Russia’s increasing use of the RMB and connectivity with China’s international payment system will struggle to mitigate the fallout of international sanctions.
“Apply this economic, peaceful, silent, deadly remedy and there will be no need for force.” Following World War I and the subsequent creation of the League of Nations, President Woodrow Wilson used these words to describe the impact of sanctions. Certainly, times have changed.
Following the 2014 invasion and annexation of the Crimean Peninsula, Russia was the target of many such sanctions. And now, following a full-scale invasion into its neighbor Ukraine beginning on February 24, Russia has once again been pummeled with coordinated sanctions from the United States and the European Union, among other nations. The United States’ sanctions included export controls, direct sanctions on military and political targets, and financial sanctions against two of Russia’s largest banks: Sberbank and VTB Bank. Edward Fishman, the former Russia sanctions lead from the Obama administration, was quoted saying, “I was part of the team that designed sanctions in 2014, and this is far beyond what we contemplated.” As Russian troops have continued to pour into neighboring Ukraine, though, it can only be that Woodrow Wilson’s optimism on sanctions failed to apply to Russia.
In response, on March 2, the European Union played what has been touted as a trump card: banning seven major Russian banks from the SWIFT payment messaging network. According to the announcement, VTB Bank, Bank Otkritie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank, and VEB Bank had seven days to wind down their use of SWIFT from the time of the announcement.
The Society for Worldwide Interbank Financial Telecommunication, to give SWIFT its full name, is an organization that oversees the world’s leading international payment messaging system. While SWIFT does not directly handle clearing and settlement procedures itself, it is responsible for delivering messages on how payments should be given and received, and it is used by over 11,000 financial institutions globally. A SWIFT ban on Russian banks essentially prevents them from conducting cross-border transactions – unless they wish to communicate by clunky email or telegram.
In the past, Russia’s former finance minister forecast that excluding Russia from SWIFT would cause its GDP to shrink by 5 percent. So, how have things changed? Can Russia’s increasing use of the RMB and connectivity with CIPS mitigate this magnitude of an economic fallout?
In response to Western sanctions on Russia following the invasion of Crimea in 2014, Russia established SPFS, a regional alternative to SWIFT. The Russian central bank holds that there are more than 400 participants on the network. While most of these member banks are located within Russia, many can also be found spread across the former Soviet Union. By the end of 2020, the platform conducted communications for approximately one fifth of all domestic bank transactions.
