The European Union on Wednesday formally excluded seven Russian banks from the SWIFT payment system as part of the bloc’s latest sanctions over Russia’s attack on Ukraine.
“Today’s decision to disconnect key Russian banks from the SWIFT network will send yet another very clear signal to [Russian President Vladimir] Putin and the Kremlin,” European Commission President Ursula von der Leyen said in a statement, adding that the latest sanctions are the largest ever to be enforced against any country in the EU’s history.
The measure, taking effect on March 12, excludes two of Russia’s biggest institutions, Sberbank and Gazprombank, because they handle most of the payments for oil and gas, which EU countries are still buying from Russia. The EU relies heavily on Russia for oil and gas and about 40 percent of gas consumption in the 27-member bloc comes from Russia.
Expelled institutions added to the final list, which was unanimously adopted by member states on March 2, include the country’s second-largest bank VTB, Bank Otrkitie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank, and VEB. The seven institutions have a 10-day transition period to wind down their SWIFT operations, the EU said in its official journal.
Russia’s VEB said it was largely focused on domestic projects which were unaffected. For overseas-related businesses, it would use SPFS, a messaging system developed by Russia’s central bank.
Sovcombank said SWIFT would not impact it because other sanctions had already blocked its ability to make overseas payments. Promsvyazbank said it was prepared for the disconnection from SWIFT and it would not have a significant impact on the bank’s operations.
Removing banks from SWIFT, headquartered in Belgium, is a measure seen as drastic and unlikely just a week ago and is one of the most powerful tools Western authorities have used to punish Russia.
SWIFT, or the Society for Worldwide Interbank Financial Telecommunication, allows easier communication for 11,000 banks in 200 countries to ensure payments can cross borders securely and quickly from one bank and end up in the account of another bank. About 50 percent of Russian banks are connected to SWIFT, the second-largest number of users after the United States, according to the Russian National SWIFT Association.
The interbank messaging network is the backbone of the international financial transfer system and in February alone, it sent 385 million messages. On a daily basis, SWIFT processes transactions worth billions of dollars.
Without SWIFT, Russian banks and the country’s central bank are effectively blocked from operating on a global scale, which means an added risk of a domino of defaults from issuers and the impossibility of conducting the most basic international operations.
Only three countries have been banned from SWIFT: Iran since 2012, North Korea, and now Russia, albeit partially, as oil and gas exports, as well as other key commodities, remain in the system.
However, Russian banks may bypass the SWIFT system and use other alternatives, mainly through a parallel system in China called CIPS, or the Cross-Border Interbank Payments System, which facilitates transactions in yuan. According to CIPS, at least 25 Russian banks conduct yuan transactions through their system.
Using CIPS and other direct or indirect tools to bypass SWIFT has been an alternative for Iran and North Korea but doesn’t solve the problem of access to reserves of the central bank nor does it truly mitigate the impossibility of conducting global transactions. The yuan is only used in 4 percent of global currency transactions, according to the Bank for International Settlements.
Daniel Lacalle and Reuters contributed to this report.