Megan Davies, Paritosh Bangsal, and Catherine Belton

LONDON/NEW YORK – A Western alliance’s decision to prevent “selected Russian banks” from SWIFT will cause a serious economic setback, as well as causing great financial pain for the banks and their companies. The allies have more to do.

Society for Worldwide Interbank Financial Telecommunications (SWIFT), a secure messaging platform that allows for rapid cross-border payment, has taken over as the primary mechanism for financing international trade.

Russian banks will be unable to access SWIFT, which means that they may have difficulty communicating internationally with other peers, even those from friendly countries, such as China. This could slow down trade and increase the cost of transactions.

The allies haven’t yet revealed which banks they will target, despite having pledged to curb Russian central bank’s ability to help the ruble. Experts in banking sanctions and banking said that this would make a huge difference to the impact of the measure.

Edward Fishman from the Eurasia Central of the Atlantic Council, a specialist on economic sanctions, said “The devil will lie in the details.” Let’s look at which banks they pick.

He tweeted that if the list included the biggest Russian banks such as Gazprombank and VTB it would “an absolutely enormous deal” (NYSE:).

VTB and Sberbank have stated previously that they are ready for all developments.

Experts believe that some of the banks being kicked off SWIFT could be encouraging “nesting”, which is when Russian entities use non-sanctioned institutions and large multinationals to get into the global financial market.

This workaround would cause compliance problems for banks around the world.

“It really is a dagger into the heart of Russian banks,” said Kim Manchester, whose firm provides financial intelligence training programs to institutions.

Manchester claimed that the Biden administration was selective with its sanctions. This left room for tightening further, blocking additional banks or imposing a blanket ban. “It’s a slow-moving barrage.”

DIVASTATIVE BLOW

Russian economies and markets will likely suffer severe consequences.

According to Sergey Aleksashenko (a former deputy chairman at the Russian central bank, who lives now in the United States), the sanctions will likely hit the ruble hard on Monday. This could lead to many Russian imports being wiped out.

Aleksashenko stated that this is the end for a substantial part of our economy. The consumer market will disappear in half. They will be gone if they aren’t paid for.

The impact might be lessened if listed banks are limited to sanctioned ones and Russia’s central Bank is given the time to transfer assets, says a Russian former banker speaking on condition of anonymity.

If it’s the top 30 Russian banks, then it won’t really matter. However, if it are the top 30 Russian banks that have been sanctioned then this is a completely different issue,” he stated.

“It sounds extremely loud, everyone is so happy. However, in truth it’s just a political statement.

The U.S. previously announced sanctions against only a few Russian banks, including Sberbank or VTB. They directly targeted the large majority of $46 billion in daily foreign currency transactions made by Russian financial institutions. These sanctions were applied to nearly 80% Russian banking assets.

Russia established its own network called the System for Transfer of Financial Messages, which is an alternative SWIFT.

The central bank estimates that it sent approximately 2 million messages to Russia in 2020. This is about one fifth of Russian internal traffic. It plans to increase this percentage to 30 percent by 2023.

SPFS has had difficulty adding foreign members because it limits the messages size and only operates on weekdays.

FINANCIAL NUCLEAR WAPON

It was a difficult decision to stop SWIFT from Russian banks.

The past days have seen Ukraine urge Western countries to remove Russia from its payments system. This was supported by Britain, but other countries like Germany are concerned about what the impact could be on their companies and economies.

Bruno Le Maire (Finance Minister) said that SWIFT’s ban was a “financial financial nuclear weapon” on Friday. He said to reporters, “When you hold a nuclear weapon in you hands, it is important that you think before you use it.”

However, the tides turned when Russian forces attacked Kyiv, and any hope of a diplomatic solution was lost.

Germany had softened its stand earlier on Saturday and said it wanted to find a way for Russia to be removed from SWIFT.

Manchester, a financial intelligence expert, stated that the ban partial would make it more difficult for Russian banks to access the financial system.

Large multinational banks and banks that have SWIFT access may be the next hub for financial transactions from Russia.

Global banks would need to be vigilant about nesting and ensure they do not support transactions violating Western sanctions.

Manchester stated that he had spoken to someone in the bank’s financial crime division on Friday.

These banks might face harsh regulatory penalties for failing to comply with sanctions, he said.

“They are burning the midnight oil to make sense of everything that’s going on,” Manchester said.