Keywords: SWIFT, crude oil, natural gas, wheat, barley
On February 26, local time, the United States, the European Union, the United Kingdom and Canada and other Western powers suddenly issued a joint statement, announcing that several major banks in Russia are prohibited from using the SWIFT international settlement system, and the largest 10 financial institutions are within the scope of sanctions, involving nearly 80% of the total assets of the country's banking industry. S&P Credit Rating Agency has downgraded the country's rating to "junk." Given the importance of the country's position in the supply of commodities, Trotron brings you an analysis of the SWIFT sanctions in particular.
First, swift introduction
1.SWIFT system
SWIFT (Society for Worldwide Interbank Financial Telecommunication), Chinese: a global interbank financial telecommunications system that transmits transaction data to more than 11,000-priced banks, securities institutions, market infrastructures and businesses worldwide, and any organization can be allowed to become a user to use SWIFT's services as long as it meets the eligibility criteria. SWIFT is regulated by the G10 central bank as well as the European Central Bank, whose chief regulator is the National Bank of Belgium. International dollar transactions are mainly based on SWIFT transactions, but not only that, other countries' foreign exchange transactions are mostly completed through SWIFT, for example, in January 2022, the proportion of global payments in the renminbi hit a record high, accounting for 3.2% from 2.7% to 3.2%, accounting for the fourth place in global foreign exchange transactions, which actually refers to the share of SWISS payments in RENMINBI.
SWIFT sanctions are not the SWIFT system to initiate sanctions, because SWIFT is a neutral institution, and does not have the right to impose sanctions, but needs to be issued according to the regulatory unit in accordance with the law to order SWIFT, and then the SWIFT system regulators vote to decide whether to implement sanctions, as long as most of the countries support, sanctions will have a high probability of taking effect, and the way of sanctions is also very simple, that is, the relevant trading accounts in the system are listed as "blacklist", Packets for financial transactions of accounts on the blacklist cannot be sent through the system. Once the SWIFT sanctions come into effect, it means that the efficiency of global financial transactions for accounts that are listed as "blacklisted" will be greatly reduced.
More seriously, SWIFT sanctions are not enforced independently by the SWIFT system. SWIFT sanctions are often accompanied by a ban on transactions by the initiating state of the sanctions against financial institutions within its jurisdiction, i.e. prohibiting banks, institutions, enterprises within the scope of their administration from trading with institutions or enterprises of the subject of the sanction. At the same time, as the "extended sanction" of SWIFT sanctions, institutions that violate the ban and agency transactions with sanctioned institutions may also be added "extended sanctions", although they will not be listed together in the SWIFT blacklist, but it is still likely to be marked as blacklisted by other peer institutions, resulting in restrictions in their own financial business. These sanctions are also known as "a basket of SWIFT sanctions", once implemented, will inevitably have a serious blow to the finances of the sanctioned countries, so the SANCTIONS OF THE SWIFT trading system is the last resort, once the sanctions take effect, it is almost equivalent to being isolated by the international financial system, the power and impact are very huge, so it is called "financial nuclear bomb".
It should also be noted that SWIFT does not involve cross-border currency settlement business, which is still handled by independent institutions, such as the New York Clearing House Interbank Payment System (CHIPS), which is responsible for US dollar settlement, and the Cross-border Rmb Payment System (CIPS) in China to complete cross-border settlement, while CHIPS and CIPS are connected to the SWIFT system.
2. Historical SWIFT system sanctions
The United States has imposed financial sanctions on several countries, such as North Korea, Iran, and Russia. The means by which the United States imposes financial sanctions also vary depending on the size of the sanctioned country. The most direct method is to directly cut off the connection between a country or institution and the CHIPS system so that it cannot conduct cross-border transactions in US dollars. As mentioned above, the CHIPS system is primarily responsible for the clearing of large dollar transfers and payments, usually in conjunction with the financial information exchange function of the SWIFT system. The most significant reference in history is the SWIFT sanctions imposed by the United States on Iran.
U.S. financial sanctions against Iran have gone through the process of cutting off CHIPS and removing SWIFT. The United States first banned Iranian financial institutions from using the CHIPS system in 2008, thus cutting off Iran's cross-border payments using dollars and dealing a blow to Iran's oil exports. But Iranian banks are still in the SWIFT system and can settle payments in other currencies, so in 2012 the United States persuaded other members of swift's board of directors to move Iran out of the SWIFT system. Although Iran later returned some of its banks to the SWIFT system through the signing of the "Iranian Nuclear Treaty" with Western countries, the Trump administration unilaterally announced its withdrawal from the "Iranian Nuclear Treaty" in late 2018 and coerced swift organizations to remove Iran from the system again. Iran is one of the major crude oil producers in the Middle East, its crude oil production peaked at about 4.4 million barrels per day, and since the sanctions in 2012, crude oil production has gradually reached more than 3 million barrels, with exports directly halved, can only be traded through foreign shadow agencies, and often requires up to seven or eight intermediate transshipments to bypass the blockade. Swift's sanctions against Russia are the first time in history that a superpower has been imposed, and will inevitably affect the direction of the global financial system.
| Time | Sanctioned subjects |
| March 2012 | Iran (Blacklist) |
| November 2018 | U.S. Withdraws from the JCPOA and Re-Imposes Sanctions on Iran (Blacklist) |
| March 2017 | North Korea (remove country code) |
| February 2022 | Russia (Blacklist) |
Nor is it the first time the United States has attempted to remove Russia from SWIFT. In 2014, the United States wanted to remove Russia directly from the SWIFT system, but SWIFT believed that the proposal "violated the rights of members and harmed the interests of interested parties" and did not take further action. Finally the United States unilaterally took a suspension of credit card companies MasterCard and VISA services for Russian banks, resulting in some debit cards and credit card payment functions being frozen. In addition, the United States has also frozen the assets of some Russian companies in the United States, restricted the financing activities of Russian companies in the United States, and cut off some channels for Russia's dollar acquisition and trading. Although Russia has not been kicked out of SWIFT, because some Russian banks have been blacklisted in the United States, all Russia-related SWIFT remittances need to be reported by remittance banks, and the original three- and five-day transfers have been delayed to one month, resulting in a sharp decline in Russia's GDP and exports in 2014.
2. Disclosure of the details of the SWIFT sanctions
1. Where have the sanctions progressed?
Since the important events in the international situation, the major countries have maintained "relative restraint", before the 26th, the United States made it clear that the implementation of SWIFT sanctions by Russian financial institutions is not the target of the first batch of sanctions, and it is difficult to reach an agreement on the implementation of SWIFT sanctions on Russia within the European Union, but everything has reversed on the evening of the 26th, and the attitude of Germany, which has repeatedly held opposing views, has suddenly turned 180 degrees, although there are still clear opposition voices in Germany. However, Germany's Scholz announced that it supported SWIFT sanctions against Russia, and then on the morning of the 27th, the United States announced the decision to impose SWIFT sanctions on Russia, and this may trigger a more serious "series of sanctions". And as Yellen put it, "The sanction is unprecedented." ”
Sanctions can be divided into two parts, one is the CAPTA sanction, mainly for banks, the directive is EO14024.2, and the other part is the equity asset financing sanction, mainly for enterprises, the directive is EO14024.3. (EO14024.1 was implemented on June 14, 2021, mainly by prohibiting financing by the Central Bank of Russia, the State Wealth Fund, and the Ministry of Finance in the primary bond market.) ）
The SWIFT sanctions imposed by the United States against Russia are signed and confirmed by the White House and are the responsibility of the Office of Foreign Assets Control (OFAC) of the Treasury Department, which is based on the EO14024 resolution "Blocking Assets Related to Certain Harmful Foreign Activities of the Government of the Russian Federation" signed by Biden on April 19, 2021, and subsequent sanctions will record the recent CAPTA directive. The CAPTA Directive is ofFIC providing notice of actual action by foreign financial institutions (FFI) for which the opening or maintenance of a correspondent or express account is prohibited or subject to one or more restrictions or strict conditions. Once a foreign financial institution is found to meet one or more of the criteria listed below, certain restrictions or strict conditions may be imposed, including prohibitions on opening or maintaining correspondent or express accounts for that foreign financial institution.
The sanctions directly target two of Russia's largest financial institutions, the Reserve Bank of Russia (Sberbank) and the Bank of Russia Public Joint Stock Company (VTB), which are assessed to be 80 per cent of russia's foreign trade in U.S. dollars, and that sanctions on these two banks will affect russia's entire banking system in general.
Sberbank has a special status, holding about a third of all bank assets in Russia. Sberbank is the largest financial institution in Russia and is majority-owned by the Government of the Russian Federation (GoR). It has the largest market share of savings deposits in the country, is a major creditor of the Russian economy and is considered a systemically important financial institution by the Russian government. OFAC requires all U.S. financial institutions to close any Sberbank correspondent or payable account within 30 days and to reject any future transactions involving Sberbank or its foreign financial institution subsidiaries. (EO14024 Directive 2, see annex for the list). Sberbank and other affiliated entities identified as being subject to the relevant Russian CAPTA directive have been added to OFAC's CAPTA, and all foreign financial institutions in which Sberbank directly or indirectly owns 50% or more of the shares are prohibited by the Russia-related CAPTA directive, even if not listed in OFAC's CAPTA list.
VTB Bank holds nearly 20% of the banking assets in Russia, VTB is majority owned by the Russian Federal Government (GoR), EO 14024 is designated to be owned or controlled by GoR, or to act directly or indirectly on behalf of GoR or on its claim, as well as to operate or have operated the federal economy in the Russian financial services sector. In addition, according to EO 14024, 20 subsidiaries of VTB Bank are designated as directly or indirectly owned or controlled by VTB Bank. All entities in which VTB Bank directly or indirectly owns 50% or more of the shares will be blocked, even if not listed by OFAC.
OfAC has also imposed lockdown sanctions on three other major Russian financial institutions: Otkritie, Novikom and Sovcom. The three financial institutions play an important role in the Russian economy, holding together $80 billion worth of assets. These designations further restrict Russia's financial services sector and significantly weaken the ability of other key sectors of the Russian economy to access global markets, attract investment and use the dollar. Like Sberbank and VTB, subsidiaries of the three institutions will also be on sanctions lists.
In addition to the sanctions imposed on the above-mentioned financial institutions, OFAC issued Directive EO14024: Prohibiting new debts and new equity due in excess of 14 days and property interests, financing and other transactions due in excess of 14 days for Russian state-owned enterprises, entities operating in the financial services sector of the Economy of the Russian Federation, and other entities determined to be prohibited by this Directive will be prohibited. It should be noted that the directive will include Gazprom, Rosneft Pipeline Network, And Russia's largest maritime and cargo companies within the sanctions list. (See Annex EO14024.3 for details)
2. Immunity
Before announcing the sanctions, the United States repeatedly stressed that it would not impose sanctions on Russian energy exports, and the sanctions also included exemptions, apparently to prevent the sanctions from affecting other stakeholders to the greatest extent possible. In particular, these exemptions cover the entire process of producing and selling energy.
| 1 | International organizations |
| 2 | Agriculture and healthcare and the fight against COVID-19 are related |
| 3 | Civil aviation emergency hedging |
| 4 | energy |
| 5 | Specific debt or equity transactions |
| 6 | Derivatives contracts |
| 7 | Process sanctions-related transactions |
Iii. Analysis of the follow-up impact of sanctions
The CAPTA sanctions are the most critical part of the sanctions, which go into effect on March 26, which means that the United States will ban any transactions related to them from March 26. Before it officially enters into force on March 26, there is still a window of nearly a month to mediate. Obviously, in the face of high global inflation, sluggish economic growth, and the new crown epidemic, sanctions against Russia are only adding fuel to the fire. So I still don't think the sanctions will take effect. But we also need to have a clear prejudgment and preparation for the logic of the impact on commodities after the sanctions take effect.
The Russian economy is resource-oriented, with energy exports accounting for nearly half of Russia's GDP. Among the important export commodities, natural gas, crude oil, nickel, silver and platinum, copper, wheat, barley and sunflower seeds all account for nearly 10% or more than 10% of the global share, especially natural gas (nearly 20%) and wheat (nearly 18%).
For resource-exporting economies, foreign trade is mainly to export the superior resources of raw materials in exchange for dollars, and then import short-board commodities in their industries through the dollar (more dispersed) to meet the needs of domestic production and life, thereby continuing to support the production of raw materials and forming a closed loop.
However, once the dollar link is blocked, the direct impact will first affect the foreign exchange market of the ruble, resulting in a sharp depreciation of the ruble against the dollar. And because major financial institutions are banned from SWIFT, settlement and control of offshore markets will become extremely difficult, and intervention in the exchange rate market will be almost impossible to achieve.
Russia has been implementing the provisions of free exchange of foreign exchange since July 1, 2006, assuming that crude oil is purchased at the current exchange rate of the US dollar and the ruble, and assuming that the Russian government, in order to stabilize prices, uses the exchange price of crude oil recorded in rubles unchanged, we convert at the exchange rate of February 21 and February 28, 95.52 US dollars / barrel on the 21st (7484 rubles) and on February 28, the equivalent us dollar is equivalent to 72.2 US dollars / barrel. If this process is not controlled, it will inevitably lead to uncontrollable hyperinflation in Russia and the loss of a large amount of foreign exchange reserves. Considering that after the ban on SWIFT, the dollar settlement of Russian imports will also become a problem, Russia can respond by ending the free exchange of foreign exchange and beginning to control the export of important raw materials and materials.
Exchange rate controls are almost an inevitable option, and failure to regulate them will lead to a rapid decline in foreign exchange reserves. Export control will also be a supporting program for exchange rate control, because after the exchange control, although enterprises can still handle export business without sanctions, but because the offshore market exchange rate is out of control, if it is not controlled, it will cause the inflation that was previously said to be difficult to control, because the offshore dollar account has freely purchased commodities (in addition to energy, medical and other necessities), so the key export commodities (especially crude oil, natural gas) will limit the export volume and export location, and the existing foreign exchange reserves will be completed through a third party to complete the import of commodities For imported goods, we will also focus on the national strategic level as much as possible, and reduce the import of non-essential consumer goods.
Once SWIFT sanctions are generally in force in G7 countries, other countries will passively get involved in the sanctions. Russia is also bound to carry out foreign exchange, import and export controls, although the Russian government has long been by increasing gold and foreign exchange reserves, raising interest rates to make interest rates exceed inflation levels (as of press time, the Russian central bank announced an emergency interest rate hike of 1050 basis points to 20%), de-dollarization, the construction of a new trading system (SPFS) and other ways to deal with potential risks, but these far from covering the losses caused by the ban on SWIFT and other extended sanctions, Russia's economy is bound to suffer a heavy blow.
For other economies around the world, the SWIFT sanctions against Russia, led by the United States, are a seriously wrong operation that hurts the enemy 1000 and loses 5000. At present, the epidemic has not yet exited, and the global inflation caused by energy shortages has further transformed into structural inflation, which has seriously dragged down the global economic growth momentum, and monetary policy must also be shifted to tightening to control inflation, which in turn will lead to secondary recessionary pressures on the economy. In this global economic context, the unprecedented launch of "nuclear-level financial sanctions" on global resource exports and military powers, to a small extent, even if it affects 30% of Russia's crude oil and natural gas exports, it may bring about a 20% price increase in the global energy market, even if the use of all surplus production capacity is still difficult to make up, the global energy demand gap will further expand, and the subsequent impact caused by this is even more difficult to estimate.
Under the premise of believing in the good, the author believes that the SWIFT sanctions against Russia will eventually be denied and will not be actually implemented, but for the market, it should also be fully prepared to deal with the small probability of events under the great changes that have not been encountered in a hundred years.
Annex: United States Treasury Department Sanctions List