After the intense battles in Ukraine by the Russian troops, last Saturday the US, EU  and their allies  have decided to impose more sanctions on Russia with the intention to stop Russia from continuing with the attacks on Ukraine.

It has been decided to cut off number of Russian banks from the main international payment system SWIFT and to prevent the Russian Central Bank  from deploying its international reserves, to lessen the effectiveness of the sanctions being imposed. It is estimated that this measure will be curbing the Russian government from over $600 billion (worth of Euro 536 billion) of foreign currency reserves. This might reduce the ability for Russia to make use of its war chest.

Excluding some of the Russian Banks from SWIFT makes it more difficult for them to get access to the financial markets around the world. In fact, this decision has also been considered as a nuclear option. The list of banks being excluded from SWIFT is not yet known; however, this should include the five major lending Russian banks that were already facing sanctions by the international community.

SWIFT Stands for Society for Worldwide Interbank Financial Telecommunication. It is a secure messaging system that helps facilitating the process of cross-border payments, which will ultimately enable international trade. It is based in Belgium and was founded in 1973 and facilitates transactions between more than 11,000 banks and financial institutions around the world.

Banning Russia from SWIFT was not an easy decision to take, as trade and finance always have two parties being involved and the exclusion of Russia from SWIFT will also have an impact on European Economies, especially knowing that the main weakness of Europe is that it is heavily dependent on Russian gas supplies for its energy. In fact at first Germany. Italy and Cyprus were not sure whether such sanctions were to be implemented.

After the hope of a diplomatic resolution diminished and the Russian forces launched an assault on Kyiv all members unanimously agreed to proceed with these sanctions, but they have decided to impose such sanctions on certain Russian Banks in order to make sure that these sanctions will have the maximum impact on Russia and will have less impact on Europe. It has been decided that European businesses would continue to collect their money and to also continue buying Russian Energy.

The impact of the new measures/sanctions being imposed might take some time to show their effectiveness and it is not yet known how severe the impact is going to be especially knowing that the European nations are still dependant on Russian energy.

Russia has also been is considered, as the fifth largest trading partner for the European Union, whilst on the other hand the EU is considered as one of the largest if not the largest trade partner for Russia. The European Union is predicting an increase in the price of gas, and this has been taken into consideration before introducing these such measures.

One should also take into consideration that Russia has been working on its foreign exchange reserves in case it had to face such an eventuality. In fact, it has reduced its reliance on foreign currency from 22 per cent in 2020 to 16 per cent of its holdings in dollars by mid-2021.

One can say that the impact of these sanctions was already felt on Monday morning as the Russian Ruble fell almost 30 per cent against the US dollar and the Russian central bank raised interest rates to 20 per cent in an effort to try to avoid the risk of depreciation  and inflation.

For the time being Russia can still opt to continue with its trading by turning on its own alternative to the SWIFT system called the System for Transfer of Financial Message (SPFS)  which was founded in 2014 by the Russian Central bank, however this is not considered as big and effective as the SWIFT system when it comes to the connection of international banks.  Most of the banks participating in this system are mostly working inside Russia. There is also the fear that in order to minimise the impact of these sanctions, Russia will turn on China, which till now has not imposed any sanctions on Russia, so that Russian Banks will route payments through China which has its own payment system.  Russian Banks can also opt for an alternative system such as emails in order to able to send and receive payment instructions.

Although Russia might have its ways and means to minimise the impact of these sanctions, it is estimated that these sanctions will for sure affect and hurt the Russian economy, with the main intention being that of stopping or reducing the attacks on Ukraine. For this reason sanctioning Russia from the SWIFT system was considered as a nuclear economic weapon, however one should also keep in mind that such sanctions will inevitably be a cost for Europe too.

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