Payments Sanctions on Russia Have Been Coming Quick, But Their Impact May Be Limited

The actions taken by the SWIFT payments-messaging network and by Visa Inc. and Mastercard Inc. to punish Russia for its invasion of Ukraine will have an impact, but a muted one, observers say. 

The 49-year-old SWIFT system, which on Saturday said it is banning Russian banks, has not barred all Russian banks, leaving open channels for payments on Russian oil and gas, says Eric Grover, a payments consultant and close observer of the payments business in Europe. Meanwhile, “the Visa and Mastercard bans will be more effective, but [Russia] can weather that,” he adds.

The European Union, Britain, Canada, and the United States on Saturday moved to shut down access to the international SWIFT network by certain Russian banks following Russia’s Feb. 23 invasion of Ukraine, but they did not name the financial institutions. The EU on Wednesday said it would bar seven Russian banks but exempted institutions involved in moving energy-related payments, according to Reuters. The Belgium-based Society for Worldwide Interbank Financial Telecommunication facilitates money movement among banks in countries around the world. It handles roughly half of all high-value cross-border transactions.

About 40% of Europe’s oil and gas is imported from Russia, according to estimates. The country generates 17% of gas production and 13% of oil output globally.

Both Visa and Mastercard on Tuesday said they are suspending access by Russian banks to their networks, complying with bans announced by Western governments. Visa derived $964 million in net revenue from Russia in its fiscal 2021, or 4% of its total, according to an 8K filing late Wednesday. It took in another $241 million, or 1%, from Ukraine. The corresponding percentages for Mastercard are 4% and 2%, according to an earlier filing by that company.

The punitive actions, indeed, may have a harsher impact on the payments networks than on Russia, according to Grover. “They probably kill the viability of Visa and Mastercard as payment systems in Russia,” he notes. He points to the country’s competing Mir network, which he says will likely benefit from the bans. The impact “will be painful but it’s not crippling,” Grover says. “They have the Mir network as a domestic alternative.” 

Spurred by similar banking sanctions imposed in 2014 in response to Russia’s invasion of Crimea, the country’s central bank established Mir in 2017 to lessen dependence on foreign payments systems. Since then, “Russian banks have been pressured to issue Mir cards,” Grover says.

The bottom line, Grover adds, is that the West is “not willing to take the pain of fully punitive economic sanctions.” Its reliance on Russian energy exports, in particular, will soften its response to Russian president Vladimir Putin’s decision to invade Ukraine, he concludes. “The reason we’re not willing to kick all the Russian banks out of SWIFT is because we want to continue paying them for gas and oil. This is not a slip-up. [We] consciously decided we need to have a hole” in the ban.