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UKRAINE

Swift banking: How would Germany’s ban sanction Russia?

Since Germany supported a ban on Russia from the Swift global payments system, here's what that entails and how it would act as a sanction on Russia.

Swift banking: How would Germany's ban sanction Russia?
Russian forces were approaching Kyiv from the north and northeast. Photo: Sergei SUPINSKY/ AFP

In the latest round of sanctions against Russia, Germany and other Western allies agreed to cut Russia out of the Swift payments system.

The group of world powers said in a statement it was “resolved to continue imposing costs on Russia that will further isolate Russia from the international financial system and our economies.”

Exclusion from Swift, a very discreet but important cog in the machinery of international finance, is one of the most disruptive sanctions the West has deployed against Russia for its invasion of Ukraine.

READ ALSO: Germany set to shut airspace to Russian planes on Sunday

The move had been threatened in recent weeks by the European Union and other Western allies as a means of escalating punishment of Russia for its aggressions against its ex-Soviet neighbour.

As the Russian military stepped up its assault on Ukrainian cities on Saturday, Western powers sought to debilitate the country’s banking sector and currency by cutting selected banks from the international system used to transfer money, severely hamstringing Russia’s ability to trade with most of the world.

Italy and France backed the measure, with Germany shortly after also pledging its support, albeit in a slightly more cautious manner due to fears of the collateral damage such a move would create.

German leaders said they were working on excluding Russia from the Swift interbank system in a “targeted and functional” way.

The United States, Canada, the European Commission and Britain have also given their support.

EXPLAINED: How the Ukraine crisis could impact Germany

Wealthy Russians connected to President Vladimir Putin’s government will also no longer be allowed to use the so-called golden passport system to obtain European citizenship for themselves and their family members.

Ukrainian military vehicles drive through Kyiv.

Ukrainian military vehicles drive through Kyiv. (Photo by Daniel LEAL / AFP)
 
 

What is Swift?

Founded in 1973, the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, actually doesn’t handle any transfers of funds itself.

But its messaging system, developed in the 1970s to replace relying upon Telex machines, provides banks the means to communicate rapidly, securely and inexpensively.

The non-listed Belgium-based firm is actually a cooperative of banks and proclaims to remain neutral.

What does Swift do?

Banks use the Swift system to send standardised messages about transfers of sums between themselves, transfers of sums for clients, and buy and sell orders for assets.

More than 11,000 financial institutions in over 200 countries use Swift, making it the backbone of the international financial transfer system.

But its preeminent role in finance has also meant that the firm has had to cooperate with authorities to prevent the financing of terrorism.

READ ALSO: Germany says EU will ‘severely’ sanction Putin

A Ukrainian serviceman holds a rocket-propelled grenade launcher

A Ukrainian serviceman holds a rocket-propelled grenade launcher on his position on the front line near Novognativka village, Donetsk region on February 20th, 2022. Anatolii STEPANOV / AFP

Who represents Swift in Russia?

According to the national association Rosswift, Russia is the second-largest country following the United States in terms of the number of users, with some 300 Russian financial institutions belonging to the system.

More than half of Russia’s financial institutions are members of Swift, it added.

Russia does have its own domestic financial infrastructure, including the SPFS system for bank transfers and the Mir system for card payments, similar to the Visa and Mastercard systems.

Are there precedents for excluding countries?

In November 2019, Swift “suspended” access to its network by certain Iranian banks.

The move followed the imposition of sanctions on Iran by the United States and threats by then-Treasury Secretary Steven Mnuchin that Swift would be targeted by US sanctions if it didn’t comply.

Iran had already been disconnected from the Swift network from 2012 to 2016.

Is it a credible threat?

Tactically, “the advantages and disadvantages are debatable,” Guntram Wolff, director of the Brussels-based Bruegel think tank, told AFP.

In practical terms, being removed from Swift means Russian banks can’t use it to make or receive payments with foreign financial institutions for trade transactions.

OPINION: This is Russia’s war, but we Europeans need to learn fast from our mistakes

“Operationally it would be a real headache,” said Wolff, especially for European countries that have considerable trade with Russia, which is their single biggest supplier of natural gas.

Western nations threatened to exclude Russia from Swift in 2014 following its annexation of Crimea.

But excluding such a major country – Russia is also a major oil exporter – could spur Moscow to accelerate the development of an alternative transfer system, with China for example.

What does Germany say about the move?

Banks hit by the new measures are “all those already sanctioned by the international community, as well as other institutions, if necessary”, said the German government’s spokesman in a statement.

“This is intended to cut off these institutions from international financial flows, which will massively restrict their global operations,” he added.

The allies also agreed to impose restrictive measures to prevent the Russian central bank from “using international financial transactions to prop up the ruble”, he said.

Germany has previously showed hesitation from backing the move – earlier this week, German Finance Minister Christian Lindner said he was “open” to including Swift in the EU’s sanctions response package, but expressed concern for the country’s heavy reliance on Russian gas.

Germany’s blocking of Russia from Swift “would mean that there is a high risk that Germany will no longer receive gas, raw material supplies from Russia,” he added.

But the authorities since reviewed their stance, agreeing to back the move in a bid to ramp up sanctions against Russia.

EU foreign ministers are due to meet on Sunday evening to discuss further sanctions.

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GERMANY AND UKRAINE

What a Russian victory in Ukraine would mean for Germany

For German residents, there is reason to fear a Russian victory in Ukraine. A new mass exodus of refugees would create bottlenecks in housing, childcare and schools, among other issues.

What a Russian victory in Ukraine would mean for Germany

Recent news from Ukraine has been bleak. The surge in missile and drone attacks on Ukrainian power plants over recent weeks has plunged whole districts of the capital into darkness for hours on end.

Kyiv has outlined a five-point strategy to weather the storm, including electricity rationing, urging help from abroad, receiving more air defence systems, and overhauling the grid.

Ukrainian President Volodymyr Zelensky this week said Ukraine needed “quick” and “cost-effective” repair work ahead of winter.

“We need your equipment and financial support to respond now and maintain normal life,” he told a reconstruction conference in Berlin.

While a plan to use frozen Russian assets for war-torn Ukraine dominates G7 talks in Italy on Thursday, there are voices in Germany – especially among the far-right AfD party – that would rather Germany cut off all its support for Ukraine. But these pro-Russian positions, veiled as arguments for peace, tend to ignore how dramatically a Russian victory in Ukraine would shake Germany.

An investigation by Tagesspiegel looked at what exactly a Russian victory would mean for people living in Germany. Here are the main impacts.

Germany would need to dramatically increase military spending

Andreas Schwarz, the SPD budgeter responsible for the defence budget has warned that if Ukraine lost the war, Germany would be forced to spend even more money on defence in one fell swoop.

Russia would suddenly be at the NATO border in Europe feeling militarily superior.

German defence expert Roderich Kiesewetter suggests that Germany would run out of ammunition after a few days in the event of a direct war. Kiesewetter has called for at least three percent of Germany’s gross domestic product to be invested in armaments.

Germany has made efforts to up its defence spending recently, but it is still unclear if the country will maintain a two percent GDP target for defence spending going forward.

But a sense of urgent need to ramp up Germany’s military defences does seem to be growing. On Wednesday Defence Minister Boris Pistorius announced a plan to bring back conscription to the armed forces.

Recently, former British Armed Forces Minister James Heappey estimated that a Ukrainian defeat would cost the West collectively trillions of dollars.

READ ALSO: Is Germany gearing up to reintroduce compulsory military service?

Pistorius with members of the army

Ukrainian President Volodymyr Zelensky (centre left) and German Defence Minister Boris Pistorius (centre right) stand with Ukrainian and German soldiers during a visit to a military training area in Mecklenburg-Vorpommern, north-eastern Germany, on June 11, 2024. Photo by Jens Büttner / POOL / AFP

Higher prices

Ukraine is one of the largest agricultural exporters in the world and also has stocks of rare earths and critical minerals.

A Russian takeover of the country would likely spell massive price fluctuations for goods like Ukrainian grain – which would spell increased grocery prices in Germany as a start, according to many economic projections.

More war refugees in Europe

Migration researcher Gerald Knaus told the Tagesspiegel that a Russian victory in Ukraine could “turn another ten million people into refugees”.

In parts of eastern Ukraine, such as the metropolis of Kharkiv, Russia has been wearing down peoples’ will to stay with near constant bombardment. 

Hundreds of thousands of people living there regularly go without electricity due to destroyed substations and infrastructure. Kharkiv alone is home to 1.3 million, including 200,000 internally displaced persons.

According to Eurostat, since the beginning of the war, 4.3 million Ukrainians have fled to neighbouring European countries. At 1.27 million, Germany has taken in the majority.

READ ALSO: Two years later, two Berlin residents from Ukraine on how war affects their lives

Germany’s interior ministries don’t expect tensions to ease soon. The Federal Office for Migration (BAMF) continues its efforts to distribute refugees across the country, but there is no doubt that in many places resources are running thin.

Helmut Dedy, Chief Executive of the Association of German Cities has called on federal and state governments to provide more facilities.

Increased pressure on the welfare system

Many refugees from Ukraine, and indeed many refugees broadly, are dependent on state benefits for some period of time after arriving in Germany.

As of January the employment rate among refugees from Ukraine was around 25 percent. In December of last year 710,000 Ukrainians received citizen’s allowance.

Refugees are obliged to apply for a work permit in Germany before they can join the workforce. Additionally they face a language barrier, and many of their professional qualifications may not be immediately recognised.

School and day care spots running thin

Since the outbreak of Russia’s invasion of Ukraine, nearly 220,000 children and young people who have fled the country have enrolled in German educational institutions.

So far German states have managed to handle the situation relatively quietly, but there is reason to believe that further stress on the system would be more than it can take.

A Ukrainian student in a German classroom

A name badge with an Ukrainian name seen in an international class at the Max-Ernst comprehensive school (Gesamtschule) in Cologne. (Photo by Ina FASSBENDER / AFP)

The president of the North Rhine-Westphalian Teachers’ Association suggests that the region he represents is already at its limit.

The German Association of Cities and Towns and the Association of Towns and Municipalities (DStGB) have also identified a shortage of school and day care places, as well as shortages of language courses and staff for integration services.

Germany’s educational system has already shown signs of stress – in the form of teachers’ strikes and school dropouts – before an additional influx of students are added into the mix.

Exacerbating the housing shortage

In response to the initial wave of incoming Ukrainian refugees, a section of the Building Code was enacted which allowed for the construction of new refugee accommodation without a development plan.

In some places, especially in parts of eastern Germany with growing vacancies, the influx of Ukrainians actually helped to stabilise the housing market.

But in cities where a severe shortage of housing has already been growing for years, there is no doubt that any number of incoming residents only adds stress.

Such is not only the case in popular cities like Berlin, Hamburg or Munich. In Mecklenburg-Western Pomerania, for example, the local Ministry of the Interior sees municipalities facing a major challenge in providing housing.

READ ALSO: ‘Tense housing situation’: Why a Berlin renter can’t be evicted for two years

German defence expert Roderich Kiesewetter emphasises that the aforementioned impacts on German life are not yet a foregone conclusion. He told Tagesspiegel that Ukraine could still defend itself and restore its 1991 borders according to international law, “But only if we support them accordingly and stop setting red lines for Ukraine and us”.

With reporting by AFP.

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