What follows Russian exclusion from SWIFT?

In a joint statement on Saturday, the U.S., U.K., E.U., and others announced that they would move to exclude “selected Russian banks” from SWIFT, the international payments system. The coalition has also frozen assets belonging to Russia’s central bank in response to the country’s invasion of Ukraine.

Why should we care?
Many of the intended short-term consequences of these sanctions have already materialized; Russia’s currency lost more than 30% of its value over the weekend, and the country’s market may soon enter a spiral. In the medium-term, according to the Carnegie Moscow Center, the total removal of Russian banks from SWIFT would cause Russia’s GDP to fall by 5%. Other effects are still undetermined and varied. “Exclusions from SWIFT will lead to missed payments and giant overdrafts similar to the missed payments and giant overdrafts that we saw in March 2020,” according to Credit Suisse Group AG strategist Zoltan Pozsar. “Banks’ inability to make payments due to their exclusion from SWIFT is the same as Lehman’s inability to make payments due to its clearing bank’s unwillingness to send payments on its behalf.” This may force monetary authorities to pump dollars into the financial system—including the Fed, which may have to grow its balance sheet once more. Two other crucial factors remain: (1) Ordinary Russian citizens will bear the brunt of the sanctions’ effects, and (2) Russia is a nuclear power that has placed its nuclear forces on alert. Payments-related sanctions bring peace or, potentially, a deeper dive into war. “History does not repeat itself, but it rhymes,” said Pozsar.