Putin’s chess game confronted by SWIFT blockade

After weeks of threatening to bar Russia from access to the international financial system of SWIFT, Western governments have concluded that Putin’s war in Ukraine needs severe repercussions. Western nations, especially Europeans, were wary of putting a total blockade of SWIFT on Russia. The thinking was that it would hit the Russian economy and its leaders hard and negatively impact Europe’s energy importers, including Germany, Italy, and the Netherlands.

Due to the continuing war operations of Putin’s armed forces in Ukraine, and increased internal pressure on Western governments, several countries took significant steps.

At present, Putin’s Russia has still had full access to most of its international FX reserves or was able to earn revenues from its investments and assets around the world. However, the EU and the US have now put a total blockade on Russian financial assets abroad including companies and real estate.

Still, the “nuclear option,” as some have called it, was not in place. Until now, any barring of Russia from access to SWIFT wouldn’t have included energy sector transactions, one of Russia’s main income generators.

European countries are still trying to assess how to cope with the possible loss of Russian oil and gas supplies, as a full SWIFT bar will block Russia’s financial transactions. If Russia’s oil and gas revenues from Europe end, the continent will probably be looking at a significant energy crisis within days.

Putin has been counting on possible divisions inside of Europe, primarily based on his weaponization of energy supplies.
Even though the direction of actions of the West to the Russian war in Ukraine has been robust, immediate and hard-hitting sanctions have still been minimal.

However, all has changed. The SWIFT sanctions implementations are happening.

The need for hard-hitting and compelling sanctions forcing a possible retraction of the Russian invasion of Ukraine is indisputable. Putin has called the bluff. Moscow will be sitting in the corner very soon if the West also decides to include energy sector transactions. Still, will this be enough to stop Russia at present? Sanctions will take time to bite, even SWIFT.
What will be worrying for Putin is the fact that a SWIFT barring at present already blocks all of Russia’s international assets, worth around $165 billion.

At the same time, around 50 percent of the much talked about Russian Central Bank’s FX and gold reserves are in foreign banks abroad. The current measures will block approximately $300-350 billion of Russia’s Central Bank. The latter will soon have significant impacts on Russian citizens, as ATMs and banks will be struggling to supply cash on the street.

Without SWIFT, which is the world’s most-used interbank communication system, Russia cannot act anymore. Most international trade happens via SWIFT, so barring Moscow and its oligarchs and multinationals from using it would be closing the door. Even that Moscow has already put increased efforts into setting up a SWIFT-independent financial system with parties such as China, the current revenue streams of Moscow are still primarily linked and dependent on it.
Ukraine’s government had already asked for these measures before, but until this weekend, partly in vain.

Now, leading SWIFT power brokers are reported to have blocked Moscow at present. Over 11,000 financial institutions use SWIFT to send secure payment orders and are critical to moving funds to Russia’s oil and gas sector. At present, more than 300 Russian banks and financial institutions use SWIFT for interbank transfers. A SWIFT barring has already been effective with Iran.

The first results of these developments are already evident. British oil and gas giant BP has decided to leave its significant JV with Rosneft in Russia. Other leading oil and gas companies, such as Shell, Total, and others, will follow for sure. The impact will be heavy, as it is a money issue and potential access to technology and markets is affected. Other major Western companies, including banks, IT, and consultancies, will be leaving Russia, the market expects.

For the MENA region, the situation is almost the same. Even if most Arab countries are unwilling at present to take a stand, due to economic and financial reasons, they now will be forced to comply. A SWIFT nuclear option will also block other international financial transactions or access, such as the multi-billion investments of several Arab sovereign wealth funds, growing cooperation in oil, gas, and agriculture, or simply exporting and importing major Russian-MENA trade products.

The options for Arab governments to push back on this SWIFT strategy are fragile. Main Russian parties will be sanctioned, blocked, or taken offline, cooperation with Russia’s RIDF sovereign wealth fund for sure a target.

The direct impact is also there, but this was in place before the SWIFT decision. Significant parts of MENA will be looking at food and agriculture shortages because Ukraine and Russia are the largest wheat, corn, and sunflower exporters. These volumes are not available for a very long time.

The economic fallout from the decision by Western powers to confront the Russian operations will be significant, and leave Europe destabilized and looking at other potential Russian military actions.

The world will need to reassess not only the position of Russia but also assess the implications for global oil, gas, and grain supplies in the short term. Energy prices will spike, bringing some relief to energy exporters. Still, long-term, the already fragile energy supply, and agricultural commodities will worsen with a bang.