US may draw the line at cutting off Russia from Swift

Seven years after Russia annexed Crimea and backed a separatist uprising in eastern Ukraine, the US and its European allies are putting President Vladimir Putin on alert. Yet more military aggression against Ukraine will result in measures more severe than the economic and political sanctions the western allies imposed in 2014.

“If, in fact, he invades Ukraine, there will be severe consequences . . . and economic consequences like none he’s ever seen or ever have been seen,” President Joe Biden said on Wednesday.

What might he have in mind? For one thing, Washington is pressing Germany’s new coalition government to be ready to stop the opening of the Nord Stream 2 pipeline, a project that would increase Russian gas exports to western Europe but, in US eyes, would make Ukraine more vulnerable to Kremlin pressure.

Apart from that, there have been suggestions in Washington foreign policy circles that the Biden administration could unsheathe American dollar power. In particular, speculation is rife that Russia could be cut off from access to the Society for Worldwide Interbank Financial Telecommunication, or Swift, an important system for international money transfers. This is sometimes dubbed the “nuclear option” — though no weapons would be involved.

So far, the Biden administration has carefully avoided saying that steps to shut out Russia from Swift are under consideration. Moreover, despite their public rhetoric, both Washington and Moscow know that the shock value of US economic sanctions has been somewhat dulled by overuse in recent decades.

Most economic sanctions used by US presidents are implemented under the International Emergency Economic Powers Act, the successor law to the 1917 Trading with the Enemy Act. There have been more emergencies than most can remember. A congressional agency found in July 2020 that there had been 59 declared national emergencies since 1977, of which 33 were still going on.

The IEEPA gives the president extraordinary powers to block dollar flows, freeze the use of the payments system, impose tariffs and restrict exports. These have been used against “rogue state” officials, terrorists, drug lords, cyber hackers, money-laundering banks and regimes considered hostile to US interests.

A mini-industry in Washington services people and companies listed as “specially designated nationals”, a label that makes you unwelcome at a lot of banks and airports around the world. The list is maintained by the Office of Foreign Assets Control of the US Treasury. Ofac staff have access to financial, intelligence and law enforcement records.

As the list of sanctioned people and countries has lengthened, Washington has appreciated that it has created a sort of anti-alliance stretching from powerful figures in Venezuela and Iran to North Korea’s ruling Kim family. Those targeted by the US shared contacts in the gold, cryptocurrency and money laundering world.

Besides that, rival powers such as China or Russia might turn a blind eye to sanctions-busting. And there has been a growing risk to the dollar’s attractiveness as a reserve currency and medium of exchange. If the world relied less on the dollar system, the US would find it harder to finance its government and corporate deficits overseas.

So when some US policymakers air the idea of cutting off Russia’s access to Swift, the Ofac people cough and look at the ceiling.

Until last month, Michael Parker was a prosecutor in the US Department of Justice’s Money Laundering and Asset Recovery Section, where he worked closely with former colleagues at the Ofac. Now he heads the money laundering and sanctions division of Ferrari Associates, a Washington law firm. As he sees it, “cutting Russia off from Swift, absent any other action against Russia, serves only as a deep annoyance. Swift, remember, is just a communication system.”

Swift, based in Belgium, serves as the primary secured messaging system that ties together the world’s correspondent bank relationships. But another former senior Ofac official says: “Swift is just one mechanism. There are other means to do direct payments between banks. They could go back to using telexes, as they did in the past.”

This former official adds: “If you politicise a Europe-based institution such as Swift, then you encourage countries like Russia and China to set up their own system. So there are tremendous disadvantages to a Swift cut-off to implement a policy decision.”

A Russian attack on Ukraine would trigger some US financial sanctions. But they might not include ending access to the Swift system.

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