On March 2, 2022, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) confirmed it will disconnect seven Russian banking groups from its financial messaging system on March 12, at the request of the EU and international partners. This system underpins the majority of international interbank payments. These seven banks are already subject to economic sanctions by the EU and other G7 countries. In combination, these measures deny or significantly diminish the access of the Russian banking system to the global financial system, markets, and infrastructure. At the same time, sanctions targeting the Central Bank of Russia's (CBR's) foreign exchange reserves are undermining its ability to act as a lender of last resort. (For more information, see Russia Ratings Lowered To 'CCC-' And Kept On CreditWatch Negative On Increasing Risk Of Default, March 3, 2022.)

S&P Global Ratings acknowledges a high degree of uncertainty about the extent, outcome, and consequences of the military conflict between Russia and Ukraine. Irrespective of the duration of military hostilities, sanctions and related political risks are likely to remain in place for some time. Potential effects could include dislocated commodities markets--notably for oil and gas--supply chain disruptions, inflationary pressures, weaker growth, and capital market volatility. As the situation evolves, we will update our assumptions and estimates accordingly. See our macroeconomic and credit updates here: Russia-Ukraine Macro, Market, & Credit Risks. Note that the timing of publication for rating decisions on European issuers is subject to European regulatory requirements.

Below, we answer some questions about the SWIFT cutoff, the other sanctions, and their effect on the Russian banking system.

Frequently Asked Questions

What is SWIFT?

SWIFT is a global, member-owned cooperative headquartered in Belgium that provides services related to the execution of financial transactions and payments between banks globally. Among these services, it provides the main messaging network for international payments. Since its creation in 1973, SWIFT has established itself as by far the most popular system underpinning international payments, with more than 11,000 institutions across 200 jurisdictions connected to it.

Are there alternatives to SWIFT for banks under sanctions?

Using SWIFT isn't, in and of itself, a technical requirement for banks to be able to execute transactions. But to execute payments outside of SWIFT, banks could have to resort to processes that are less efficient, more costly, and more manual, which typically also makes them more risky.

Alternative systems have emerged in the past decade. For instance, Russian authorities have supported the development of what is known as SPFS, while Chinese authorities have developed the Cross-Border Interbank Payment System (CIPS). However, these aren't commonly used for U.S. dollar and euro transactions, nor are they as globally accepted as SWIFT. Moreover, although Russian banks could switch to these alternative systems, their counterparties might not be as willing to participate. Another alternative is for Russian banks cut off from SWIFT to use intermediaries that are still connected to SWIFT or establish bespoke processes. However, the other sanctions already imposed on these seven banks materially reduce the practicality of these alternatives for a large number of counterparts.

Have any banks ever been cut off from SWIFT before?

In March 2012, Iranian banks were cut off from SWIFT following U.S. initiatives. This came on top of earlier sanctions, including the February 2011 executive order by former U.S. President Barack Obama that froze all of the U.S. assets of Iran's government, central bank, and financial institutions. Iranian banks still managed to complete transactions in and out of Iran using third parties that were willing to act as intermediaries. But in response, U.S. authorities fined a number of banks that facilitated such transactions. There are still workarounds to SWIFT, but they're more complicated than using SWIFT.

How significant is being cut off from SWIFT?

The seven Russian banks being cut off are already subject to economic sanctions by the EU and other G7 countries. Effectively, the cutoff helps reinforce these restrictions. These entities are Bank Otkritie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank, Vnesheconombank (VEB), and VTB Bank.

The sanction exempts Sberbank and Gazprombank, which are the main facilitators of payments for EU gas and oil imports. That said, the European Commission stated that is prepared to add further Russian banks with little advance notice, which could affect the willingness of certain counterparties to conduct transactions with banks not yet affected.

What about the sanctions on the CBR?

On Feb. 28, U.S. authorities--in coordination with other jurisdictions--introduced restrictions on the operations of the CBR, the National Wealth Fund of the Russian Federation, and Russia's Ministry of Finance. This immobilization of certain CBR assets rendered a large part of these reserves inaccessible. We consider the effect on the creditworthiness of Russia's banking system to be significant, as the measure undermines the CBR's ability to support the liquidity (including in foreign currencies) of Russian entities.

What do the sanctions mean for banks outside Russia?

We believe the direct effects of the SWIFT sanctions will likely be limited and manageable for banks outside Russia. Even without the other sanctions already imposed on these seven Russian banks, we believe many foreign banks might not be willing to consider alternative interactions with banks cut off from SWIFT so as to avoid compliance and operational risks.

Would a delayed payment because of technical difficulties constitute a default under S&P Global Ratings' criteria?

We believe that being cut off from SWIFT increases the risk of delays on payments. As per our ratings definitions, in the case of a noncredit extraordinary event, if we expect a missed payment to be made after our applicable timeliness standard but within a few business days after that, we apply reasonable judgment, and the rating might not go to 'D'. An example is when, due to a natural catastrophe or other force majeure event, an issuer cannot access payment systems for a few business days.

In contrast, we do not allow delays beyond our timeliness standards if the issuer pays the trustee on a timely basis but a judicial action--such as a government sanction against the issuer--interferes with the payment being made to the investor.

What if a sanctioned entity uses a different currency to satisfy foreign currency debt obligations?

If sanctions result in an entity becoming unable to access a foreign currency, then we will assess the other means that the affected financial institution could use to meet its obligations in that currency.

Our ratings focus on an issuer's ability and willingness to meet its financial obligations in full and on time as well as in accordance with the terms of the obligation, including in the agreed currencies. If payment is made in a currency not stipulated in the terms of the obligation and we believe that the investor does not agree to the alternative payment, we could deem this a default--even if the inability to access the foreign currency is beyond the sanctioned financial institution's control.

If a sanctioned financial institution modifies the terms of the obligation in consultation with the investors or a trustee to enable payment in another currency, we consider the nature of the modification and the value of the agreed repayment. Similar to standard exchange offers, we typically deem a modification in this scenario to be a default if (1) the investors receive less than the value of the original promise and (2) the restructure was conducted in what we consider to be a distressed situation under our ratings definitions.

Other analytical factors that could be relevant to our assessment include failure of repayment that is due to a creditor's inability to receive the attempted payment following sanctions.

What happens if an entity can't make a payment to a Russian bank due to sanctions against that bank?

If payment doesn't reach a Russian bank due to a judicial action against that bank, such as a freezing of its assets, it would not affect the issuer credit rating on the entity attempting to make the payment. This typically includes the case of an obligor not making a debt payment to a particular creditor because of a sanction imposed on that particular creditor that prohibits the obligor from making such payment to them.

Related Research

• Russia Ratings Lowered To 'CCC-' And Kept On CreditWatch Negative On Increasing Risk Of Default, March 3, 2022