[OPINION] The banking and financial system as a weapon of war in the Russian-Ukrainian crisis
All this news about Russia’s invasion of Ukraine has rightly made people nervous and scared. Some see signs of a possible world war, with tensions in Europe spilling over to other parts of the world. In fact, the violation of Taiwan’s airspace by nine Chinese aircraft on the same day as the Russian invasion was seen as an indication that a similar move may soon be taken by China in its bid to reclaim Taiwan.
As expected, the Russian incursion into Ukrainian territory was immediately condemned by several countries. These countries, led by the United States and the EU, warned Russia that its invasion would not go unpunished. Sanctions were threatened to be imposed on Russia.
Since the much-criticized Russian action was military in nature, some observers expected counter-military measures to be launched by the United States and its allies. Thus, images of tanks, missiles and fighter jets have been conjured up in the minds of those observers who believe that a military counterattack is necessary to stop the Russian invasion.
What is interesting, however, is that the sanctions implemented so far by the United States and its allies have not been military in nature. Rather, they were sanctions involving or affecting the banking and financial system. The United States has made it clear that it has decided to impose these financial sanctions as a punitive measure against Russia.
US President Joseph Biden said access to the US financial system by Russian banks and senior officials and oligarchs has been restricted. This means they will no longer have access to the US dollar, which is the de facto global currency. This will negatively affect Russian import and export trade, as these cross-border transactions are highly dependent on the use of US dollars for payment and settlement. Meanwhile, Russian officials and oligarchs could see their assets and investments in Western countries frozen or difficult to move or liquidate.
Discussions are also underway to remove Russia from SWIFT. British Prime Minister Boris Johnson is the strongest supporter of the move among Western leaders. Political commentators called this decision a “nuclear option”.
SWIFT is the acronym for Society for Worldwide Interbank Financial Telecommunication. As its name suggests, it is primarily a messaging system. Founded in 1973 and based in Belgium, SWIFT replaced the telex used by banks and financial institutions to send secure messages and payment orders. There are now over 11,000 financial institutions using SWIFT and in 2021 it was estimated that 42 million messages were delivered through this system every day. Since it is an email system, some would call it the “Gmail of the World Bank” or the group chat of financial institutions.
It therefore appears to be a harmless operational tool used by banks. In fact, in banks and other financial institutions, operations staff are the most knowledgeable about how SWIFT works. And yet, this innocuous operational tool is now also considered a powerful weapon of war, “the nuclear option”, as some experts would call it.
Although no real money passes through SWIFT, messages sent via SWIFT are essential for banks in the execution of payment and settlement transactions. So removing Russia from SWIFT will immediately cut off Russian banks from this “financial institutions group chat”. This will in turn prevent the transfer of cash, whether entering or leaving Russia, and prevent the settlement of transactions. This will have a negative impact on the import and export of Russian oil and gas, as payments for such transactions can no longer be processed via SWIFT.
In 2014, it was estimated that Russia’s GDP would shrink by 5% in one year without SWIFT. The impact on the Russian economy would therefore be substantial and immediate.
And therein lies the power to use the banking and financial system as a weapon of war. Its harmful effects on the country subjected to this type of sanctions would be serious and immediately felt. He can bring the country to its knees without sending an armada of tanks and fighter jets into the territory of the rogue state. It’s the equivalent of punching someone in the wallet. Since no real army is sent into enemy territory, bloodshed and casualties on the part of the sanctioning country are avoided.
The use of this weapon of war, however, has its drawbacks. Most important is the fact that its ill effects will be felt not only by the political leaders and elites of the wandering state, but also by its people. When the sanctioned country is brought to its knees, it takes its own people with it. Therefore, the use of this weapon requires a balance between the need to make it effective and the desire to show compassion to the innocent citizens of the country.
Another possible downside is the politicization of what would normally be considered a “neutral public service”. SWIFT, as mentioned earlier, is primarily an operations tool used in payment and settlement transactions. Its members rely on this tool knowing that it is mainly used for commercial and not political purposes.
In fact, they have done this before with Iran being banned from SWIFT to prevent it from pursuing its nuclear ambitions. The use of the SWIFT withdrawal threat against Russia this time will confirm the suspicion that this operational tool has indeed been weaponized. This may cause other countries to configure their payment and settlement system outside of SWIFT to prevent detection and retaliation. In fact, China and Russia have done this before, but have not yet succeeded given that the members of the systems they have put in place are quite small compared to SWIFT.
The interdependence of the global financial system has enabled political leaders to use the banking and financial system as a weapon of war. This interconnection, however, can also be an effective instrument of peace. This can be a powerful incentive for countries to avoid wars, as these violent adventures will inevitably lead to the collapse of financial markets and other negative economic effects.
So far in this Russian-Ukrainian crisis, we have already seen stock and bond markets scare and commodity prices skyrocket in anticipation of all-out war. The effects of a war can prove too costly, making peaceful negotiation and diplomacy between countries with opposing interests much more desirable than a war of attrition. – Rappler.com
Roberto L. Figueroa is a lecturer in banking and finance law at UP College of Law. He is also a graduate of Harvard Law School with a specialization in international finance.