The West cannot isolate Russian banks due to global impact

The West has not done everything possible to block Russia’s access to SWIFT

From February to May 2022, the United States and the European Union repeatedly decided to block some Russian banks’ access to SWIFT – but spared those processing international payments related to oil and gas.

Indeed, Russia is a major energy exporter and abruptly cutting off access to all its banks would have far-reaching global repercussions.

“There would be a lot of collateral damage that would affect non-Russian banks and other banks in the international banking system,” Alex Capri, a lecturer at the National University of Singapore, told Business Insider.

The international banking system is interconnected. Multi-party trade finance moves along complex supply chains as products move from supplier to final buyer.

“If you paralyze the entire Russian banking system, other banks in the world will also suffer the consequences, because they finance trade and other commodities,” said Capri, who described the cut of the access from all Russian banks. banks as the “nuclear option”.

However, if things go “really bad”, as in the case of a rapid expansion of the war in Ukraine, the West could “absolutely” redouble its efforts and close SWIFT’s Russian banks, added Capri, who was the regional head of international trade for KPMG. and customs practice in Asia-Pacific and former international trade specialist with the United States Customs Service.

But ultimately, we may not reach such a stage.

“The Russian economy is in great difficulty”

Despite the West’s frustration with how the Russian economy still appears to be holding up, the sanctions finally appear to be bearing fruit.

This is partly due to secondary sanctions. The West has tightened its restrictions against companies in third countries who still do business with Russia.

So while Russia has managed to hang on to its economy so far, it is in “very deep difficulty” in the medium term, Richard Portes, professor of economics at London Business, told BI School.

Portes cited the decline of Russia’s “natural trading partners” – those geographically close to the country – as a major stumbling block.

“Russia does not trade with Europe, so the opportunities, the possibilities for profitable and reasonable trade are very limited,” Portes told BI.

Although Russia has managed to redirect most of its oil exports from Europe – previously its largest market – to India and China, such a move comes with costs, including lower sales prices and logistical challenges.

“These alternatives cannot adequately, effectively, efficiently and productively replace trade with Europe,” Portes said.

Human capital and investments are also fleeing due to the brain drain to Russia and Western restrictions on investment and trade.

“In five years, you’re going to see a truly disastrous slowdown in the Russian economy,” said Portes, who called for stricter enforcement of sanctions.

Russia cannot create foreign exchange reserves

One of the main reasons why the Russian economy is unlikely to hold up is the limited nature of its reserves.

“Russia can compensate for the decline in revenues from exports of natural resources using its gold and foreign exchange reserves, as well as the effect of decreasing imports,” wrote Alexander Kolyandr, a financial analyst, in a published article in April for the Carnegie Endowment for International Peace. 9. “But reserves are not infinite and there is a limit to the contraction of imports.”

Portes agreed with this position.

“Barring a big increase in the price of oil or some other windfall, they would have big problems financing their imports over the next couple of years, in the short term,” Portes said.

Reflecting Russia’s financial isolation, the country has limited options other than the Chinese yuan for its reserves, Russia’s Central Bank said in a report released in March.

In April 2022, the governor of the Russian central bank, Elvira Nabiullina, warned Russia’s reserves can’t last forever.

“An important problem is that they lack foreign exchange reserves and it is impossible to create foreign exchange reserves,” Portes added.