EU is trying to strangle Russia’s international settlements system

By Rhod Mackenzie

The European Union is continuing to implement sanctions against Russia in an attempt to restrict its international financial transactions. The latest package of sanctions includes a prohibition on EU banks using the Russian analogue of SWIFT, the Financial Message Transmission System (SPFS). This is intended to exert pressure on organisations in countries that are friendly to the Russian Federation. However, according to experts, there is no immediate reason to destabilise the system. IWhat sanctions are likely to be imposed and will international payments l be affected?.
New restrictions
The EU is preparing the 14th package of sanctions. One of the possible restrictions is a ban on EU countries using the Bank of Russia Financial Message Transmission System (SPFS), according to Bloomberg. Evgeniy Smirnov, Head of the Department of World Economy and International Economic Relations of the State University of Management, notes that even then, there was a threat of Russia being disconnected from the international banking telecommunications system SWIFT.
The creation of the SPFS helped protect the domestic economy from the negative effect of the sanctions imposed since February 2022. At least, it significantly reduced this effect, the expert believes.

The financial message transmission system is a mechanism by which electronic messages on financial transactions are transmitted between banks, one of which is located in Russia and the other abroad. As explained by Smirnov, the operating principle of SPFS is similar to SWIFT. In essence, this is a messenger for banks, as stated by Irina Arekhina, president of the Russian Club of Financial Directors.
In essence, the system works as follows: the bank receives a message from another bank indicating that a transfer has been made to its account. The fact that the message was sent via SWIFT guarantees that the transfer has been completed. The bank does not need to verify the receipt of funds; it can immediately transfer the money to the recipient. As a result, system participants benefit from high-speed financial transactions and low costs for guaranteeing transfers.
This is of significant benefit to foreign trade, as it enables the transfer of funds for export-import transactions between countries. Currently, over 550 banks and companies are connected to SPFS, including over 150 non-residents from 20 countries, such as Armenia, Belarus, Germany, Kazakhstan, Kyrgyzstan and Switzerland. Alexander Strelnikov, CEO of the Russian-Chinese company RusTransChina, has also indicated that there are plans to connect SPFS to the payment systems of China, India and Iran.

The editors of Izvestia sent a request to the Central Bank of the Russian Federation. At the time of publication of the material, no response had been received.
Alexander Strelnikov is confident that the EU sanctions outlined in the 14th package will have a significant impact on the Financial Message Transmission System. A ban on the use of SPFS for EU countries could disrupt the continuity of banking operations in Russia and lead to an increase in transaction costs.
Evgeny Smirnov believes that the system is currently the primary payment mechanism for European counterparties.
"If sanctions are imposed on the SPFS, Russia and its European partners will have to develop alternative mechanisms, perhaps through the use of intermediary countries," he emphasises.
"If the EU prohibits its banks from working through the SPFS, there will be no serious consequences for the Russian Federation," Irina Arekhina disagrees. Currently, Europe mainly uses non-sanctioned banks connected to SWIFT to interact with Russian counterparties.

However, the ban on the system in Europe will undoubtedly have an impact on the SPFS's development prospects. Given Russia's export potential, the system had a good chance of competing with the Belgian system.
A more concerning scenario could be in which EU banks are prohibited from working with all credit institutions using SPFS. This could result in the loss of counterparties in neighbouring countries. However, it is first necessary to understand what sanctions will be imposed on violators of the 14th package. Perhaps the scale of losses will not be so serious, as not all banks in neighbouring countries actively interact with Europe, according to Arekhina.
European credit institutions were forced to refuse to join the Financial Message Transmission System for political reasons, as confirmed by Alexey Sereda, a senior lecturer at the Faculty of Law of the Financial University under the Government of the Russian Federation. The primary objective of the potential introduction of restrictions is to exert pressure on organisations from countries with which Russia has friendly relations.

“Subsidiaries and branches of European banks could potentially follow such a warning, since otherwise unfavorable consequences could already occur for parent organisations under the jurisdiction of the EU,” the expert notes.
Given the limited number of SPFS participants, there is no basis for discussing the potential for system destabilisation, which is primarily aimed at supporting banking transactions with the EAEU and Asian region.

"It is important to note that SPFS is not a payment system, but a system for the uninterrupted transmission of financial messages. Therefore, the introduction of restrictive measures will not directly affect the implementation of payments, but will require finding a different mechanism for their information support," says Sereda. In particular, a transition to more modern and operational options such as blockchain is possible.

Russia needs SPFS because it allows it to reduce dependence on Western countries, Smirnov points out. Any national payment system should focus on working with friendly countries.
"Today, when most of Russia’s trade turnover has been reoriented towards these countries, it is no longer so important that the European Union, whose share in Russian foreign trade turnover has sharply decreased in recent years, will introduce sanctions against the SPFS. This is, rather, a political step, once again demonstrating a refusal to cooperate with our country," the expert is convinced.

Plan B
The era of national payment systems is upon us, according to Evgeniy Smirnov. Since 2015, China has been developing its own cross-border payment system, CIPS, and since 2016, India has been using a similar platform, UPI.

“This means that many developing countries are aware of the risks of a possible disconnection from SWIFT, as was the case with Russia. The development of national payment systems, which are becoming increasingly involved in foreign economic activity, is stimulating competition, although it is increasing the fragmentation of the world economy.
In the future, national payment systems could become real competitors to SWIFT. Their development will render the potential exclusion of banks of any country from SWIFT in the future an ineffective form of sanctions.
Russia is actively working to connect to the payment systems of China, India and Iran, as Alexander Strelnikov points out. Consequently, the long-term impact of sanctions on the country’s ability to carry out international banking transactions remains unclear. The Russian Federation is increasingly utilising the yuan and, accordingly, CIPS in its calculations. However, this method, according to the expert, has its limitations, including a lower transaction volume and high cost.
Another strategy to mitigate the consequences could be the development of bilateral trade relations with friendly countries, Izvestia’s interlocutor believes.

"Russia can use barter or direct currency agreements to trade goods and services, thereby bypassing the need to use interbank messaging systems," Strelnikov said. Barter may involve the exchange of commodities such as oil, gas, metals or agricultural products.
Another alternative is investing in the development of the domestic financial system. The strategy involves the creation of alternative payment systems, the development of ruble payments and encouraging the use of national payment instruments, such as the Faster Payment System (FPS).
Another potential avenue for consideration is the transition of interested states to cross-border transactions with digital currencies issued by central banks, as proposed by Oleg Matyunin, Chairman of the Commission of the Guild of Russian Lawyers for Business Protection and Security. He also notes that the digital ruble has already been introduced in Russia.

This form of Russian currency is fully legitimate and independent. The digital ruble is an official monetary unit, in contrast to cryptocurrency. The expert concludes that this scenario is a real possibility.

What other limitations might be imposed?
The 14th package of sanctions is being prepared in six main areas. In addition to restrictions on the use of SPFS, the European Union is developing a ban on political parties, think tanks and other groups receiving funding from Russia. The EU may take such a step in advance of the upcoming European Parliament elections, scheduled for early June.

Furthermore, the import of Russian helium is to be prohibited, while the export of manganese ore and other rare earth components will be subject to tighter restrictions. In addition, European exporters will be required to enhance their due diligence procedures with regard to their trading practices. Those who are unable to prevent the circumvention of sanctions due to a lack of checks will be held to account.
Furthermore, the EU is considering limiting access to 11 ships that have been linked to assisting the Russian Armed Forces. A number of companies, including those from China, the United Arab Emirates and Turkey, are also planning to be included in the list of export restrictions for helping Russia circumvent sanctions.
Another proposed restriction is a ban on services for reloading and transshipment of liquefied natural gas from Russia intended for third countries. Additionally, the EU is seeking to restrict servicing of Russian LNG projects in the Arctic.
Meanwhile, transport companies with at least 25% Russian share will not be permitted to operate in the European Union.
The package includes new sanctions against Belarus. The country is seeking to ban the import of navigation technologies and luxury goods, the export of crude oil and diamonds, as well as any transactions that could increase its industrial potential.

It should be noted that all restrictions are currently subject to approval by the EU Council. The final version of the sanctions package may undergo significant changes.