On 24 February 2022, Russian President Vladimir Putin announced a ‘special military action’ against its eastern neighbour Ukraine. Putin’s military action brought unbearable misery on Ukraine killing thousands of soldiers and common citizens and destroyed property worth in billions. The world called it an unjustified and unprovoked act and slapped a set of tough sanctions especially by the USA and EU against Russia that were both diplomatic and economic in nature.
The EU decided to prohibit Russian banks from accessing the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system used by banks and other financial institutions for quick and secure exchange of information.
It is important to mention that SWIFT is only communication tool and not a medium to transfer fund or a payment gateway. The US has not banned Russian banks from transacting with banks from other countries while the EU barred only three Russian Banks from conducting financial transactions. Barring Russia from accessing SWIFT would thus make it difficult but not impossible. The financial communication can be sent via other comparative less secured modes. Delisting Russian banks from SWIFT by the US and the EU needs necessary approval from European Central Bank and US Federal Reserve System.
Russia is already using its internally developed Structured Financial Messaging Solution (SPFS) system since 2015. A wider application of this system would be useful for Russia to bypass the economic sanction.
Options are also open for Russian banks to use Cross-border Inter-Bank Payments System (CIPS) developed by China which has much broader network than SPFS. Moreover, process to link SPFS to CIPS is already underway.
One of the crucial catches in the sanctions announced by the US treasury department is that it exempted eight crucial sectors including energy from its ambit. Later it included oil in the list still leaving gas out of its ambit. Similarly, the EU’s list of sanction also excludes the energy sector. The EU only banned the selling of technology to Russian energy firms. It is unlikely that the US or the EU nations will buy Russian energy in a currency other than the dollar. Thus, it keeps the door open for dollar to flow in Russian economy. Moreover, the US sanction will come in force on 26 March though the EU has implemented all the sanctions it announced so far.
There is a possibility that China may come forward to help Russia as it did in 2014 to cushion its sanction hit economy. China purchased Russian gas worth multi-billion dollars for its energy-hungry economy offering a great relief to Putin, following the trade and financial sanctions imposed in 2014 over his seizure of Crimea from Ukraine. Over the last few years both nations have significantly expanded their trade across various sectors. During 2021, the bilateral trade between them was USD 147 billion which includes agricultural as well as industrial and energy items.
Along with their expanding trade, China and Russia are increasingly using their own currencies to transact. This is helping them to reduce their reliance on USD and exposure to the US and western financial system. Chinese state media reported that China used the yuan to settle 17 percent of the total trade transaction with Russia in 2021.
Though China came to Russia’s rescue in 2014 it will be difficult to repeat this in 2022 owing to its changing geo-political equation with the US and its allies. China is already engaged in a trade war with the US since 2018 which has severely affected its economy. Many countries perceive China as their national threat which forced them to ban several Chinese firms, especially from the technology sector, to operate in their territories. Helping Russia to evade sanctions imposed by the western powers would further weaken China’s relationship with them. Hence China would extend support to Russia only if it wants to risk its own access to the US and the European market. And even it helps; it might be well within limits.
Though there are some possible solutions to evade sanctions, it is more important to announce truce to the war that has already killed thousands of citizens and destroyed property worth billions of unaccounted amounts. The sanctions are perceived as a tool to penalise the economy; however its implications depend on the size and strength of the economy facing the ban. Though the long-term effect of the sanction could take time to unleash, its immediate effect has already hit several economies indirectly around the world. As the world heavily depends on Russia for energy needs it will undoubtedly have serious consequences on the world economy which is yet to recover from the downfall of Covid-19.