The Impact of Western Financial Sanctions against Russia Cannot be Underestimated

On February 27, the European Union, the United Kingdom, the United States, and Canada issued a joint statement banning some Russian banks from using the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system, touted as the “financial nuclear weapon”.

SWIFT was established in May 1973 and is headquartered in Brussels, Belgium. Based on the standardized system of codes, its main function is to securely transmit international financial information data. It is used by more than 11,000 financial institutions in over 200 countries and territories to send secure payment orders. Nearly 40 million messages with instructions to transfer trillions of dollars were sent each day over the platform, making it the most important payment messaging network in the world, by far. By the end of 2021, USD, EUR, GBP, and RMB accounted for 40.5%, 36.7%, 5.9%, and 2.7% respectively in the payment market of the SWIFT system.

SWIFT is nominally a neutral utility, with its main board members being EU countries, and would not have had to comply with U.S. sanctions laws and regulations. However, SWIFT handles the vast majority of global money transfers, and the proportion of which is settled in USD is more than 40%, giving the U.S. ample leverage to turn it from a commercial tool to a political one. After the September 11 attacks in 2001, the U.S. gradually strengthened its control over the SWIFT system in the name of anti-terrorism, and officially began to monitor the data of the SWIFT system in 2011. SWIFT, CHIPS (Clearing House Interbank Payments System), and Fedwire together form the basis of cross-border transactions in USD. The SWIFT system mainly deals with the transmission of information flow, while the CHIPS is a global fund transfer system operated by the United States and is responsible for the clearing of USD transactions across borders. The Fedwire system on the other hand, handles the real-time settlement of USD transactions in the United States.

If a bank in a country is removed from the SWIFT system, it means that that bank can no longer receive and transmit international financial information via SWIFT. This does not mean that the removed financial institution cannot operate because of this, but it can only operate with inefficient and primitive systems, such as barter or cash transactions, which are cumbersome and costly. This is like using old telegraph system to communicate in the 5G era, where smartphones are ubiquitous. It can be deemed that the key loss that SWIFT sanctions will inflict on a country is efficiency. Therefore, financial institutions that are excluded from the international financial settlement system will be in a situation of isolation.

What will be the impact of the SWIFT sanctions imposed by many western countries on some Russian institutions on the market? Research by Chinese economist Ren Zeping’s team believes that SWIFT sanctions against Russia will have the following impacts: (1) It will exacerbate global energy and food shortages through trade channels. Russia is an important exporter of oil, natural gas, metallic minerals, and food in the world. In 2020, Russia’s crude oil exports accounted for 11.1% of the global total, ranking second in the world; about 40% of the EU’s natural gas imports come from Russia. Removing Russia from the SWIFT system is equivalent to cutting off the energy supply channel, which will exacerbate energy shortages and rising inflation. (2) Removing Russia from the SWIFT system will lead to the spread of global panic and threaten global systemic financial security through the channels of debt exposure and risk appetite. (3) It has little impact on China. As the scale of the China-Russia trade in 2021 only accounts for 2.42% of China’s total imports and exports, and China-Russia trade can be settled in RMB, which can bypass the SWIFT system, the direct impact on the trade channel is limited. However, the country still needs to be alert to indirect impacts such as financial market volatility. Studies have also suggested that if Russia were excluded from SWIFT, it could still use the RMB for settlement, boosting the currency’s international status.

The above views on the impact of SWIFT sanctions are basically conventional judgments. However, from the perspective of ANBOUND team, some of the above judgments may need to be revised in terms of the broader scope of sanctions. In the face of the comprehensive sanctions imposed on Russia by Western countries, especially the financial sanction that removes Russia from the SWIFT system. The possible impact on China should be considered as well.

For example, domestic companies should pay attention to whether the U.S., Europe, and other countries have imposed so-called “secondary sanctions” against Russia. On July 27, 2017, the U.S. Congress revealed a number of Russian entities that were included in the sanctions list when it passed the new sanctions. Chinese individuals and companies that have business dealings with these Russian entities will also be included in the U.S. sanction list, which will result in fines and the loss of opportunities to interact with U.S. individuals and enterprises, the most important of which is the ban on using USD for interbank payments. As the U.S. and Europe have imposed sanctions on Russia and many Russian banks were included in the SWIFT sanctions list, the country should pay close attention to the “secondary sanctions”.

In the case of Iran, for example, although China does not agree with the sanctions imposed by the U.S. on Iran, the vast majority of Chinese companies that have business dealings with Iran are affected by the sanctions in practice. In fact, Huawei has been sanctioned for having business relations in Iran. More significantly, Chinese banks could also be prevented from paying USD to any of the Russian entities on the sanctions list, and would even be required to conduct due diligence on all Russian bank transfers to rule out the risk of sanctions. On the top of that, the insurance industry will also be similarly affected, with insurers or indemnity associations likely to shirk claims or guarantees involving Russia. If Chinese companies comply with the sanctions, they are in effect participating in the sanctions against Russian companies; failure to do so could expose Chinese companies to U.S. sanctions. This round of Western comprehensive sanctions against Russia involves finance, investment, science and technology, trade, tourism, aviation, and other fields, which will not only deal a devastating blow to Russia’s relevant fields, but Chinese companies involved in these fields may also face major risks and need to avoid them as early as possible.

ANBOUND Research Center (Malaysia) is an independent think tank situated in Kuala Lumpur, registered (1006190-U) with laws and regulations of Malaysia. The think tank also provides advisory service related to regional economic development and policy solution. For any feedback, please contact: malaysia[at]