Pull the rope

The main principle of war is to hurt or harm the enemy as much as possible. And what hurts more in the twenty-first century than money? While the United States and NATO members have denied any direct involvement in the Ukraine war, they are fighting the war on the economic front. In a bid to stop Russia from further attacks, the United States, the European Union and other countries have levied several economic sanctions on Russia. Sanctions are penalties that one country imposes on another to penalize them for violating international laws. These sanctions can be unilateral i.e. levied by one country on another country or multilateral i.e. several countries collectively levying a ban on other countries. Usually, these sanctions take the form of trade embargoes and travel bans, as they are the easiest to implement. However, this time threat is from the world’s most powerful nation and therefore, the sanctions are being levelled accordingly. Belarus which has supported Russia in this war is also facing the wrath of these sanctions.

Sanctions that Russia is facing

Since 80% of Russia’s foreign exchange transactions are carried out in US dollars, the United States has announced that it has frozen the assets of four major Russian banks and also cut them off from dollar trades. Several measures have been taken to ensure the Russian Government, companies or citizens cannot raise, withdraw or deposit money in other countries. The United Kingdom and others have also followed the same. Russian President Vladimir Putin’s assets in the United States, European Union, United Kingdom, Switzerland, Japan and Canada have been frozen for recognising the independence of Donetsk and Luhansk and for the full-scale invasion of Ukraine. Similar sanctions have also been levied on Russia’s Foreign Minister, Defence Minister, Chief of Armed Forces and Russian Security Council members. Some countries have also banned all 351 Russian Parliamentarians who supported Russia’s vote for recognition of Donetsk and Luhansk, from travelling and have frozen their assets as well. A long list of Russian industrialists and politicians has also been placed in the sanctions list, and their assets have been frozen. Businesspersons who are considered to be close to President Vladimir Putin have been targeted ahead of others. The United States, European Union and others have closed their airspace to Russian aircraft and therefore, Russians or others cannot fly to or from Russia to these countries. Many western countries have banned the export of high-end technology, especially those relating to military up-gradation to Russia and also includes electronics, telecommunications and aerospace, countries. European companies have been banned from doing any business with Russian state-owned companies.

Companies that have cut their ties with Russia

Apart from the Government’s sanctions, various companies have also voluntarily opted to stop providing goods or services to Russia, or have halted their operations in Russia. Visa, Mastercard and American Express have suspended all their operations in Russia to protest the invasion of Ukraine. Their cards will no longer work on ATMs, card swipe machines, online payments or international payments to Russian companies. However, the Russians would be able to continue using their card within Russia, until the expiry of the card. Microsoft said it was horrified by the situation in Ukraine and would suspend all new sales of its products and services in Russia. Apple halted product sales and restricted Apple Pay Russia, disabled Apple Maps in Ukraine, and removed Russian State media outlets from its App Store. Meta has announced that Facebook pages and Instagram accounts would no longer be accessible in Russia. Dell has suspended product sales in Russia.

Mango, which employs 800 people in Russia, has temporarily closed its stores and its online platform. Ikea has closed all its 17 stores in Russia and has paused sourcing materials from Russia. H&M, the world’s second-largest clothing retailer, has paused all of its sales in Russia. Nike has stopped taking online orders for Russian customers as processing payments becomes more difficult with the sanctions, however, has allowed its stores to remain open. Netflix has temporarily halted all future film and television projects in Russia and has defied calls from the Government to add state news channels to its services. Later, it also suspended all its services in Russia. Airbnb has suspended all operations, hitting Russia’s 90,000 active short term rentals on the service. Spotify has indefinitely closed its Russian offices and removed state-backed media content from its platform. Mercedes-Benz Group has halted the sale of cars and vans in Russia. Harley-Davidson has paused the shipment of motorcycles to Russia saying its thoughts are on the safety of the people of Ukraine. BMW has stopped the export of cars and said it would stop production on the ground there.

Banning Russia from SWIFT

To further escalate the economic war, the United States and European Union used the so-called ‘Economic Nuclear Weapon’ by banning Russian banks from SWIFT to isolate Russia from the international financial system. SWIFT stands for the ‘Society for Worldwide Interbank Financial Telecommunication’. It is a secure platform for financial institutions that exchange information about money transfer transactions. The SWIFT network is based in Belgium and is overseen by the central banks of 11 countries – Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, the United Kingdom, and the United States, apart from Belgium. SWIFT does not move money rather it only verifies information of transactions with secure financial messaging services that include more than 11,000 banks in over 200 countries, under its network.

When we request to transfer money to someone in a foreign country, our bank only sends a message which contains details of account, beneficiary and amount, to the other bank, through the SWIFT messaging system. Based on the message, the other party bank releases payment to the intended beneficiary. Since banks have several transactions every day across cities and multiple countries, the actual remittance only takes place at designated settlement times when only the net amount of all transactions put together, is paid or received, as applicable. Thus, cutting off a country from SWIFT is equivalent to restricting the internet access of a nation, as it becomes difficult to execute and settle thousands of transactions that occur every day with multiple banks, in multiple currencies and across multiple countries. Before this day, only one country has been cut off from SWIFT — Iran, and it resulted in Iran losing one-third of its forex reserves. Thus, banning Russia from SWIFT is the harshest measure against the country, and is expected to badly hit its economy, as it is heavily reliant on the SWIFT platform for its oil and gas exports. This move will cripple the country and push it back to ‘the telephone or a fax machine’ to make payments. Currently, only a few banks have been banned, to keep the option of further escalations open.

Impact of sanctions

The United States and the European Union are using sanctions as the main weapon of war instead of the army, navy and airforce. Firstly, for years, economic sanctions have had little impact, despite being levied on 50+ countries, with 27% of world GDP. Most autocratic governments have bypassed the sanctions and managed to stay afloat. The sanctions have already tumbled the Russian currency, Rouble, by 28% this year and have led to inflation in the country. Russian Ruble is now worth less than a penny, falling from 0.013 against USD before the war to as low as 0.0072 on March 8. The Russian Central Bank had to double its key interest rate to 20%. Meanwhile, share prices also dropped by over 90% in offshore trading, as many multinationals have left Russia. Russia has already announced emergency measures, to ban residents from transferring money abroad and forcing exporters to buy the currency, to restore the plunging Russian Ruble.  There is a shock in the economy with financial panic, sudden market closures, and inflation that will take months to stabilize. Russia is sitting on doors of a big recession that will impact its investments, spending, exports, and trade if the economic sanctions continue.

Meanwhile, Russia had prepared for the war, and the sanctions, as it had been building up foreign currency reserves which were touching a record high of USD 630 billion in January 2022. Since the 2014 attack on Crimea, Russia has worked on alternatives, to the SWIFT system, including the SPFS (System for Transfer of Financial Messages), developed by the Central Bank of Russia. Russia had shifted to ‘System for Transfer of Financial Messages (SPFS) which is based on a network of more than 100 countries on China’s Cross-border Interbank Payment System (CIPS) system. It has been internally using the network since 2014, after learning lessons from the sanctions levied back then. About 20% of Russia’s international trades are also done through SPFS.