Invest: Russian banks off SWIFT, what does it mean to investors?

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Last week, one of the most discussed forms of sanction on Russia for its invasion of Ukraine was the idea of cutting Russian banks off of the SWIFT interbank messaging system. This was widely considered to be a very big deal because SWIFT is how banks mainly send payment instructions, and without access to SWIFT it will be somewhere between administratively annoying and almost impossible for Russian banks to interact with the global financial system. And this week it sort of happened, on a smallish scale and with a lot of carve-outs.

For starters, SWIFT is for cross-border payments, partially cutting some Russian banks off the SWIFT system does NOT substantially control who is allowed to send wires, but it does send a certain sort of message to the banks who interact with those Russian banks.

I think the best articulation of the strategy is “We are attempting to convey enormous displeasure while sanctioning some banks which are believed to be close to politically exposed Russians, while not making it impossible for Russian firms generally to transact internationally nor sparking a humanitarian crisis either inside or outside of Russia.

Many commentators confuse the actual effects of severing particular banks from SWIFT with what they perceive as the policy goal motivating it. More important than either is, in my opinion, what it communicates about commander’s intent to the policy arms who are responsible for enforcing it.

Specifically, it communicates that Something Has Changed and that Russian institutional money, specifically “oligarch” money, is now tainted, and not in the benignly ignored fashion it has been for most of the last few decades.

Read: “We will with absolute certainty hand out billions of dollars of fines stochastically over the next ten years. You can minimize how many hit your institution by successfully intuiting who is on the Bad Risks list. We will be sharply less tolerant of ‘Cyprus is an EU country and so banked customers in it are per se low risk’, ‘lots of people buy real estate in London and we couldn’t possibly inquire about all of them’, and things which we have previously turned a blind eye to, and we will probably lie about having turned a blind eye to that, and you will, too, if you know what is good for you.”

That is, the SWIFT cutoff is not really about SWIFT; it is about communicating to international banks that they should enact their own sanctions on Russia to avoid trouble with their authorities. They should cut off the sorts of Russian transactions that the authorities would want them to cut off. What those sorts of transactions are is not spelled out, but the banks are smart and can probably figure it out.

I think that this is probably the correct model for most other sanctions on Russia, too. For an international bank or investor or company, determining that Russia is “uninvestable” is not a matter of parsing the text of the sanctions declarations and deciding that there is no legal way to own Russian assets; it is a matter of observing the overall mood of those declarations and saying “hey this seems like a huge headache and not worth our while.” 

But, there is another side to that trade. Big banks with lots of regulatory entanglements are going to say “this is not worth our while,” which will have the effect of making various Russian transactions difficult even if they are not technically sanctioned. Other firms will care less about reputational risk and good relations with regulators, and will specialize in reading the rules closely, figuring out exactly what they’re allowed to do, and doing it. Probably there is money to be made with that approach.