Jean Diederich (APSI): Impact of Sanctions and Changes in Payments
"Disconnecting Russian banks from SWIFT means Russia will change payment channels. That risks weakening the influence of American and European institutions and will cause the creation of two distinct systems to limit sanctions in the future,” says Jean Diederich, Partner AZZANA Consulting, President of APSI and member of Digital Europe. Interview.
What is the impact of sanctions on payment systems and more particularly SWIFT?
Disconnecting Russia from SWIFT impacts businesses and financial institutions on both sides. However, the impacts of sanctions in relation to the concept of debit and credit must be differentiated. Of course, the sanctions imposed are aimed at blocking Russian assets in banks, but many financial institutions have also financed Russian companies and granted huge credits. This means that strict sanctions or a general disconnection from SWIFT would lead to difficulties, even the risk of default by certain European banks, whose outstanding Russian loans amount to more than $76 billion. Moreover, the short-term impact of sanctions on Russia is limited by the fact that they do not affect payment transactions in the Russian energy sector, Russia’s lifeblood and on which Europe largely depends. Therefore, payments denominated in euros and dollars continue to flow to Russia, which has even requested payments in rubles to counter the imposed sanctions. This seems to be a bad political idea that may change soon!
“A general disconnection from SWIFT would lead to difficulties, even the risk of default by certain European banks.”
Can the international payment systems fundamentally change?
There is a risk because sanctions are likely to fundamentally change the geopolitics of cross-border payments. Since 2014, Russia has prepared for international sanctions by establishing its own payment infrastructure, the Russian SPFS financial message transfer system. Beijing is also set to dramatically accelerate efforts to establish new payment channels through the renminbi-denominated China-led China National Advanced Payment System (CNAPS) across Asia, including Russia. Knowing that more than 50% of Chinese exports to Russia were denominated in dollars in 2020, while two-thirds of Russian exports to China were denominated in euros, and most of the rest were denominated in dollars, one understands the disadvantage for our banks. So, by disconnecting Russian banks from SWIFT, trade between Russia and its main trading partner, China, will change payment channels, and given the current free fall of the ruble, the renminbi will probably be chosen as the new currency pivot. Consequently, this will gradually weaken the influence of American and European institutions in these regions and will risk the creation of two distinct systems to limit sanctions in the future. The question then arises: Will interoperability be guaranteed with current systems?
Is it possible that Russia is using cryptocurrencies to circumvent sanctions?
Indeed, some believe that Russia also uses cryptocurrencies to circumvent sanctions. Vladimir Putin had hinted that Russia had certain competitive advantages especially in mining transactions (that are dependent on the price of electricity) as well as having many IT experts in cryptocurrencies. But as China has banned cryptocurrencies, Beijing is likely to accelerate the deployment of its "central bank digital currency" (CBDC) to counter them and force Russia to adopt it instead of dollars or euros for its exchanges cross-border.