USA and EU play the SWIFT card

The United States and the European Union have agreed that seven Russian banks will be cut off from the SWIFT payment network. This is the financial “nuclear” weapon to strike the Russian Federation. At the moment, Gazprombank and Sberbank have been spared.

The financial “nuclear” weapon

The Society for Worldwide Interbank Financial Telecommunication, acronym SWIFT, is a company based in Brussels that manages the messaging network of the same name used by most of the banks in the world on which the flow of orders and receipts of financial transactions is recorded. Each bank is associated with a SWIFT security code which serves to ensure that the amount is successfully transferred to the recipient’s current account. You need to specify the code to order international transfers. The United States and the European Union have decided to block access to the network to some commercial banks in the Russian Federation, with the aim of seriously affecting their economy.

The affected banks are/will be:

• VTB Bank: the second bank of the Russian Federation, part of the Russian financial group VTB Group, (former) sponsor linked to Euroleague Basketball.
• Bank Rossiya: “Putin’s personal bank”, involved in the Pandora Papers financial scandal, historically closely linked to the oligarchs and which controls a large part of the Russian media. The bank was already hit by US and EU sanctions after the invasion of Crimea in 2014 and was barred from the EU capital market.
• Bank Otkritie: in 2014 it became the first commercial bank in the Federation with the purchase of 625 billion rubles bonds issued by the oil company Rosneft. The bank used the bonds as collateral to obtain hard currency repo financing from Russia’s central bank and inject liquidity into sanctions-hit Rosneft. In 2017, the bank was hit by a liquidity crisis and was nationalised. The institute was consequently excluded from the EU capital market.
• Novikombank: bank specializing in financing companies in the heavy machinery, automotive, high-tech and hydrocarbon sectors.
• Promsvyazbank: since 2016 under state control and officially designated as a support bank of the Russian defense sector. Clients were asked to sell or withdraw foreign securities and convert or withdraw dollar deposits.
• Sovcombank: it has already been subject to American sanctions since February 25th. His cards are now active only in Russia. The main shareholder of the institution is Sovco Capital Partners with an 86.5% stake. Other shareholders include the sovereign wealth funds of Russia, Saudi Arabia, Qatar and the Russia-China and Russia-Japan bilateral cooperation funds.
• VEB.RF — one of the largest investment companies and the leading development bank in the Russian Federation. Under Russian law, it has the legal form of a non-profit organization.

Exempt banks are:

• Gazprombank: the third largest bank in the country, specializing in corporate & investment banking, retail banking and deposit services. It is controlled by the energy giant Gazprom with a 46% stake. The institute carries out securities trading operations, exchanges foreign exchange, acts as a clearing house and collects payments for gas and oil orders.
• Sberbank: the largest banking group in Eastern Europe, 52.32% controlled by the Central Bank of Russia. In 2014, the bank had already been hit by sanctions from the United States and the European Union. The institution’s European arm has already announced it was leaving the EU capital market after the ECB declared it was at risk of default. According to Eurotower, the European subsidiary and the subsidiaries in Slovenia and Croatia have suffered a drastic deterioration in their liquidity position and there are no measures that can realistically restore this position. The financial assets of the two subsidiaries were transferred to two separate credit institutions in order to guarantee the protection of depositors.

The exemption of the two banks from the exclusion from SWIFT can be traced to two factors. Firstly, it reflects the will not to push the accelerator of sanctions right now. Further sanctions of increasing magnitude are likely to follow as the military escalation increases. A second factor can be traced back to the dossier of Italy’s and Germany’s dependence on Russian gas. The exclusion of Gazprombank from SWIFT would automatically block the possibility of making payments.