01 Mar 2022

Financial sanctions against Russia can be tightened further

Russia’s SWIFT exclusion could be expanded by a block on correspondent banking relations and a complete ban on exports and imports

The financial sanctions imposed on Russia in the wake of the Ukraine conflict vary in severity, but they can be further intensified. Thus, Russia’s exclusion from the SWIFT (“Society for Worldwide Interbank Financial Telecommunication”) payment information system could be supplemented by a blocking of correspondent banking relationships with Russian banks, including the Russian central bank, as well as a blocking of real economic imports and exports based on financial transactions.

This is the assessment of an academic task force around the Leibniz Institute for Financial Market SAFE and the Peace Research Institute Frankfurt (PRIF) regarding the sanctions recently imposed by the European Union together with the United States, Canada, and the United Kingdom against Russia due to the invasion of Ukraine. In combination, these individual measures constitute further steps toward a comprehensive sanctioning strategy in the West’s relationship with Russia.

According to the SAFE-PRIF team, if SWIFT were excluded alone, Russian banks could find alternative communication channels to instruct payments from banks abroad, such as via fax and email. “This would be less reliable and more vulnerable to fraud, but payments would still be possible,” says SAFE Director Jan Pieter Krahnen. Since Russia and China have already developed their payment information system, a SWIFT exclusion of Russia could mean the loss of universality of the SWIFT system in the longer term.

Correspondent banks and import-export flows represent other possible sanctions targets

According to the researchers, financial sanctions against Russia could also directly target correspondent banking. This would prohibit banks in Europe from doing business with some or all banks in Russia. Flanking secondary sanctions would be conceivable “if, for example, credit institutions that help a bank in the sanctioned country circumvent the imposed restrictions lose their operating license in the EU,” adds Loriana Pelizzon, Director of SAFE’s Financial Markets Research Department. The blocking of interbank transactions would apply also to the Russian Central Bank, making foreign exchange transactions almost impossible.

Ultimately, the closure of a gas pipeline or the suspension of coal imports would automatically bring the flow of payments from these transactions to a halt as a further tightening, regardless of a SWIFT protocol or correspondent banking relationship. This would then directly cut off real economy import-export flows. “In principle, the thumbscrews can be tightened even further for the Russian economy,” the SAFE-PRIF team summarizes.

Download the SAFE Policy Letter No. 95

Scientific Contact

Prof. Loriana Pelizzon, Ph.D.

Director Research Department "Financial Markets"