Throwing Russia out of SWIFT if it invades Ukraine may not be the nuclear option


At a congressional hearing on Tuesday, the chairman of the Senate Foreign Affairs Committee fired a shot across the bow at Russia as it rallied troops near Ukraine’s borders: invade Ukraine and we will destroy your economy.

“I want to be crystal clear to those listening to this hearing in Moscow, Kiev and other capitals around the world: A Russian invasion will trigger devastating economic sanctions like we have never seen before,” said Senator Bob Menendez.

The warning reflects growing concern in Washington that Russia is preparing its forces for a second invasion of Ukraine – one that could be far more bloody and protracted than in 2014. However, US President Joe Biden ruled out the possibility of a US military operation in Ukraine from Ukraine, it also underscored how sanctions have become the main weapon of choice in Washington’s response to Russian aggression.

At a congressional hearing on Tuesday, the chairman of the Senate Foreign Affairs Committee fired a shot across the bow at Russia as it rallied troops near Ukraine’s borders: invade Ukraine and we will destroy your economy.

“I want to be crystal clear to those listening to this hearing in Moscow, Kiev and other capitals around the world: A Russian invasion will trigger devastating economic sanctions like we have never seen before,” said Senator Bob Menendez.

The warning reflects growing concern in Washington that Russia is preparing its forces for a second invasion of Ukraine – one that could be far more bloody and protracted than in 2014. However, US President Joe Biden ruled out the possibility of a US military operation in Ukraine from Ukraine, it also underscored how sanctions have become the main weapon of choice in Washington’s response to Russian aggression.

After Biden and his Russian counterpart Vladimir Putin spoke on Tuesday, US National Security Advisor Jake Sullivan said the United States is ready to go further than 2014. US officials said they are considering a variety of options, including possibly Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the banking messaging cooperative that underpins much of the global financial system.

Russian individuals and companies are already subject to a large number of sanctions for the invasion of Ukraine and the annexation of Crimea in 2014, as well as for election interference, cyberattacks, human rights violations, the use of chemical weapons and the dealings with regimes in North Korea, Syria and Venezuela. What more can the United States do, and would any of it actually work?

What options are just on the table?

This is not the first rodeo in Washington with Russia sanctions. Although the Biden government keeps its cards close on certain moves, experts and former sanctions officials said potential targets are Russian banks, state-owned companies, the Russian Direct Investment Fund and Kremlin-affiliated oligarchs. Other options include foreclosing the country from SWIFT and widening sanctions against trading Russian government bonds on the secondary market.

Brian O’Toole, a former Treasury Department official and economic expert with the Atlantic Council, believes the United States and its European allies will target Russian banks, Russia’s ruling elite, including Russian development bank VEB, as an early step , which target larger commercial banks like Sberbank of Russia.

“Sberbank has about 50 percent of the consumer market in Russia, so [sanctions] would have a huge impact on ordinary Russians, “said O’Toole. “While pursuing VEB, which is essentially like a glorified piggy bank for the Kremlin … one is essentially targeting the cronies, the center of power around Putin first.” (VEB was linked on Russian spy rings in the US in the past.)

Target selection is a delicate process made even more difficult by Russia’s deep integration into the global economy. After the Russian invasion of Ukraine in 2014, the United States imposed limited sectoral sanctions that prohibited certain financial interactions with the Russian defense, finance, and energy sectors.

Given the dominance of the US dollar and US markets, imposing extensive sanctions on these companies – essentially their foreclosure from the dollar and the US financial system – would send a strong message to Putin.

“Essentially, you are telling Putin that if you are going to wage a war militarily, we will wage war economically,” said John Smith. former director of the US Treasury Department’s Office of Foreign Assets Control.

Another possible option would be to sanction Russian oligarchs who benefit and support the Putin system in order to put pressure on the Kremlin. “They want to pull these backers one by one,” said Smith, now a partner in the law firm Morrison & Foerster. “You want to put increasing pressure on a regime to change its behavior by weeding out the people who areo support the regime. “

Sanctions are also not the only response that is being considered. In her phone call on Tuesday, Biden warned Putin that in the event of an invasion the US would increase military aid to Ukraine and strengthen the capabilities of NATO allies in Eastern Europe, something Putin has long railed against.

What impact would sanctions have on the Russian economy?

In short, it is difficult to say how much pain further sanctions would cause the Russian economy. “If you want to get into a fight, ask economists to measure it,” said Daniel Fried, who in 2014 was the US State Department’s sanctions policy coordinator involved in the West’s response to Russian aggression against Ukraine.

In 2019, the International Monetary Fund estimated that the sanctions slowed Russian growth by 0.2 percentage points between 2014 and 2018. Maria Shagina, a sanctions expert and visiting scholar at the Finnish Institute for International Affairs, said the sanctions were never designed to torpedo the Russian economy. Rather, it is a matter of “adding costs here and there and then possibly making the difference overall. That’s how it works, ”said Shagina.

The Russian government has tried to protect the economy from the sanctions shock, come up with an alternative to SWIFT, reduce its dependence on the dollar and build its national wealth fund for a rainy day. In addition, the devaluation of the Russian ruble after the sanctions of 2014 has even taken on a bit of sharpness: Moscow earns hard dollars from energy exports, but pays its domestic bills cheaper.

But all of this costs growth. “In the medium and long term, this is very bad news for the Russian economy,” said Fried. “Your future looks narrower and darker the further you look ahead.”

What is the so-called nuclear option?

In 2019, then Russian Prime Minister Dmitry Medvedev described Russia’s exclusion from SWIFT as tantamount to a “declaration of war”. But experts and former officials caution sanctions not the panacea they are often mistaken for. “Everyone falls victim to this because it’s so easy to talk and it sounds so important and it sounds really tough,” said O’Toole.

The move would cause considerable chaos in the short term, both within Russia and for international companies operating there, as almost all international transactions would be suspended. But there are other options for financial news, and since 2014 Russia has been developing its own, the financial news transmission system, the Now Accounts for around 20 percent of all domestic transfers.

Excluding Russia from SWIFT may not be a nuclear option in and of itself, but fearful markets could turn it into one. “It will not be this formality that will undermine the Russian economy, but the way the market overreacts,” Shagina said. “The Russian ruble will fall and many investors will pull out of the Russian economy.”

As with the escalation of sanctions in Iran, any move to cut Russia off from SWIFT would likely be used as a knife twist after other, more potent, measures were taken. “Cutting banks off, that has the effect,” said O’Toole.

Are sanctions enough to prevent Putin from invading Ukraine (again)?

Believing that Western sanctions were preventing Russia from penetrating deeper into Ukraine, many Obama administration officials pushed Moscow to negotiate de-escalation talks with Kiev in Minsk, Belarus. But since the Kremlin has worked to make the economy sanction-proof, it has likely considered threats of further penalties in all decisions on military action.

“I think it’s about whether you think that the people in the Kremlin are completely rational and that there is no emotional connection to what is happening in Ukraine,” Shagina said. “This fear of a NATO expansion … somehow overthrew all other rationalities here.”


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