Pressure From All Sides, On All Players

The stakes are rising on all sides over Putin's Ukrainian invasion.

Several EU countries are pushing to disconnect Russia from SWIFT (Society for Worldwide Interbank Financial Telecommunications), the global payment system that undergirds virtually all international trade today.

SWIFT is a messaging network that financial institutions use to securely transmit information and instructions through a standardized system of codes. 

SWIFT assigns each financial organization a unique code that has either eight characters or 11 characters. The code is interchangeably called the bank identifier code (BIC), SWIFT code, SWIFT ID, or ISO 9362 code.

Several EU countries want Russia ejected from SWIFT, which in theory would cripple their export economy—at the risk of losing access to Russian commodities.

While some nations (UK, Poland, and Lithuania for example) are pushing hard for Russia to be shut out of SWIFT - the global electronic payment-messaging system - many others are anxious of executing the so-called 'nuclear option' for fear of the potential blowback.

“The EU isn’t on board with removing Russia from SWIFT for one thing because the EU isn’t on board with letting go of Russian energy,” said Erik Meyersson, a Stockholm-based senior economist covering the Eurozone at Svenska Handelsbanken AB.

The fly in the ointment is that Russia has been building out its own financial messaging network, System for Transfer of Financial Messages (SPFS). China also has its own system. Driving Russia out of SWIFT could result in Russia building greater economic ties to China.

However, China is walking its own tightrope over Ukraine. While expressing a measure of sympathy for Russia, China's state owned banks are curtailing financial activities around Russian commodities.

While Beijing has so far clearly telegraphed it is aligned, at least ideologically, with Moscow in the nascent Ukraine war, refusing to call Putin's move an "invasion" and also blaming the US for stoking the conflict while refusing to condemn the military action, Bloomberg reports that "at least two" of China’s largest state-owned banks are restricting financing for purchases of Russian commodities, "underscoring the limits of Beijing’s pledge to maintain economic ties" Russia in the face of sanctions by the U.S. and its allies.

According to the report, Industrial & Commercial Bank of China’s offshore units stopped issuing U.S. dollar-denominated letters of credit for purchases of physical Russian commodities ready for export, even though yuan-denominated letters of credit are still available for some clients, subject to approvals from senior executives.

Bank of China has also curbed financing for Russian commodities based on its own risk assessment, Bloomberg also noted adding that the bank has yet to receive explicit guidance on Russia from Chinese regulators.

For all of Beijing’s bluster, China is often more willing to comply with sanctions than their rhetoric suggests, and it is reported that Xi Jinping, on a phone call with Putin, pressed him to negotiate rather than try to fight.

China’s four largest banks have complied with previous U.S. sanctions against Iran, North Korea and even top officials in Hong Kong because they need access to the U.S. dollar clearing system, a Bloomberg source said, even though China has regularly breached the Iran oil embargo and its purchases of millions of barrels of Iranian oil in violation of US sanctions are not exactly a secret.

Perhaps to demonstrate to the West his eagerness to mediate, in a phone call with Vladimir Putin on Friday, Xi urged the Russian leader to negotiate with Ukraine to defuse tensions.

The wrong move by any player in this global psychodrama and global finance heads south with frightening speed.