Will the conflict in the Ukraine ever end?

Despite the fact that another ceasefire was reached last month in Minsk, Belarus the signs of success have been mixed. Violence has continued to flare across the country and both the Ukrainian forces and rebels hold little trust in one another’s intentions. Unsurprisingly, multiple leaders appear to be planning for a breakdown in the ceasefire and are posturing in an effort to increase pressure on Russia. Philip Hammond, the United Kingdom’s foreign secretary, recently promised a significant increase in economic pressure if there are further assaults by the Moscow-backed rebels. And Donald Tusk, the president of the European Council, is hoping that Europe will take a more aggressive stance alongside the United States against President Vladimir Putin’s involvement in the Ukraine. David Cameron further threatened Russia by contemplating actions that would restrict its access to international markets and financial systems, raising the spectre of a ban on Russia’s access to the Society for Worldwide Interbank Financial Telecommunication, or SWIFT.

Image courtesy of European External Action Service, © 2014, some rights reserved.

Image courtesy of European External Action Service, © 2014, some rights reserved.

The Society for Worldwide Interbank Financial Telecommunication is a network that allows financial institutions to send and receive information in a reliable, standardised environment. SWIFT does not directly facilitate the transfer of funds, hold money, or clear or settle payments. Rather, it is the main method of sending payment orders, or instructions to transfer funds, and is therefore an integral part of the international financial system. In essence, it acts as the messaging system for the financial industry by providing a standardised template for transfers. In terms of its organisational structure, SWIFT is a cooperative society owned by its member financial institutions and is headquartered in Belgium, near Brussels. While it claims to be independent of political manipulation, the growing use of financial institutions as strategic tools has made SWIFT an important factor in modern international politics. 

In 2012, the Belgium-based society was forced to cut ties with Iran in an attempt to force the country back to the negotiating table regarding their nuclear program. The havoc that the ban wreaked is indicative of the potential damage it could cause in Russia. In March 2012, the SWIFT system was banned and while the Iranian press largely denied the effects of the sanctions, the ban practically sent the Iranian economy back in time; Iranian banks had to resort to leasing telephone and fax lines in order to continue moving money through the economy. The ban is now widely considered to be the major factor that returned Iran to the negotiating table, and it was one of the first sanctions that the government requested to be lifted.

Compared to Iran, a SWIFT ban in Russia would likely be even more devastating to the domestic economy. Russia is the second most prolific user of the system in the world with over 90 per cent of current international payments made using the SWIFT system. A ban would cripple the Russian economy by making transfers between domestic and international financial institutions very difficult. While there are some workarounds, they would involve a significant increase in the time and costs of transactions. Some predict that the country could utilise Internet transfers, however, these are generally considered to be not very safe and are relatively unreliable. More likely, Russian banks would utilise Chinese banks as intermediaries, which would add significant monetary and temporal costs to every transaction. Additionally, a ban would hamstring the Russian economy by driving away Western investment and greatly affecting foreign firms that do business within the country. The potential impact of being cut out of the SWIFT system has not been lost on Russian politicians, who have had very strong responses to the proposition. Dmitry Medvedev, the Russian Prime Minister, recently noted that if SWIFT access was restricted, then the Russian ‘economic reaction and generally any other reaction will be without limits.’ Even United States Treasury officials warned that a ban should only be used ‘the most extraordinary situations.’

Certainly, a SWIFT ban would be one of the last resorts if Putin continues his aggressive meddling in the Ukraine. And at a basic level, it is worth investigating whether it is even a realistic political option. While the Belgian society claims to be apolitical, it is likely that they would comply to a ban if there was unified Western support for such an action. Naturally, the difficulty lies in establishing that consensus, given large internal divisions within the European Union surrounding the issue of Russian sanctions. While the United Kingdom and the Baltic states have been pushing for stronger sanctions, a sizable portion of the European Union has been hesitant. The recent EU meeting in Latvia showed that most ministers are seeking to give the Minsk agreement more time before renewing the current sanctions, let alone increasing them. EU ministers from Italy, Austria, and Greece are pushing for using the success of the Minsk agreement as the litmus test for the sanctions regime. The current sanctions, which will need to be renewed in July, need unanimous approval to be extended to the end of the year. Therefore, only a complete breakdown in the ceasefire in the form of a major rebel offensive would prompt a serious discussion of ramping up Russian sanctions within the EU. And given the necessity of a united Western consensus in pushing through with a SWIFT ban, it seems unlikely that such a ban would see the light of day. Despite the strong rhetoric from the United Kingdom and the United States, it seems unlikely that such a ban is possible. Perhaps that is a good thing. Given the rhetoric concerning a SWIFT ban on both sides of the conflict, it could certainly move the West and Russia much closer to a conflict than we have been in quite some time.