The Case for SWIFT Sanctions Against Russia
There are good reasons to be wary of using SWIFT sanctions. But there are better reasons to push for them, right now.
Recent events have revealed an unexpected Ukrainian gift for stirring and often insightful rhetoric. “Russian warship, go fuck yourself,” will go down in the annals of military history, a fitting modern response to “Go tell the Spartans that we lie here, obedient to their commands.”
But for me, the most personally moving message out of Ukraine came from a tweet by Ukraine’s Minister of Foreign Affairs, Dmytro Kuleba.
The bar for banning Russia from SWIFT, the international communication system that banks use to send payment instructions, has always been very high. The United States has a unique position in the world economic order—a position from which we reap enormous benefits—because it is perceived as an honest broker. Over the last 20 years or so, we’ve started to leverage that position to achieve various American policy goals. While SWIFT itself is not subject to direct U.S. control—it’s run by the G-10 central banks, based in Brussels, and subject to EU law—SWIFT has no choice but to honor American sanctions, just like everybody else. That’s why the Iranians were cut off from the SWIFT system in 2012 and again in 2018. But if used too often, banking sanctions can create an incentive for the rest of the world to create a parallel banking system and reserve currency that doesn’t depend on the United States.
We have overreached before. For example, FATCA—the Foreign Account Tax Compliance Act—was a huge overreach and a serious mistake. FATCA requires foreign banks, wherever they are, to report any customer with an American connection to the IRS. Yet rather than make the entire world help collect American taxes, a great many banks responded by simply refusing to do business with Americans or companies that had an American connection.
So banning Russia from SWIFT could potentially have a similar effect. Kicking countries America doesn’t like out of SWIFT creates an incentive to develop a new system that excludes the United States. And this system wouldn’t just appeal to “bad actors,” either.
To some extent, this sort of transformation is already underway. Both Russia and China have developed alternatives to SWIFT though they have, as yet, limited international reach and are not interoperable.
Also, there are other ways to transfer funds internationally. Iran’s central bank, having been cut off from the system twice in the last decade, has become fairly adept at SWIFT work-arounds. And then there are cryptocurrencies, which are entirely outside the system.
Nonetheless, at least for now, it is impossible to effectively run a modern economy without access to the SWIFT system.
There’s also the problem that completely banning Russia from SWIFT would inflict economic pain on the West as well as on Russia. Banning Russia would make it effectively impossible to pay for Russian energy and Europe imports quite a lot of its energy from Russia, especially natural gas. Austria, Italy, Slovakia, and Germany would be most affected by a shut-off. In the winter, almost 30 percent of Germany’s total energy supply consists of Russian gas. Because there is some elasticity in the system, cutting off Russian gas would result in higher prices rather than empty pipes and serious physical hardship. Nonetheless, that’s why Biden announced that the current sanctions package, “is specifically designed to allow energy payments to continue.”
Those are serious concerns.
And yet, even taking all of this into account, the bar for banning Russia from SWIFT has been cleared. We should do it. Now.
We need to ban Russia from SWIFT, not because it is in America’s interests, but because it is in defense of the liberal world order that the West has spent the last century trying to build.
We did not build this international system to make it easier to make money selling widgets to the Lebanese. We built the system because it creates peace and prosperity. And the former is more important than the latter. International trade is an important tool for raising everyone’s standard of living. But ultimately, preventing things like the Russian invasion of Ukraine is the primary objective.
Usually, prevention of aggression is best accomplished through integration and engagement. In this particular case, given Putin’s behavior, it will be best accomplished through Russia’s expulsion from the world order that it wishes to both benefit from and ignore.
If you think that Putin will be satisfied with Ukraine, I have a piece of Sudetenland to sell you. Russia—and other similarly-minded regimes—are watching our reactions closely while they consider their next moves. Do you think Putin will believe that the West will start a nuclear war in defense of the Baltic states if Germans can’t be bothered to wear an extra sweater in defense of Ukraine? When Russia has a right to “territorial integrity” and Kalingrad is being “threatened by NATO” and blah, blah, blah? Irredentism is an excuse, not a reason, and there is always another imaginary wrong to be righted. Russia has already threatened Finland and Sweden with military consequences if they move to join NATO. Does anyone believe this is “just” Ukraine’s problem?
Direct military action in support of the Ukrainians is not practicable right now, without risk of spreading the conflagration. But that is all the more reason we should spare no effort to provide Ukraine with non-military support. And at the very top of that list is expelling Russia from SWIFT.
As I write this, the EU has agreed to partially eject Russia from the SWIFT system with the goal of punishing Russia while not undermining the EU’s ability to pay for Russian energy. The mechanism is still being worked out but this will probably be accomplished by allowing some Russian banks to remain in the system—or by creating a system that only permits energy-related payments.
Locking the Russian central bank out of SWIFT is a big step and could seriously affect the price of the ruble, but “targeted” SWIFT sanctions aren’t going to have the same effect on the Russian economy as a blanket ban. Certain Russian banks will suffer, but the ones still connected to the system will more than pick up the slack. (And Russians know all about money laundering.)
There is also an unsavory fiddling-while-Rome-burns aspect to a relentless focus on home heating bills while Ukrainians are fighting and dying, outnumbered and outgunned. Inflicting economic pain on Russia is important—and so is sending the message that the West will defend the liberal world order even if it costs us something.
Ukraine's Minister of Foreign Affairs was correct. This is the West’s “Never Again” moment, when all our pieties and pronouncements are put to the test in a way they have not been for 80 years.
We will stop Putin because Putin will not stop on his own. The only question is how much damage we will allow him to do first. The bitter lesson of the 20th century is that leaders like Vladimir Putin cannot be appeased, only confronted, and that the cost of delaying confrontation increases geometrically.
If banning Russia from SWIFT will help defeat Putin now, then it will be a laughably small price to pay.