Saturday, 28 January 2023

SWIFT has yet to disconnect Russian banks from network

5 min read

By Foo Boon Ping

Despite widespread media reporting of US and Western sanctions on seven Russian banks, SWIFT has yet to disconnect any of them from its network. It will do so on 12 March after it received legal instruction in pursuant of EU Council Regulation (EU) 2022/345 of 1 March 2022.

In an updated message to the banking community posted on its website on 2 March, the global financial messaging platform SWIFT stated that it will comply with EU Council Regulation (EU) 2022/345 of 1 March 2022 to remove the seven Russian banks under US and Western allies' sanctions on 12 March.

It said, "As previously stated, we will fully comply with applicable sanctions laws. To this end, in compliance with the legal instruction in EU Council Regulation (EU) 2022/345 of 1 March 2022, we will disconnect seven designated Russian entities (and their designated Russia based subsidiaries) from the SWIFT network. This regulation requires us to disconnect the identified entities on 12 March 2022, and we will do so accordingly.

In an earlier statement on 1 March, SWIFT said that it was engaging with the authorities to understand which entities will be subject to the sanctions and will disconnect them once it receives legal instruction to do so.   

On 26 February, the US Biden Administration bit the bullet to bar part of the Russian financial system from  SWIFT. The escalation of Russia’s attack on Ukraine had hastened its decision. The White House announced that leaders of the European Commission, France, Germany, Italy, the United Kingdom (UK), Canada, and the US, later joined by Japan, are committed to "ensuring that selected Russian banks are removed from the SWIFT messaging system. This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally." 

The joint press statement also stated that the leaders are committed to "imposing restrictive measures that will prevent the Russian central bank from deploying its international reserves in ways that undermine the impact of our sanctions".

This more severe measure which the US and Germany had resisted earlier for their wider impact on the international banking and financial system was precipitated by the escalation of Russia's attack on Ukraine as its troops advance towards Kyiv and other Ukrainian cities.  The leaders "are resolved to continue imposing costs on Russia that will further isolate Russia from the international financial system and our economies. We will implement these measures within the coming days," the White House statement read.

As an independent bank-owned cooperative that provides a common financial messaging utility, SWIFT by itself does not impose or carry out financial transactions that are subject to sanctions. However, as a company incorporated under Belgian law it must comply with related European Union (EU) regulations, as confirmed by the Belgian government. Additionally, it is obligated to support its member banks' compliance with applicable domestic and international laws, including sanctions. There is already a precedent of SWIFT complying with such sanctions to remove banks from its network. 

In March 2012, in compliance with international sanctions against Iran, SWIFT was required under EU Regulation 267/2012 to terminate services to EU-sanctioned Iranian banks. In a statement then, the former CEO of SWIFT,  Lázaro Campos, said "This EU decision forces SWIFT to take action. Disconnecting banks is an extraordinary and unprecedented step for SWIFT. It is a direct result of international and multilateral action to intensify financial sanctions against Iran.” As the EU is a party to the current Russian bank sanctions announced with the US, it will have the force of law to effect SWIFT's compliance. 

In the wake of the attack, Russian financial institutions are facing a barrage of sanctions from the UK, US as well as the EU member states and partners. The cumulative actions will also directly impact banks and FIs in countries that have significant exposure to Russia and its related interests. Data from the US Treasury shows that on a daily basis, Russian FIs conduct about $46 billion worth of foreign exchange (FX) transactions globally, 80% of which are denominated in US dollar. 

The US Treasury’s earlier action against Russia’s two largest lenders, Sherbank and VTB, which make up more than 50% of total industry assets will impact global correspondent banking flows, and by extension the ability of European and US companies and banks to process payments for Russian counterparties. The US Treasury’s imposition of correspondent and payable-through account sanctions on Sberbank and full blocking sanctions on VTB will likely send ripples across global FIs. According to these directives, U.S FIs are required to close any correspondent payable-through accounts and reject any future transactions including any payments processed in US dollar once it hits a US FI. Blocking sanctions have also been imposed on three other major Russian financial institutions; Otkritie, Novikom, and Sovcom. 

To read the SWIFT message to its community, click here.

To find out how the SWIFT ban will impact the Russian and international banking and financial systems, click here.

To read the White House joint statement in full, click here

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