Choking Russia's Banks Would Be the Ultimate Sanction

By Carol Matlack September 01, 2014

Photograph by Anadolu Agency/Getty Images

Russian President Vladimir Putin in Belarus on Aug. 27

The European Union is poised to hit Russia with a fresh round of sanctions, amid mounting evidence of direct Russian military intervention in southeastern Ukraine. EU leaders said on Aug. 31 after a weekend summit meeting in Brussels that they’ll decide within a week on possible new penalties against Moscow. Meanwhile, Ukrainian officials are meeting with Pro-Russia separatists in Minsk on Monday for preliminary peace talks.

So far, the sanctions imposed on Russia don’t seem to have caused major disruption to its $2 trillion economy. Now, some are urging the EU to wield what may be the most powerful sanctions weapon at its disposal, the same one it used against Iran in 2012: Locking Russia out of the SWIFT interbank payments system.
Belgium-based SWIFT is a secure messaging system used by more than 10,500 banks for international money transfers. Without it, Russian banks and
their customers couldn’t readily send or receive money across the country’s borders, wreaking havoc with trade, investment, and millions of routine financial transactions. SWIFT has to comply with EU decisions because the organization is incorporated under Belgian law.

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When sanctions imposed in 2012 blocked Iran’s banks from using SWIFT, the economic impact was “profound,” says Mark Dubowitz of the Washington-based Foundation for Defense, which has lobbied the U.S. government to take a hard line against Iran. “We know it has been painful,” Dubowitz says, because in talks with the West, “Iranian negotiators have systematically demanded that this is one of the sanctions that should be relieved first.”
The EU, though, seems reluctant to take such a step. Although Britain has been pressing for it, German Chancellor Angela Merkel said on Aug. 31 that there was no discussion of a SWIFT ban during the weekend summit. Merkel and other leaders said they were considering possible measures targeting Russia’s energy and finance sectors.
Even if Russia were locked out of SWIFT, it could still find ways to move money across borders. Russian banks could set up direct transfer arrangements with foreign financial institutions. Russia might even try to create its own payments system as an alternative to SWIFT, which is a private, non-profit cooperative of member banks. Deputy Finance Ministry Alexey Moiseev said on Aug. 27 that the Russian government has already drafted legislation to set up a new bank-transfer system.

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Most big banks outside Russia, however, “would be very reluctant” to help Russia bypass SWIFT, Dubowitz says. They could face reprisals from the U.S. and EU, or might even be expelled from SWIFT, since the cooperative’s bylaws forbid members from participating in activities that could harm it.
One major reason for Europe’s hesitation could be the risk of reprisals by Moscow, says Chris Weafer of Moscow-based consulting firm Macro Advisory. “Blocking Russia from the SWIFT system would be a very serious escalation in sanctions against Russia and would most certainly result in equally tough retaliatory actions.”

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Matlack is a Paris correspondent for Bloomberg Businessweek.