The EU, US, UK and Japan disconnected several Russian banks from the Swift network and sanctioned the central bank. But is that enough? Russia could circumvent sanctions.
According to experts, the exclusion of Russia from the Swift international banking communications network does not have to lead to complete financial isolation in the medium or long term. Because Russia expected sanctions from the West and prepared accordingly. There are a number of ways that Russia could resort to reducing the effectiveness of sanctions.
Since then, Russia has taken precautions and built its own payment network with its neighboring countries: SPFS, a system that, although not as sophisticated as Swift, works on a very similar principle.
Exclusion from the Swift system would mean some disruption to the Russian economy, but not stagnation. 400 Russian banks are already connected to the system. And neighboring countries such as Belarus, Venezuela, Iran and Turkey have also expressed interest in using the system in the past.
“Of course, Russia’s exclusion of Swift is unpleasant, but it is not dramatic or deadly,” said the chairman of the Russian parliament’s Committee on Financial Markets, Anatoly Aksakov. International money transfers also existed before Swift.
There is also the Chinese Swift alternative: CIPS. Last year, China doubled the amounts transferred through the network daily to $50 million. While that’s significantly less than the $400 billion that switches sides daily through Swift, it clearly shows the potential.
And China has been promoting for years to be more independent of the Swift system. Excluding Russia from the network could give a new impetus to these movements.
Before invading Ukraine, Putin was looking for partners. Russia has strengthened relations with China in recent months in particular, for example through a long-term gas supply contract or intensified trade relations, for example with wheat exports.
Before the Olympic Games, both statesmen publicly showed their solidarity. Putin’s project is also interesting for China: the country sees Taiwan as part of China, the international community contradicts China’s position and emphasizes Taiwan’s independence. Therefore, China is likely to keep a close eye on Putin’s actions.
It could help Putin, for example, with indirect payment transactions through China or with the supply of high-tech products. However, as the conflict escalated, China publicly withdrew. At the UN Security Council, the country abstained from voting on a resolution calling on Russia to leave Ukraine.
The more the West isolates Russia on the international stage, the more distance China is likely to seek. The country is unlikely to want to risk doing business with the Western world.
Putin could also circumvent sanctions with cryptocurrencies. Russia could switch to classic cryptocurrencies or try to link the country to the new China digital currency e-Yuan (eCNY), says Philipp Sandner, an economist at the Frankfurt School of Finance and Management and one of the leading experts in the field of digital currencies.
“In the short term, alternatives to crypto assets are like Bitcoin and Ethereal and e-Yuan are still more theoretical in nature,” Sandner said. “Companies in Russia or anywhere else in the world cannot hold, send or receive bitcoins.” In the medium term, however, this could be very different. “In a batch it can be done in six to 12 months. But you won’t be able to do that in a few days.”
Ross S. Delston, an anti-money laundering compliance expert, believes that Russia has been preparing for financial sanctions for some time. “If the Russians decide, and I’m sure they already have, not to use any currency other than crypto, they can bypass almost all sanctions,” he told CNN.
Mainly Russian billionaires and oligarchs are to be expected to switch to crypto assets to bypass any financial blockade, crypto expert Timo Emden agrees. “In the short term, Bitcoin and Co offers a suitable vehicle to park assets and thus protect them from sanctions,” says Emden.
Difficulties with the e-yuan
Sandner sees bigger hurdles to switching to the Chinese digital currency, which is being used for the Winter Olympics in China was introduced: “The digital e-yuan so far has only been about the payment transactions Domestic. Until now, the focus has not been on connecting people and companies from abroad.”
According to Emden, Russia could even step up efforts to create its own digital currency. “It is not without reason that Vladimir Putin has recently signaled tolerance towards Bitcoin and company,” the expert said.
The United States and Europe are likely to further increase their regulatory efforts regarding Bitcoin and Co in the future. “If Russia is successful in using crypto assets to participate in the real economy despite a potential delisting of Swift, there is a risk of a global regulatory shock,” says Emden.
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