When Russia first invaded Ukraine, the West slapped Moscow with swathes of sanctions in an attempt to cripple its finances and force it to end the war quickly.
However, more than two years later, the war is ongoing and the Kremlin is touting its robust economy.
But it’s not because the sanctions are not effective. It’s really because the West hasn’t gone all the way. There’s one major thing the West could, but won’t, do: kill all Russian banks’ access to the Society for Worldwide Interbank Financial Telecommunications, or SWIFT.
From February to May 2022, the US and European Union repeatedly moved to block some Russian banks’ access to SWIFT — but spared those that process international oil and gas payments.
That’s because Russia is a major energy exporter, so abruptly cutting off all its banks’ access would have a massive knock-on impact globally.
“There’d be a lot of collateral damage that would affect non-Russian banks and other banks in the international banking system,” Alex Capri, a senior lecturer at the National University of Singapore, told Business Insider.
The international banking system is interconnected. Trade financing involving multiple parties moves down complex supply chains as commodities move from the supplier to the end buyer.
“If you paralyze the entire Russian banking system, there’ll be other banks around the world that will take the brunt of it as well, because they finance trade and other commodities,” said Capri, who described cutting off the access of all Russian banks as “the nuclear option.”
However, if things get “really bad,” such as in a rapid expansion of the war in Ukraine, the West could “absolutely” double down and shut the Russian banks from SWIFT, added Capri, who was the regional leader of KPMG’s international trade and customs practice in Asia Pacific and a former international trade specialist at the US Customs Service.
But it may not come to such a step after all.
Despite the West’s frustration with how Russia’s economy still appears to be holding up, the sanctions appear to be finally working.
This is in part due to secondary sanctions. The West has tightened its restrictions against companies in third-party countries that still do business with Russia.
So while Russia has been able to hang on to its economy so far, the economy is in “deep, deep trouble” in the medium term, Richard Portes, an economics professor at London Business School, told BI.
Portes cited the scaling back of Russia’s “natural trade partners” — those near the country geographically — as a major stumbling stone.
“Russia is not trading with Europe, so the opportunities, the possibilities for profitable, sensible trade, are very limited,” Portes told BI.
While Russia has managed to pivot most of its oil exports from Europe — previously its single largest market — to India and China, such a move comes with costs that include lower selling prices and logistical challenges.
“These alternatives cannot properly, effectively, efficiently, productively replace trading with Europe,” Portes said.
Human capital and investment are also flowing out due to Russia’s brain drain and the West’s restrictions on investment and trade.
“In five years, you’re going see a really disastrous slowdown in the Russian economy,” said Portes, who called for stronger sanctions enforcement.
One key reason why Russia’s economy is unlikely to hold up is due to the finite nature of its reserves.
“Russia can compensate for a fall in revenues from natural resource exports using its gold and currency reserves, as well as the effect of shrinking imports,” Alexander Kolyandr, a financial analyst, wrote in a post for the Carnegie Endowment for International Peace on April 9. “But reserves are not infinite, and there is a limit to how far imports can contract.”
Portes agreed with this stance.
“Unless there was a big increase in the oil price or some other windfall, they would have major problems financing imports over the next couple of years in the near-term future,” Portes said.
In a reflection of how financially isolated Russia has become, the country has limited options other than the Chinese yuan for its reserves, the Central Bank of Russia said in a report in March.
In April 2022, Russia’s central bank governor Elvira Nabiullina warned Russia’s reserves can’t last forever.
“A significant problem is that they are running out of foreign exchange reserves, and you can’t create foreign reserves,” Portes added.
