March 7, 2022 | Policy Brief

Time to Sanction Russia’s Alternative to SWIFT

March 7, 2022 | Policy Brief

Time to Sanction Russia’s Alternative to SWIFT

Per an agreement with Washington and other Western allies, the European Union last week prohibited the SWIFT financial messaging system from providing services to seven Russian banks sanctioned over Moscow’s aggression against Ukraine. The SWIFT cut-off will sever critical ties between Russia and the global marketplace, but Moscow will likely try to employ its parallel messaging system, SPFS, to mitigate the cost of sanctions.

SWIFT, or the Society for Worldwide Interbank Financial Telecommunication, is a Belgium-based global messaging system that facilitates transactions between over 11,000 financial institutions around the world. On February 26, the European Commission, France, Germany, Italy, the United Kingdom, Canada, and the United States agreed to remove “selected Russian banks” from SWIFT. Brussels followed through on March 2, requiring SWIFT to cut ties with VTB Bank, Vnesheconombank (VEB), Bank Otkritie, Novikombank, Sovcombank, Promsvyazbank, and Rossiya Bank, including their majority-owned subsidiaries.

The U.S. Treasury Department had designated the first six of those banks on February 22 and 24 and Rossiya Bank in 2014, while the European Union sanctioned VEB, Promsvyazbank, and Rossiya Bank on February 23. These designations prohibit U.S. and EU persons from transacting with the sanctioned banks. The U.S. designations will make them toxic to most major firms around the world given the central role of the U.S. financial system.

Combining the SWIFT cut-off with individual designations is important for two reasons. First, losing access to SWIFT does not necessarily preclude a bank from transacting with other financial institutions. While most partners will eschew banks cut off from SWIFT, some might continue their business by relying on less efficient alternatives. Second, and relatedly, disconnecting Russian banks from SWIFT without first precluding transactions with them could perversely promote the use of alternatives to SWIFT.

Russia began developing its SWIFT alternative, known as SPFS, or the System for Transfer of Financial Messages, in 2014 amid fears that Russian banks could be booted from SWIFT. Moscow fully launched the system in December 2017. According to Russia’s central bank, SPFS had 338 users as of March 3. They include major Russian financial institutions and other companies as well as a relatively small number of foreign banks, many of them subsidiaries of Russian banks. The system currently handles about one-fifth of Russia’s total domestic payments.

Over the longer-term, Russia may also look to CIPS, or China’s Cross-Border Interbank Payment System. Launched in 2015, the system is designed to promote use of the renminbi in international settlements, with messaging flows going through either CIPS or SWIFT. Moscow and Beijing have previously discussed linking SPFS and CIPS as part of their broader efforts to undermine the effectiveness of U.S. sanctions.

While far inferior to SWIFT, SPFS and CIPS could offer alternatives for undesignated Russian banks in the event that Russia completely loses access to SWIFT, as Kyiv and many U.S. policymakers have advocated. China may be unwilling to risk allowing sanctioned Russian banks to use CIPS, but those banks could use SPFS to facilitate transactions with any foreign partners still willing to work with them.

With President Vladimir Putin so far unwilling to de-escalate in Ukraine, Washington and its allies should urgently look for additional ways to ratchet up the economic pressure on Moscow. This should include working closely with European allies to designate additional Russian banks and cut them off from SWIFT, working toward comprehensive isolation of the Russian financial sector.

To support these efforts, Washington and its allies should target SPFS to undercut Russia’s ability to use the system as an alternative to SWIFT for international transactions. For example, the Biden administration could announce that it will bar any financial institution connected to SPFS and above a certain capitalization threshold from using correspondent or payable-through accounts in the United States. Using Section 311 of the USA PATRIOT Act, Treasury could also require U.S. financial institutions and agencies to reject transactions that directly or indirectly utilize SPFS.

With Russian forces currently moving to encircle Kyiv, Washington and its allies have no time to spare.

Matthew Zweig is a senior fellow at the Foundation for Defense of Democracies (FDD), where John Hardie is research manager and a research analyst. They both contribute to FDD’s Center on Economic and Financial Power (CEFP). For more analysis from the authors and CEFP, please subscribe HERE. Follow Matthew on Twitter @MatthewZweig1. Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focused on national security and foreign policy.


Russia Sanctions and Illicit Finance