Today, Explained - Breaking Russia’s banks

Episode Date: March 7, 2022

The US and EU are denying a handful of Russian banks access to SWIFT, a key tool in the global financial system. This episode was produced by Miles Bryan, edited by Matt Collette, engineered by Efim Shapiro, fact-checked by Laura Bullard, and hosted by Noel King. Transcript at vox.com/todayexplained Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

It's Today Explained. I'm Noelle King. A few weeks ago on the show, we talked to the historian Nicholas Mulder. He wrote a book about the history of economic sanctions and whether or not they work. And his answer was, not so much, although the U.S. keeps trying. In most cases, I think it's clear that if the goal of those sanctions was behavioral change, only a very small amount of them have worked, or they've worked only a little bit, but not actually fully. But if the U.S. and Europe don't want to get involved in a ground or air or sea war with Russia, hitting its financial sector is one of the only options.

On February 26, the U.S., Canada and European allies announced they had committed to kicking some Russian banks out of SWIFT. On today's show, we explain what SWIFT is. Get groceries delivered across the GTA from Real Canadian Superstore with PC Express. Shop online for super prices and super savings. Try it today and get up to $75 in PC Optimum Points. Visit superstore.ca to get started. To explain what Swift is, we called Emily Peck, a markets reporter for Axios. It stands for the Society for Worldwide Interbank Financial Telecommunication, but it just goes by SWIFT. Who came up with that name?

I'm not sure exactly who came up with that name, but it is a cooperative of financial organizations all based in Belgium. This dates back to the 1970s. SWIFT was founded to take over from a now very outdated technology. So in times of non-invasion, in times of non-war, what does SWIFT do? Okay, so this has been really an interesting journey for me, Noelle, because I'm not a longtime Swift expert by any means, like many of us just getting up to speed during this crisis. And you might have seen already Swift described as a messaging service used by banks. And that is correct. You can think of Swift as the backbone of the financial services sector. About half of all high-value payments across borders go through SWIFT.

It links more than 11,000 banks in 200-plus countries. But what I think people might not understand and what kind of does take a while to grok is that when you're moving money around the world, the message is everything, right? It's not like someone's mailing cash or checks to another bank or financial institution. You tell a bank or you yourself want to move money. So you send a message. You say, I'm moving $100 to Noelle and sending it to her bank in this place. And here is the bank number. And that message is really what is so important. And without a system that lets all the different banks and institutions easily send these messages to each other,

it becomes very difficult to transfer money between countries. And that is what SWIFT is doing, is transferring money between countries, bank to bank. And this is a thing that I don't think I understood until you just said it. Swift is a messaging service, but Swift is not the thing sending me $100. It's the thing sending the message that says, I, Emily, am sending Noelle $100. Exactly. Yes. Someone described it to me like an ATM. You go to the ATM and you deposit your $100 in there. And like, that's what matters. No little man is inside the ATM machine, like holding on to my money or anything like that. It's the message is everything. And you know, the banks will settle up. They kind of like net out the money. You know

what I mean? Because they're sending money back and forth all the time. This is a worldwide financial messaging system. Russia is part of the world. Russia is using SWIFT. And then Russia invades Ukraine. And what happens between Russia and SWIFT? Well, at first, nothing. Nothing happens at all. SWIFT keeps being SWIFTY. Russian banks and companies and people still use it to send their money. But then there starts to be this kind of outcry. There are major things they've not done. No block on Russia's energy market and no move to block Russia from a system called SWIFT,

an interbanking messaging platform that enables global payments. The U.S. and the EU and other Western allies start talking about sanctions and you start hearing like they want to possibly cut Russia off from SWIFT. And then a big announcement about sanctions comes out last week. Putin chose this war and now he and his country will bear the consequences. The U.S. and EU, they cut off Russian banks' access to the United States financial system, but they do not cut off SWIFT. The sanctions that we have proposed on all their banks

have an equal consequence, maybe more consequence, than SWIFT, number one. Number two, it is always an option, but right now that's not the position that the rest of Europe wishes to take. Everybody at this point, after Russia invades Ukraine, the West is really upset. They're looking for things they can do to punish Russia. And it would seem like cutting Russian banks off from SWIFT would be a really easy way to, like, knock them for a loop. Why doesn't that happen?

Well, it doesn't happen right away because I think it's seen as like, someone described it to me as the ultimate sanction. It's considered like a very big deal for, I guess for a couple of reasons. One, Swift likes to say it's not political. It tries to be more of a neutral mechanism. And once you start monkeying with neutral mechanisms and using them as political weapons, you change the nature of the service. Second, the sanctions they initially took against the Russian banks, cutting them off from the US financial system, asset freezes, things like that. The argument was this is going to be a bigger deal than the SWIFT cutoff. SWIFT cutoff is symbolic, but these bank sanctions are going to be a bigger deal than the SWIFT cutoff. SWIFT cutoff is symbolic, but these bank sanctions

are going to be a bigger deal. So initially, that's why SWIFT was left out. But then, but then, then the Ukrainian Minister of Foreign Affairs, as we say in these times, he took to Twitter. And, you know, he tweeted the next day, you must ban Russia from SWIFT and kick it out of everywhere. We demand and we need immediate steps to impose a full financial isolation of Russia from all civilized systems, applying to all Russian banks, including its central bank. And this idea that you must ban Russia from SWIFT really took off. And I guess it went viral in as much as a wonky financial transaction messaging service based in Belgium can go viral. It did. And so then what happened was the US, the EU said, you know what, I will now propose to EU

leaders the following measures. First, we commit to ensuring that a certain number of Russian banks are removed from SWIFT. We learned seven Russian banks were going to be banned from SWIFT. That hasn't gone into effect yet. And they left out the biggest Russian bank, Sberbank. They also left out a bank that's like partly owned by Russian gas giant Gazprom from the Swift ban. And the reason those two giants were left out is because one thing that the US and the EU and everyone has been concerned about in levying these sanctions has been Russia's oil and gas sector. Russia supplies around a third of Europe's gas, and the latest figures show imports have actually increased since its invasion of Ukraine. to sell the oil and gas. There's this notion of self-inflicted punishment, right? I mean,

cutting Russian oil and gas from Europe would be pretty devastating for Europe. Prices are already shooting up higher for oil and gas, and nothing's really changed. Just the idea that these markets could be disrupted has sent prices soaring. If it actually happens and the oil and gas is shut off, that would be devastating for Germany, for Italy, for all these economies. And I think there is not an appetite for that. Once a bank is cut off from SWIFT, who notices it first? Is it like some guy or gal in front of a terminal saying, oh, where'd my money go? Where are my messages?

Like, how is this realized? IRL. The seven banks have been notified. I think they have 10 days to sort of get ready. So it's not like some guy at a bank is going to all of a sudden not be able to access it. The people who might be surprised are would be people living in Russia,

because you could go on a service like Wise, where it lets you transfer money internationally. And so you could use a service, could be anyone, to send money to your relatives. And people in Russia want to get their money out of the country. So they might log on to an app or something to try and do that, and they won't be able to. So like so many of these complicated how do we punish people questions, this is one of those things that may end up punishing ordinary Russian people rather than like Vladimir Putin and his cronies who all have wealth stashed in houses and yachts and bank accounts elsewhere. I think about this all the time. I think everyone's thinking about this. We've seen already pictures of Russian people waiting on ATM lines and things like that.

All these sanctions are going to weigh heavily on the Russian people. And while it might be hard for them to get their money out of Russia, big money always finds a way. The U.S. and its allies are going after wealthy oligarchs and such. But just like you said, they have money stashed all around the world in all kinds of places and all kinds of assets. And it's going to be hard to find them all. Thank you. We're named the number one digital photo frame by Wirecutter. Aura frames make it easy to share unlimited photos and videos directly from your phone to the frame. When you give an aura frame as a gift, you can personalize it. You can preload it with a thoughtful message, maybe your favorite photos. Our colleague Andrew tried an aura frame for himself. So setup was super simple.

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with iGaming Ontario. We're back with Emily Peck. She's a markets reporter with Axios, and she's part of a team there that's putting together a new podcast called How It Happened, Putin's Invasion. SWIFT, the cooperative of financial organizations that allows banks to send messages to each other, tries to stay out of geopolitics, which makes sense. It wants to be a system for the world,

and it can only do that if the whole world participates. But when Russia invaded Ukraine, Canada, the U.S., and European allies instructed Swift to cut Russia off, and it did, partially, by tossing off seven Russian banks. It was a noteworthy move, but it's not the first time in recent history that this has happened. The example everyone points to is Iran getting cut off from SWIFT, which happened back in 2012. The European Union imposed new sanctions to put pressure on Iran to suspend its program of uranium enrichment. Western countries believe the program is designed to create nuclear weapons. It was pretty devastating for the country.

It's Iran's bank customers who will feel the immediate effects when they find they're unable to make simple international banking transactions. And then in the lead up to negotiating the nuclear deal with Iran that the Obama administration put together, they rolled back those sanctions as like a sweetener to make the deal happen. Happy crowds turned out to cheer the Iranian negotiators as they arrived back in Tehran. Young people especially who hope the deal will bring jobs and revive the economy. And when you say it was devastating for Iran, in what way? What did that look like? They weren't able to send money to buy things. It was hard for the people who live in Iran, but the country itself was able to kind of

find a way through it. It wasn't pretty, but as with so many things, it's the regular people who get hurt the most. March 1st, 2022, St. Petersburg, Russia. We just arrived here. It's like the only ATM in the entire city that's available. We got screamed at by the guards telling us that there's no money in the ATM and that we should leave immediately. A couple months ago, Today Explained did an episode about how Russia has its own version of NATO

called the CSTO, the Collective Security Treaty Organization. I think Russia would like to see it as Russia's NATO. NATO definitely doesn't view it as that. Right now, aside from Russia, it has five other members, Tajikistan, Kyrgyzstan, and Central Asia, Armenia, Belarus, and of course, Kazakhstan. And this made me wonder, in all honesty, as I've been hearing about SWIFT, is there a Russian version of SWIFT? Yeah. Russia has developed its own financial messaging system, but it doesn't have very many

financial institutions. Swift has more than 11,000. Russia has, according to Bloomberg's reporting, fewer than 400, and very few are international. So Russia has a version of Swift, but the point of a messaging system is to be in touch with as many institutions as possible. That's how you get money around the world. And if it's only in touch with 400 other financial institutions, it's a version of SWIFT, but it's kind of like a bootleg version of SWIFT. I've been thinking about it like a social network. It's only as good as the amount of people who show up to it every day. So remember when President Donald Trump got kicked off Twitter

and tried to go to other platforms. He's trying to start his own thing now. It's like, okay, you have to have critical mass for a messaging network or any kind of network to actually work. I imagine that world powers that are in difficult diplomatic relationships with the West look at SWIFT and think, hmm, there's this tool that the U.S. and the EU have that can really put our citizens in a difficult place financially, which no government wants, because that tends to be one of the ways that governments get overthrown. So I'm wondering, in particular about China, right? Obviously, vying with the United States for the position of leading world power. Does China have a version of SWIFT?

Yes, China has a messaging service also. China's cross-border interbank payment system, otherwise known as SIPS, has been striving to become a highway for the Chinese yuan. But just like Russia, it's mostly connected to other Chinese financial institutions. It's not anywhere near where SWIFT is in terms of global connections. And the other problem is China's currency is just not used that much. The global currency is the dollar. Yeah. Most payments in the world are in dollars. China has a messaging service. It's not very international. But I mean, I think you are right to ask that question. And I think SWIFT doesn't want to be used politically because if people start to view it as a political tool, then it makes it less desirable. If some world powers see SWIFT as this system that might kick them out, surely at some point,

China and Russia and other countries that are not allied with the United States and with the West are going to sit down together and say, we're going to do our own version of this and we're going to make it big and we're going to make it work. And the West can do its thing and we'll do our thing. And then we have chaos. Right. And definitely people are worried about that. not because of the power of the dollar compared to the power of the yuan. Obviously, the ruble is not very powerful at this moment. It's just not comparable. I don't think anyone wants a currency issued by an autocracy to be the one that rules them all. I mean, China manages its economy very closely. We saw, I think it was last year, they decided that their big public companies were getting too big and they stopped IPOs from

happening. I don't think anyone would want to rely on the yuan as like the global currency of choice. You have to transact in dollars. You have to transact in euros. SWIFT is how you do that. We now have seven banks in Russia cut off. And we have people in Russia who are going to suffer because of it. And we have Russia surely looking for a solution. I know that people keep bringing up cryptocurrency and the possibility people keep bringing up the specter of cryptocurrency and whether Russia might be able to use cryptocurrencies to get around these institutional banking systems that in this case have kicked them off partially. I don't think you need to worry about that very much because crypto needs on-ramps and more importantly, crypto needs

off-ramps. So you can put your money into crypto, you can buy the crypto, you can buy the Bitcoin, but you have to then convert it back into something, right? I can't take my Bitcoin to the store yet mostly and buy stuff. So when you off-ramp the Bitcoin, that's where you're going to touch financial institutions that are subject to all these sanctions and you're hit a dead end. folks at SWIFT, people in the EU and the US get together and say, we are going to kick those two big Russian banks off. They're done. Or is that just not going to happen because of the, as you said earlier, you're punishing them, but you're actually punishing yourself dilemma? I don't want to make any predictions right now because the swiftness, if you'll pardon my word choices, the swiftness of the EU and the US to levy these sanctions, how quickly they did it and how severe they've been and how they keep adding on more to the pile.

I wouldn't rule it out. Ever since the days of globalization, and I'm thinking about like the early 90s, we have heard many smart people say there are no more borders. There's just capital. And capital flows through countries and through systems, through the mechanism of messaging systems like SWIFT. Is the disconnection of Russian banks from SWIFT proof of anything about the way we talk about globalization and the free flow of money? Yes. I mean, since the 90s, there's really been huge efforts to bring Russia into the global financial system, even when it was a bad actor. Even after Crimea, I mean, there were sanctions, but Russia was still a part of the global financial system. Its wealthiest citizens

have assets, like we said, all over the world. The reason we're able to do sanctions right now to cut Russia out of SWIFT, et cetera, is because it was part of that big river of capital flowing through the world. It was a player, so that gives us leverage to punish them, essentially. By coming into the fold of capitalism,

Russia opened itself up to this. It opened itself up to the potential that it would be punished in this way. Yeah, exactly. And actually, since sanctions were levied back in 2014 after Russia invaded Crimea, it's been trying to kind of reduce its exposure to these kind of sanctions. It's tried to build up currency reserves in currencies that are not the dollar. It has a big pile of gold. So it's tried to make itself less vulnerable to being a part of the global financial system. But even for all that, it was still quite vulnerable to the global financial system. Do you think this moment in history where Russia is facing these unprecedented economic sanctions and is deciding it's going to have to find different ways to do business and different

ways to protect itself, it wants to deintegrate from the global economy, do you think that could be a trend going forward? That other countries decide we don't want to be part from the global economy. Do you think that could be a trend going forward? That other countries decide we don't want to be part of the global economic system because it makes us vulnerable? I do think that could be a trend going forward. I think a slow-moving trend, but a lot of smart financial columnists and observers and so on have been talking about this a lot the past week or two. In these sanctions, in this economic warfare, we've seen the U.S. and its allies engage in using the dollar as a weapon and demonstrating just how strong that weapon can be. At the same time, maybe that's the apex for the dollar. Maybe now that show of strength leads Russia and countries like Russia

to push harder to create something else. Today's show was produced by Miles Bryan, edited by Matthew Collette, engineered by Afim Shapiro, and fact-checked by Laura Bullard. The rest of the team includes Halima Shah, Will Reed, Hadi Mouagdi, and Victoria Chamberlain. Our supervising producer is Amina El-Sadi. Vox's VP of audio is Liz Kelly Nelson. We used music by Breakmaster Cylinder and Noam Hassenfeld. I'm Noelle King.

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