Market Wire - Western Leaders Cut SWIFT Access for Some Institutions, Apply Sanctions on Central Bank of Russia

Karl Schamotta - Chief Market Strategist, karl.schamotta@corpay.com

As combat rages across Ukraine, Western leaders have agreed to remove access to the SWIFT wire messaging system for several Russian banks - and to place restrictions on the use of foreign exchange reserves by the Reserve Bank of Russia.

In a statement released by the European Commission a short time ago, leaders from France, Germany, Italy, Canada, the United Kingdom, and the United States said they were committed 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. Second, we commit to imposing restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions.”

The move came as Western public opinion hardened against the Russian invasion, and as air raid sirens sounded across major Ukrainian cities, signalling the beginning of another bombardment.

The announced measures are likely to have broad-ranging negative effects on the Russian economy, crippling international commerce. And asset freezes or other restrictions on the use of dollar- and euro-denominated currency reserves are likely to limit intervention by the central bank, removing a key source of support for the ruble.

A sharp move to the downside is highly probable when markets open tomorrow afternoon.

But the devil is in the details:

No lenders were named specifically, and there was no indication of tighter sanctions on energy- or commodity-related transactions - which contribute the bulk of the Putin regime’s foreign revenues.

As previously noted - the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system is used to communicate transfer instructions between banks, but does not manage the movement of funds itself. The new restrictions are likely to complicate processes, yet are not, in and of themselves, capable of cutting off access to the Western financial system.

Specific sanctions on correspondent accounts, much like those announced by the Biden administration on Thursday, are a bigger impediment to the movement of money across borders - and until those are applied to the energy sector, Western sanctions might have more bark than bite.