SWIFT’s Disconnection Of Russia’s Key Banks. Portfolios and Implications
Seven Russian banks are to be disconnected from the SWIFT global payments network. We examine the banks portfolios, and the implications of these sanctions.
Which Banks Are Being Disconnected From SWIFT ?
The followed banks are being disconnected from SWIFT.
Note Acra is Russia’s domestic credit rating agency.
VTB is one of Russia’s largest commercial banks and is based in St.Petersburg. It has an ‘AAA’ Acra rating and is a Global Fortune 500 ranked business, responsible for financing Russia’s international trade, and has been providing a wide range of banking services and products in Russia, former Soviet states, Europe, Asia, Africa, and the U.S. It is also a major provider of property mortgages to Russian nationals. VTB has net assets of about US$289 billion.
Rossiya are based in St.Petersburg and has an ‘A+’ Acra credit rating, It was revealed to be a conduit for handling offshore finance for Russian investors in the Panama Papers and has been heavily involved in financing Crimean redevelopment its annexation in 2014. Rossiya has net assets of some US$5 billion.
Otkritie is based in Moscow and is one of Russia’s largest full-service commercial banks with over 440 offices throughout Russia. It is ranked 1st among privately owned banks and 4th by assets among banking groups in Russia with an ‘AA’ Acra rating, and is heavily involved in Russia’s insurance sector. It was taken over by the Central Bank of Russia in 2017 and has assets of about US$40.3 billion.
Novikombank is based in Moscow and specializes in the financing in the heavy-machinery, automotive, high-tech, oil and gas industries. It is ranked among the top 40 largest Russian banks and has an ‘A’ Acra rating and assets of US$4.3 billion.
Promsvyazbank (PSB) is a state-backed bank based in Moscow, and in part finances Russia’s defense industry although it also handles over 100,000 corporate and 2 million private Russian accounts. Acra gives the bank a ‘BBB+’ rating. Promsvyazbank has assets estimated at about US$27 billion.
Sovcombank is based in Kaliningrad, with shareholders including Russian financial investors, members of the bank’s management, as well as the Russian Direct Investment Fund, Public Investment Fund (Saudi Arabia), Qatar Investment Authority, Russia-China Investment Fund, Russia-Japan Investment Fund, SBI Holdings and others. It recently entered into an agreement with China’s UnionPay over the provision of UnionPay services in Russia.
Sovcombank pursues a policy of sustainable development and has been heavily involved in the social and environmental (ESG) aspects of its activities. It participates in the United Nations Environment Program Finance Initiative, and has signed the UN Principles for Responsible Investment. Sovcombank is also a member of the UN Global Compact, a UN initiative aimed at promoting the social responsibility of business, and was among the first among Russian banks to support the recommendations of the Task Force on Climate Related Financial Disclosures (TCFD) and has committed to apply the recommendations to make the bank’s ESG reporting even more transparent. The sanctioning of Sovcombank and its disconnection from SWIFT will have raised alarm and surprise among other global investors and partners. Sovcombank is rated ‘AA-‘ by Acra and has net assets of about US$14.5 billion.
VEB RF is based in Moscow and is a Russian state development corporation, being one of the largest investment companies and main development institutes in Russia. It has financed more than 300 Russian infrastructure and development projects. VEB.RF supports and develops the Russian economy. In partnership with commercial banks, it provides financing for large-scale projects to develop the country’s infrastructure, industrial production and social sphere, strengthen its technological potential and improve the quality of life. VEB.RF is a “non-profit organization” in Russia and is not owned, nor directed by the government or political party. Its disconnection from SWIFT will also cause alarm as to the targetting of institutions such as VEB RF. The bank has an ‘AAA’ Acra credit rating and total assets of US$50.3 billion.
When Will SWIFT Disconnect Happen?
These banks are all to be disconnected from the SWIFT network on Saturday, March 12, 2022.
Impact On Private Individual & Business Users
These banks differ widely in their activities, meaning the scope of the SWIFT disconnection is deliberately broad and has strategic implications. Impact will be felt by the private and corporate account holders of VTB, Otkritie, Promsvyazbank and Sovcombank who receive income or trade overseas. Regular account holders will need to establish accounts with Sberbank or Gazprombank, two of Russia’s largest commercial banks, who are not facing SWIFT disconnection – yet. The moves impacting account holders of VTB etc may be attempts to corall Russian private individual and business account holders to a smaller number of Russian banks to enable easier, later sanctions infliction pain directly upon the Russian population. Such a strategy would create social unrest and be a direct attempt to impose regime change in Russia.
It should also be noted that VTB and Otkritie are major providers of mortgage and insurance finance to Russian citizens and this may impact on the costs of borrowing and taking out policies in these important areas of normal Russian-private financial facilities.
Impact On Corporate Banking Users
Rossiya, Novikombank, Promsvyazbank, Sovcombank, and VEB RF are all involved in infrastructure development as part of their portfolios. SWIFT cut off will disconnect them from funding from European, Eurasia and Asian policy banks, including the Asian Development Bank, New Development Bank and the Asian Infrastructure Investment Bank, all of which Russia’s Central bank has been helping to fund. This has implications downstream as it means getting policy finance into Russia for what are typically national infrastructure development projects, some with cross-border implications and designed to improve the quality of life – not just in Russia but also the CIS. This will now be far harder to arrange directly with these banks, meaning again that Russian infrastructure development needs will need to be channeled through Sberbank or Gazprombank – making it far easier to later impose additional sanctions on these two banking alternatives.
Russia’s SWIFT Alternatives: Transactional
MIR is a Russian payment system for electronic fund transfers established by the Central Bank of Russia on 1 May 2017. The system is operated by the Russian National Card Payment System, a wholly owned subsidiary of the Central Bank of Russia. MIR itself does not issue credit or debit cards, extend credit or set rates and fees for consumers; rather, MIR provides financial institutions with MIR-branded payment products that they then use to offer credit, debit, or other programs to their customers. The development and implementation of MIR was spurred by the imposition of international sanctions against Russia over the annexation of Crimea in 2014.
MIR cards were initially accepted mostly by Russia-based companies, such as Aeroflot and Russian Railways, but it has become popular among foreign companies with operations in Russia. In April 2016, AliExpress became the first foreign company to accept MIR as a form of payment within the Russian Federation, while McDonald’s was the first U.S. company to accept it three months later.
The MIR system has been introduced into the Abkhazia and South Ossetia republics, as well as in Armenia, Turkey, Uzbekistan, and the United Arab Emirates. Bulgaria and Thailand are expected to follow, according to Central Bank of Russia. MIR has also been tested in the UK and in South Korea, although the UK operations are now suspended. India has also expressed interest in continuing dialogue on accepting RuPay Cards and MIR Cards within national payment infrastructures; China has instead become a Russian player with its equivalent – Union Pay, which is now in common use throughout Russia and unaffected by the SWIFT disconnection.
China’s Union Pay
UnionPay (UPI) is a Chinese financial services corporation headquartered in Shanghai, China. It provides bank card services and a major card scheme in mainland China. Founded in 2002, UnionPay is an association for China’s banking card industry, operating under the approval of the People’s Bank of China (PBOC). It is also an electronic funds transfer at point of sale (EFTPOS) network, and the only interbank network in China that links all the ATMs of all banks throughout the country. UnionPay cards can be used in 180 countries and regions around the world, and is a significant presence in Russia. It has partnered with several Russian banks to provide ATM access throughout the country.
In 2015 the UnionPay overtook Visa and Mastercard in a total amount of value of payment transactions made by customers and became the largest card payment processing organization (debit and credit cards combined) in the world surpassing the two. However, only 0.5% of this payment volume was outside of China. UnionPay offers mobile and online payments services.
Russia’s SWIFT Alternatives: International Payments Systems
Much of the finance into developing Russian infrastructure has been sourced from Asia as opposed to the West in recent years. This suggests that the Russian SPFS banking payments system, which already exists as an alternative to SWIFT, will be further developed and expanded.
At present, SPFS has connections to over 400 banks in Russia, and it has connectivity to banks in Armenia, Belarus, Germany, Kazakhstan, Kyrgyzstan and Switzerland. An existing drawback it that SPFS only operates during regular Russian working hours and is subject to transactional delays. Infrastructure work will need to be implemented to correct this.
Discussions are on-going with other alternative sovereign payments systems operated by China, India and Iran, as well as within the Eurasian Economic Union and CIS nations. These include Azerbaijan, Armenia, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan and Uzbekistan. Other regions can be expected to be fast-tracked include Serbia, Bosnia & Herzegovina, the UAE, Saudi Arabia, Egypt, Brazil and South Africa, in addition to some of the ASEAN countries, including Singapore and Vietnam, both of which have Free Trade Agreements with the EAEU.
Linking Russia To China’s CIPS System
There are on-going discussions concerning linking Russia’s SPFS to China’s CIPS payments system. China’s CIPS is more advanced, and is a significant financial market infrastructure in China.
CIPS allows global banks to clear cross-border RMB yuan transactions directly onshore, instead of through clearing banks in offshore RMB yuan hubs. CIPS processed around 80 trillion yuan (US$12.68 trillion) in 2021, a 75% increase from 2020.
About 1,280 financial institutions in 103 countries and regions have connected to the system. These include 30 banks in Japan, 23 banks in Russia and 31 banks from African nations receiving RMB yuan funds via infrastructure projects under Beijing’s Belt and Road Initiative. CIPS counts several foreign banks as shareholders including HSBC, Standard Chartered, the Bank of East Asia, DBS Bank, Citi, Australia and New Zealand Banking Group and BNP Paribas. Standard Chartered Bank (Hong Kong) Ltd said on Feb. 14 that it has become the first foreign bank qualified as a direct participant in CIPS outside mainland China.
China has stated that its CIPS network is open to Russian banks, although at present only Sberbank is believed to possess direct access. This will undoubtedly change in the coming days and weeks.
There is a political issue between China and Russia over the use of CIPS as only one country can provide the lead spot currency. That is now likely to be the Chinese RMB Yuan given the sustainability problems the Ruble is currently enduring.
The SWIFT disconnection does not directly impact Russian or Foreign bank account standard individual or business financial connectivity overseas as alternative options exist with Sberbank and Gazprombank. Account holders with any of the banks listed above may transfer their accounts to these banks and continue to access the SWIFT network. There are sanctions in place on Sberbank and Gazprombank but these do not affect normal bank account operating facilities.
It also remains possible to continue to use MIR and Union Pay facilities in Russia, and these are in common use throughout the country in terms of ATM access and domestic transactions. Visa, Mastercard and other credit and debit card holders in Russia are advised to discuss with their card-issuing bank the status of their continued usage as this can be subject to change.
On a political note there will be some disquiet as to why Sovcombank and VEB RF is particular have been earmarked for disconnection as Sovcombank engages in promoting financial transparency, and has other sovereign wealth funds as shareholders. VEB RF is run as an Non-For-Profit and is not connected to the Russian government. Disconnection appears to have been based solely on their lending portfolio in infrastructure projects rather than any political or financial dealing with the Russian government. This will alarm other global banks involved with infrastructure finance as the implication is that other infrastructure investment banks could face disconnection from SWIFT based on the quality and geography of their investment portfolio as opposed to purely political problems.
Russia Briefing is written and produced by Dezan Shira & Associates. During these uncertain times and sanctions imposition, our firm assists Russian companies relocate to Asia, and provides financial and sanctions compliance services to foreign companies operating in Russia. We also provide market research and advisory services to foreign exporters interested in Russia as the economy looks to replace Western sourced products. Please contact us at firstname.lastname@example.org or visit us at www.dezshira.com.