Selected Russian banks are to be removed from the Swift messaging system according to joint statement issued on 26 February by the European Commission, France, Germany, Italy, the UK, Canada, and the US in response to Russia's military action in Ukraine.

But it remains unclear which banks the western allies intend to remove from the secure platform over which letter of credit (L/C), guarantees and other transactions are routinely managed.

Meanwhile questions have been raised over how effective barring just some of Russia's banks will be in achieving the objective of harming the country's ability to operate in the global financial system and the extent to which the measure would damage European as well as Russian interests.

Commitment and Swift response

"We commit to ensuring that selected Russian banks are removed from the SWIFT messaging system. This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally," says the joint statement.

Swift appears not to have commented officially on the joint statement although the Reuters news agency reports the Belgium-based cooperative as saying that it was "engaging with European authorities to understand the details of the entities that will be subject to the new measures, and...preparing to comply upon legal instruction".

Damaging both sides

The measure would be painful for Russian financial institutions that each day manage some US$46 billion worth of foreign exchange transactions, 80 per cent of which are US dollar denominated. Russian financial institutions accounted for around 1.5 per cent of Swift's 42 million remittances per day in 2020.

But European banks are amongst Russia's biggest creditors and removing the country's banks from Swift calls into question how Moscow will repay its foreign debt. Meanwhile the EU depends on Russia for 40 per cent of its natural gas imports that are largely paid for over the Swift platform.

Russia in Swift

Russian financial institutions are shareholders in Swift, a cooperative society under Belgian law that is owned and controlled by its shareholders. Under Swift's bylaws, shareholders are obliged to have such number of shares proportional to their financial contribution for network based services.

But there is only one Russian on Swift's 24-member board, while 14 members represent European countries, the US has two seats on the board and Australia, Canada, China, Hong Kong, Japan, Singapore and South Africa are each represented by one board member.

If Swift is waiting to "comply upon legal instruction" as the Reuters' report suggests, these geopolitical weightings may not be significant but if aspects of the western allies' measures are left to the board and shareholders to determine, they will be faced with difficult decisions.

Effectiveness and enforceability

Bankers are already questioning how effective barring just some Russian banks will be. "If the[y] leave one or more Russian banks able to use Swift then all or most of Russian banks that have been barred will simply use the banks that still have access. The EU, US, UK and Canada have to sanction all or its pointless," one banker suggested in an online comment.

Meanwhile any measures are going to raise countless questions amongst those concerned with Russian L/C transactions, including what happens with L/Cs opened prior to any measure being introduced. But to some extent financial institutions were already preparing for difficult times even before the announcement that selected Russian banks would be removed from Swift.

Last week Bloomberg reported that the Industrial and Commercial Bank of China (ICBC) has ceased the issuance of dollar-denominated L/Cs for physical Russian commodities purchases and the Bank of China has also restricted financing on some level. Meanwhile Russian sellers and western buyers were reportedly already struggling to obtain L/Cs and bank guarantees as well as shipping for Russian oil.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.