros to companies in need, he said.

But the bank “has been moving its reserves from foreign central and commercial banks to the Bank for International Settlements, where they likely will continue to be freely available," he said, referring to a Swiss-based international financial institution owned by a number of central banks. "You can see this movement in recent IMF data."

According to Eichengreen, sanctions can't stop Russian President Vladimir Putin from seeking to take over Ukraine but they can make it more painful for him to do so, encouraging internal opposition to his military adventure.

"So he may ponder a way of limiting his ambitions and declaring victory at the same time. What form those more limited ambitions might take is too early to say."

Can sanctions sway Russia?

Western sanctions will not make Russia change course, according to Kremlin spokesperson Dmitry Peskov.

"The US are fans of sanctions, and the adherence to this practice has spread on to Europe. They probably believe they can persuade us to change our position by means of sanctions. Evidently, this is impossible," Peskov told reporters on Tuesday.

"This is not the first such statement. And yes, the aggressive actions against our country are of an ultra-concentrated nature now. But these actions have taken place before, too," Peskov added.

Russia has been facing Western sanctions since 2014, when it illegally took over Ukraine’s Crimea Peninsula, and as a result, many in the international community question sanctions’ effectiveness in changing Moscow’s behavior.

"I think the sanctions we've had in the last eight years haven't really proven to have worked," Nicholas Mulder, a Cornell University historian who has researched sanctions, told US public media outlet NPR.

According to Mulder, Russia appears to have taken measures to prepare for sanctions and seems to be "better prepared for an initial economic disruption than they were eight years ago."

US President Joe Biden might have better luck changing Russia's behavior by easing sanctions instead of ramping them up, Mulder has argued.

Despite the many doubts about their effectiveness, world leaders have been in favor of using such economic sanctions as a deterrent, rather than going to war.

And if they cannot dissuade Russia from continuing its war in Ukraine, perhaps at least they can help avoid the outbreak of World War III.