SWIFT’s endurance provides a lesson for tech
Hello, and welcome to Protocol Policy! Today, we’re revisiting the SWIFT sanctions everyone was talking about a few weeks ago to figure out what actually happened. Over in D.C., Janet Yellen called for a “tech-neutral” approach to regulating crypto. And Biden told Amazon to watch out as warehouse unionization efforts have entered the national spotlight.
SWIFT’s lesson for tech
Banning Russia from SWIFT was supposed to be the “nuclear option” of sanctions — at least if you took numerous pundits at their word. I wrote in February that the U.S. would hesitate to hit Russia with a SWIFT ban due to fears of de-dollarization and a cascading economic shock. And yet, weeks after the U.S. and its EU allies executed a partial SWIFT ban, the Russian ruble stands as strong as it did pre-invasion. In fact, the ruble nearly doubled its value relative to U.S. dollars over the course of the preceding month.
The SWIFT sanctions clearly haven’t been as effective as many expected. To understand why, it’s important to take into account the incomplete nature of the SWIFT ban and Russia’s strategic response.
- The SWIFT ban wasn’t comprehensive and left important carve-outs for Russia’s energy sector. The U.S.-EU coalition agreed to ban seven Russian banks from SWIFT. The EU members weren’t able to agree on banning Sberbank and Gazprombank, even though the U.S. had already sanctioned both institutions. The EU resistance likely has to do with Germany’s continued reliance on Russian gas imports; more broadly, 40% of gas used in Europe comes from Russia. Gazprombank and Sberbank serve as critical banking partners for Russia’s energy sector, and Sberbank holds roughly double the assets of any other bank in Russia.
- Russia also imposed currency exchange requirements that bolstered the value of the ruble. Beginning at the end of February, Russia required domestic exporters to convert 80% of their exchange currencies into rubles, thus increasing demand for the currency.
- And Russia’s central bank — still contending with frozen foreign currency reserves — has banned citizens from exchanging rubles for dollars. The Central Bank also banned the sale of foreign currencies and capped U.S. dollar withdrawals in foreign-currency accounts to $10,000 per person. These measures have helped limit the possibility of a bank run, seeing as many Russians would want to shift their rubles to more stable assets.
Some experts say that SWIFT was never that big of a deal in the first place.
- “The SWIFT thing is really blown out of proportion,” Chris Miller, an assistant professor at Tufts University’s Fletcher School of Law and Diplomacy, told Protocol. “What really mattered was the U.S.- and European-blocking sanctions on the banks that are targeted, which make it illegal for Americans and Europeans to transact with them,” he explained.
- And while the ruble has stabilized, Miller suggested GDP might be a better way to measure the impact of the sanctions. He cited estimates that the Russian economy will contract by 10% to 15% this year. The financial measures enacted by Russia in response to sanctions will have “a negative impact on investment in Russia for the foreseeable future,” according to Miller.
- “These are [sanctions] designed not to sanction,” Columbia University historian Adam Tooze wrote in late February. “So long as your energy-related transactions are channelled through non-sanctioned non-US financial institutions, for instance a European bank, you are in the clear.”
This sanctions package is hurting ordinary Russians while allowing the energy sector to have its best year ever. Russia’s energy sector is on track to bring in $321 billion from energy exports in 2022, which represents an increase of over 33% from last year, per Bloomberg. Goldman Sachs predicts this energy surplus could allow Russia to ease the capital controls put in place to stabilize the ruble. Meanwhile, ordinary Russians have seen their standard of living plunge since the start of the conflict.
The limited impact of the SWIFT ban gives the tech sector a valuable lesson on inertia. The ban on SWIFT prompted speculation — including my own — that fintech companies would have an opportunity to fill in the gap with blockchain-based alternatives. While the door hasn’t closed for those companies, the ban clearly didn’t incite a dramatic disruption to the international flow of interbank payments. The saga shows how easy it is to underestimate inertia: It applies to Germany maintaining its energy imports, non-sanctioned banks remaining on SWIFT and international alliances proving resilient through the war. Perhaps because the tech sector is so focused on “disruption,” it’s easy to lose sight of the fact that most things change slowly and only after considerable resistance.— Hirsh Chitkara (email | twitter)
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Thanks for reading — see you Monday!