The west has a dilemma when dealing with Russia following the invasion of Ukraine this week. So far this week, measures taken to isolate Russia’s economy by the U.S., U.K. and other countries likely will do little to sway the actions of Russia’s president Vladimir Putin.
But even harsher efforts could backfire, especially on the wellbeing of European economies.
The first issue is that sanctions rarely work to shift behavior. I wrote about it here earlier this week citing examples of Venezuela, Iran and Cuba. If that isn’t enough consider the fact that Russia was already being sanctioned by the west before this week’s invasion.
Nevertheless, governments are hell-bent on sanctions as a meaningful action. If nothing else they do show the Kremlin how displeased the west is feeling right now. They also have the advantage that sanctions don’t immediately put NATO troops at risk.
However, there is now talk in Europe and the U.S. of taking the most severe action of excluding Russia from the global SWIFT payments system. The idea is that if Russia can’t have access to incoming hard currencies such as dollars, pounds and euros, then surely its economy will surely get crippled.
That’s correct. Russia’s economy would see huge problems, at least initially. However, soon enough the country would engage in workaround solutions.
- Cryptocurrencies, such as Bitcoin, could allow the country to receive and send money.
- China may decide to offer the Kremlin, and the rest of Russia, banking services.
- It’s also true that Russia has vast foreign exchange reserves and very little debt. In other words, the country is probably able to weather a financial storm for a while.
Over a longer term these ripple effects will dilute any impact on the Russian economy.
But the real and compelling reason to not shut Russia out of the SWIFT payments system is that doing so would likely also hobble Europe’s economy. Europe relies heavily on Russia for imports of energy including natural gas and oil. While the oil can quickly get sourced from other countries, the same is not true of natural gas. And natural gas is vital to Europe’s energy infrastructure.
Put simply, for the foreseeable future Europe will need to continue receiving its energy from Russia. That also means it will need to keep paying for that energy.
If Russia is shut out of the SWIFT system, then it’s going to be far harder for Europe to send payments to Russia for the imported energy.
How will it work? It’s hard to say.
It’s unlikely that Europe will send planeloads of cash to Moscow to pay for natural gas. Also unlikely is that Europe’s governments will embrace blockchain technology or cryptocurrencies to make payments. Doing so would undermine their national currency.
Another idea is there could be an energy carve out for the SWIFT ban, meaning banks would be allowed to transact with Russia but only for the purchases of energy.
Would that work? Probably not.
Most banks are already drowning in a sea of bureaucracy. Nuanced differences about what is and isn’t allowed make matters more fraught inside the compliance department. I worked in three financial services firms and the legal department tends to be cautious to an extreme. If things have a tenth of one percent chance of going wrong then the lawyers say no.
Its for that reason that most bank officials will likely just decide to forget any “energy carve-out” and simply refuse to do any business with Russia.
That also means it’s going to be hard for Europe to get more energy from Russia, and in turn Europe’s economy will suffer. That’s particularly relevant to Europe’s largest economy, Germany, which is phasing put its nuclear power and pushing for renewables such as wind and solar energy. It needs the natural gas to bridge the gap until it has enough of those new energies.
