Explained: Why Is U.S Still Backing Off From Threat To Eject Russia From Global Payment System SWIFT

U.S President Joe Biden on Thursday unveiled sanctions against Russia that target close to 80% of assets of the country's banking sector, but still held back from depriving access to SWIFT (Society for Worldwide Interbank Financial Telecommunication), the messaging network used by 11,000 banks across 200 countries to make cross-border payments.

Managed by the National Bank of Belgium, a large share of international business transactions are conducted via the SWIFT system. It encompasses a whole communication infrastructure with its own language, codes, standards, and protocols for making sure that any trade is agreed, cleared, and settled.

“The sanctions that we’ve proposed on all their banks are of 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,” Biden said responding to the question on why Russia's access to SWIFT was not cut as part of the sanctions.

“We’ve now sanctioned Russian banks that together hold around $1 trillion in assets,” Biden informed reporters at the White House. Biden noted that the U.S. had already cut off Russia’s largest bank from the U.S. financial system.

Biden claimed that the punitive financial measures "will limit Russia's ability to do business in dollars, euros, pounds and yen to be part of the global economy."

Cutting access to SWIFT would have been a potentially debilitating measure against Russia as it will enormously damage Moscow's international trading capabilities, but why is the U.S unwilling to do that.

Fear that China's homegrown payments system could emerge as an alternative

In 2015, China launched CIPS (Cross-Border Interbank Payment System), a locally developed payment system that offers clearing and settlement services for its participants in cross-border RMB payments and trade.

CIPS has made slow but steady progress. By late 2021 it clocked a daily average volume of transactions of 310bn yuan ($50 billion), but still behind SWIFT which averages $400 billion worth of transactions a day.

The U.S and the European Union fear that cutting off Russia would allow it to embrace CIPS and effectively bolster further adoption of a rival system.

Also excluding Russian banks from the SWIFT network will violate the neutrality principle of the communications standard and will incentivise the emergence of an alternative network to communicate financial transactions resulting in fragmentation of what is now a defacto payment system.

Europe's Reliance On Russian Energy

Russia is an energy giant—the world’s third-largest producer of oil and the second-largest producer of natural gas. A major chunk of Russia’s energy output goes to satisfying European demand, especially natural gas sent over a network of Soviet-era pipelines crisscrossing Ukraine and other Eastern European countries.

Cutting Russia off from SWIFT could make it harder for European buyers to pay for its energy supplies. As Biden acknowledged, the U.S is under pressure from its European allies not to exercise this option.

Russia Has Prepared Itself For Isolation From Global Financial System

Moscow has created its own payment system, SPFS after it was hit by Western sanctions in 2014 following its conquest of Crimea early that year. SPFS now has around 400 users, according to Russia's central bank. Twenty per cent of domestic transfers are currently done through SPFS. Russia has also 'de-dollarised' its economy.

For years now, Russia has stockpiled currency reserves to the tune of over $500 billion and could easily manage to overcome any short term economic difficulties arising out of rubbles lost due to gas disruption.