Punishing Putin Through Swift Is Thorny

The Society for Worldwide Interbank Financial Telecommunication, or Swift, was founded in the 1970s to replace the telex system. It is owned by its members and overseen by central banks. Today, Swift operates in over 200 countries and connects over more than 11,000 banks, financial institutions and corporations. It doesn’t move money itself but is a vital messaging platform that banks use to order tens of millions of cross-border payments and other transactions to each other every day.

But it isn’t an easy switch to flip. While a country’s banks can operate on Swift in ways that comply with their domestic legal obligations and sanctions, the organization doesn’t decide to cut off a financial institution or a country from the network. “Swift is neutral,” according to the organization’s website. “Swift has no authority to make sanctions decisions.” Sanctions laws can conflict from country to country so, because it is incorporated in Belgium, it follows European Union regulations, according to the website. It shut off banks in Iran in 2012 in response to EU sanctions measures.

The politics of these moves aren’t simple, though. Many of those banks were reconnected in 2016 as the EU delisted banks from sanctions lists. Then in 2018, when the U.S. sought to sanction Iran again, some Trump administration officials were reported to be prepared to pressure Swift if it didn’t comply with U.S. laws. Swift restricted certain Iranian banks, which it said was an “isolated event” and “regrettable,” and “taken in the interest of the stability and integrity of the wider global financial system.” Perhaps there will at some point be further U.S. and European unanimity about the shape of financial sanctions in response to President Vladimir Putin’s actions against Ukraine.

There also have been financial-risk and plumbing concerns expressed about cutting off a major economy and commodity exporter. The chair of the Financial Stability Board, an international regulatory body, told the Financial Times that blocking Russian banks’ access to the network could spark a “severe disruption in payment flows.” The primacy of the U.S. dollar in energy markets gives the U.S. vast clout, but it also raises concerns about disruptions of key gas markets. Russian banks may be correspondents for clients in other countries, and non-Russian banks might be transacting on behalf of Russian clients. Fitch Ratings noted a Swift cutoff could “impede repayments of foreign creditors.” Some European banks have sizable lending exposure in Russia.

Big U.S. banks have limited direct exposure to Russia. The country doesn’t rank among
JPMorgan Chase’s
top 20 non-U. S. exposures, for example, and it represented just 0.3% of
Citigroup’s
exposures as of the third quarter. Citigroup already is in the process of exiting consumer banking in Russia as part of a broader exit from several markets.

Still, payments companies have long feared that the underlying system’s role in politics would put them in the middle of conflicts while encouraging national fragmentation in networks. Russia and China have been building their own Swift-like systems. Digitized central-bank currencies or other tokens such as bitcoin could be fast-tracked to play a bigger role in global payments, though it might also harden suspicion of these tools if they help degrade the effectiveness of sanctions.

Russian lenders have rebalanced toward domestic banking since the Crimea annexation in 2014 led to responsive sanctions, and their assets are now 60% funded with domestic deposits, according to research analysts at JPMorgan. But they still face potential needs to convert rubles to a “hard” currency such as euros or U.S. dollars for hedging, managing rate risk or trade, the analysts noted. Sanctions could aim to target that convertibility.

Even without a Swift cutoff, the proposed measures will include sanctioning large Russian banks, which could extend to other kinds of payments. The sanctions in response to Crimea affected U.S. card networks, for example. Since then, digital banking and payments have only grown in variety and importance. Russia might respond with its own measures, though it isn’t yet clear whether its alternative payments networks would be sufficient for its own turn inward.

Whatever happens in the coming days, it is likely that geopolitics by payments is only going to intensify. Banks and payments firms will continue to face new challenges to becoming truly global.

Write to Telis Demos at telis.demos@wsj.com