In the wake of the Russian invasion of Ukraine, Western nations still can’t agree on whether to kick Russia from SWIFT, the international payments communication system which processes $5 trillion a day. That measure has been characterized by pundits as the “nuclear option” of financial deterrence. But even with the Russian military potentially hours away from seizing Kiev, there's no consensus on deploying that particular sanction.
Some Western leaders, including U.K. Prime Minister Boris Johnson, pushed for immediate action on SWIFT. On a Thursday call with leaders of G7 nations, Johnson and Canadian Prime Minister Justin Trudeau were reportedly in agreement on this front. A spokesperson for Johnson added, however, that Britain would “work with allies to shut off access to the SWIFT payment system.” The statement suggests that the U.K. would only move forward if a consensus develops.
Germany, Cyprus and Italy are believed to be among the Western nations hesitant to pull Russia’s SWIFT access, The Guardian reported based on diplomatic sources. An unnamed EU diplomat told the paper that SWIFT might be needed “for things which are very relevant for some EU member states.” Germany, for instance, has only committed to temporarily suspending development of the Nord Stream 2 natural gas pipeline.
U.S. President Joe Biden argued that the sanctions announced today already exceeded those targeting SWIFT access. “It is always an option,” Biden said of SWIFT, “but right now that's not the position that the rest of Europe wishes to take.”
With the initial deterrence upside of SWIFT sanctions seemingly gone, the question has become whether going through with the ban would be worth the considerable risks.
First, there’s the general risk of provoking an economic shock when markets are already reeling from news of the initial invasion. The U.S. used its political influence to kick Iran out of SWIFT in the past, but Russia is a much larger economy and there’s no precedent for how markets would react. It would almost certainly send energy prices higher, worsening the domestic inflation crisis in the U.S. and EU.
As a longer-term consideration, the U.S. might not want to kick Russia from SWIFT because it would steer nations to alternative systems. SWIFT is an important tool used to uphold the international monetary system centered around the U.S. dollar. The vast majority of transactions on SWIFT are settled in dollars; by contrast, only around 2% of settlements occur in China’s yuan. Blockchain-based alternatives such as Ripple could erode the centrality of SWIFT over time, but for now, the system is critical to the international flow of credits and debits.
Russia and China have obvious incentive to push alternatives to SWIFT, but even U.S. allies might gravitate towards alternatives if Russia is kicked off. The EU developed its own alternative system after the U.S. put a premature end to the Iran nuclear deal. China has likewise developed its own system, CIPS, with more than 613 indirect participating banks, but daily payments volume in August stood at around 1% that of SWIFT.
Arriving at a consensus on SWIFT sanctions is important for the U.S. because, if it proceeds unilaterally or only with the approval of a few close allies, nations such as India, Italy and Germany could steer their national banks toward alternative payments communication systems. If these SWIFT alternatives gained traction, the U.S. wouldn’t have the kind of leverage it holds now over Russia. The question is whether actually using that leverage is worth the risk.
Climate TRACE's data show emissions at the facility-level.Image: Climate TRACE