Shares of European banks with close links to Russia have suffered sharp declines on the regions exchanges, as Western nations intensified financial sanctions on Moscow following the invasion of Ukraine.
Banks are grappling with a rapidly shifting scenario after the U.S. and EU ramped up their measures against Russia blocking some of the nation’s banks from the international SWIFT transaction messaging system and moving to target the central bank’s foreign exchange reserves.
What is SWIFT?
SWIFT, short for the “Society for Worldwide Interbank Financial Telecommunication”, is a secure messaging system that facilitates rapid cross-border payments. Its standardised system of secure messages is highly trusted, and allows banks to process high volumes of transactions very quickly. The Belgium-based system was set up in 1970 as a co-operative made up of the thousands of financial institutions that use it.
It has become the backbone of international finance. In 2020, around 38 million messages were sent each day over the SWIFT platform, according to its Annual Review. Each year, trillions of euros are transferred using the system. While there are alternatives – for example, Russia and China operate their own systems that work in similar ways – SWIFT is the most-used worldwide.
Banning “selected” Russian banks from SWIFT makes it much harder for them to access financial markets around the world. As a result, it would be much more difficult – although not impossible – for Russian businesses and individuals with accounts at the affected banks to import and export goods, and borrow and invest abroad.
The European Commission did not say which specific banks were affected by the decision, but some 300 Russian financial institutions use SWIFT for interbank transfers. The exclusion of Russian banks from international payments means that these financial institutions can no longer repay their debts to their European creditors. The ECB has warned that the European subsidiaries of Russia’s largest bank, Sberbank, face failure because of the impact of sanctions. The European arms of Sberbank are already failing or likely to fail under the weight of western sanctions and after “significant deposit outflows”, according to the European Central Bank. Sberbank Europe has about 800,000 retail and corporate customers in central and eastern Europe, with total assets of €13bn. The Russian bank established its European subsidiary when it acquired Austria-controlled Volksbank International in 2012.
Shares in Austria’s Raiffeisen Bank International have fallen more than 50% over the past three weeks amid investor concern that the sanctions would hit one of the lender’s most profitable units. France’s Société Generale SA and Italy’s UniCredit SpA were both down about 10%. All three have significant businesses in Russia. The three banks’ Russian subsidiaries have not been included in the western sanctions lists, which have focused on domestic players, and they have not been removed from the Swift global payments messaging system.
BNP Paribas, which was down almost 9%, issued a statement Monday putting its exposure to Russia and Ukraine at around 500 million euros ($559 million), and said it secured its activities there with “an important level of guarantees and collaterals.
Russia’s central bank also sanctioned
Along with pulling access to SWIFT from some of the country’s commercial financial institutions, Russia’s central bank has also been sanctioned. The sanctions would prevent the central bank from “deploying its international reserves,” the European Commission said, effectively cutting the Russian government off from over $600 billion (€536 billion) of foreign currency reserves.
The impact of the sanctions was felt as the rouble fell almost 30 per cent against the US dollar and the Russian central bank hiked interest rates to 20 per cent in an effort to stave off the risks of depreciation and inflation.
“External conditions for the Russian economy have drastically changed,” Russia’s central bank said in a statement.
