Sam Jones (formerly of this parish) writes in the FT about how the conflict in Ukraine has revealed the capacity for a new type of warfare.
This is one that has “exploded the notion that expansive communications technologies and economic interdependence were fostering a kind of grand bargain.” Against it, the great power arrayed on the other side can do little, despite its considerable conventional might.
Quite so. Take, for example, this story from Bloomberg on Friday…
The U.K. will press European Union leaders to consider blocking Russian access to the SWIFT banking transaction system under an expansion of sanctions over the conflict in Ukraine, a British government official said.The Society for Worldwide Interbank Financial Telecommunication, known as SWIFT, is one of Russia’s main connections to the international financial system. Prime Minister David Cameron’s government plans to put the topic on the agenda for a meeting of EU leaders in Brussels tomorrow, according to the official, who asked not to be named because the discussions are private.
The FT also reports that Swift is on the table, although it would be an “extreme measure”.
After all, if Europe did decide to press Belgium-based Swift, and thus financial globalisation itself, into service — it places Russia into a tricky spot this time round.
Swift doesn’t clear cross-border banking transactions itself. But it does open doors for relatively isolated banking markets (like Russia’s is, still) to connect to clearing systems such as Target2 or, in the US, Fedwire. The Kremlin has seen the risk coming and moved to create a local replacement. But as Reuters notes, less than 10 per cent of transactions involving Russian banks stay within Russia.
The model is Iran. EU sanctions in 2012 effectively obliged Swift to comply withdisconnecting Iranian banks from its processes. The use of Swift allowed what’s become quite a familiar dynamic in US and European financial sanctions.
Technically a workaround could always be found if institutions were determined to deal with Iranian banks. But risk management and compliance departments invariably weren’t prepared to take the risk anyway. This halo effect of doubt created an effective embargo.
Similar doubts must be afflicting all sorts of foreign investment into Russia at this point — even in areas which are not sanctioned directly (does a Nasdaq fund really want to buy Yandex? Would an oil prepay deal with Rosneft stay on the legitimate side of sectoral sanctions?).
Still, disconnecting Russian banks from Swift would go further in two respects.
First, it’s worth noting that the EU’s move followed evidence that western banks were“wire-stripping” Swift transfers of features that would otherwise have identified their origins in Iran. In other words, transfers involving these Iranian banks were already meant to be restricted, and so isolating a country from the global financial system was already in process.
A similar move against Russia would ratchet things much more versus the status quo. (Arguably, there’s more reason to ratchet, when President Putin is directly referring to ‘Novorossiya’ and placing territorial integrity in Europe, let alone financial globalisation, in doubt.)
Secondly, seen from the other side, the status quo has involved a great deal of capital flight from Russia in the last decade. While Russian wealth bought Belgravia property and Marbella yachts, foreigners increasingly propped up equities and domestic bonds back in Moscow, as these also became connected to the global financial plumbing.
Some foreign investors might always stick with Russia as the assets are so cheap. Gazprom and Rosneft, two enormous companies with a combined enterprise value above $270bn (the Moscow bourse’s market cap is $560bn), are respectively trading 3 and 4 times forward earnings.
Sberbank, market cap $42bn, trades below book value despite a return on equity western banks would kill for, and having survived the financial crisis with barely a dent. Is it cheap even with Swift risk? Would any of these companies appeal to a minority shareholder, if the Russian state interest in them may mean they can also be tools of this ‘hybrid’ warfare?
Interesting questions, but the cheapness is almost irrelevant if the plumbing breaks. And then, there is what happens if Russian money flows home. That end-point presumably has to be factored into the sanctions strategy, and how the EU’s policymakers believe it would pressure Putin. Would it? Putin’s power rests partly on distributing resources at home to a selected elite group. Would returning capital change, weaken or strengthen this? What about the localised bank transfer systems which Russia would try to create — would it consolidate the Kremlin’s control?
That is after all what governments who do not oversee the financial plumbing have already done, when these systems have been turned against them. WitnessArgentina’s attempt at a local-law swap of its bonds following the pari passu embargo.
As we get closer to actions like Swift disconnection, or more sanctions generally, similar responses will follow.
Still, as it is — two can play at hybrid (financial) warfare.
Related links:In Putin’s Russia, risk prices you – FT Alphaville
Russia payments: Putin’s plastic – Lex
Swift unplugs Iranian banks – FT Alphaville (2012)
Russia payments: Putin’s plastic – Lex
Swift unplugs Iranian banks – FT Alphaville (2012)
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