Goldman Sachs: The Impact on the European Economy of SWIFT’s Exclusion of Russia

Her Eleftherias Kourtali

The main concern for the EU economy in relation to Russia’s exclusion from SWIFT is the possible retaliation, according to which the Russian government would put pressure on energy exporting companies to reduce their exports to Europe and their production in general. as Goldman Sachs points out in its current analysis.

This, he explains, could lead to major disruptions in the short term for Europe as a whole, and the eurozone in particular, even though gas imports from Russia have fallen from almost 40% of total imports in 2021 to less than 20% in 2022 and Russian oil accounts for 11% of world production.

It is therefore the indirect risk of retaliation on the energy front that could prove to be potentially more detrimental to the European economy than the immediate risk of a split in financial activities due to sanctions, Goldman said. If Russia’s remaining energy exports to the EU fall sharply, it is expected to have a continuing negative impact on economic growth, potentially ranging from at least 1% of GDP in France and Germany to 3% in Italy, while boosting significantly. inflation.

More specifically, as the US bank notes, financial sanctions so far focus on five different areas (finance, energy, transportation, technology and travel). Although most of these measures reduce or prohibit the supply of materials and technology to Russia, while restricting the issuance of visas to Russian officials and members of the business community, the most important – and potentially economically damaging – sanctions are financial and energy sector.

Financial sanctions are aimed at preventing Russia from gaining access to the EU capital markets, disrupting its economy’s participation in the global financial system and increasing the cost of lending to penalized entities such as banks, government and the central bank. In addition to the freezing of central bank assets and reserves held in the EU and in contrast to the sanctions imposed in 2014, the EU – in coordination with Canada, the United Kingdom and the United States – has decided to decouple selected Russian banks from the international financial system by subtracting them from the SWIFT messaging system.

Given the EU’s tacit intention of allowing energy payments to be settled by Russia, Goldman Sachs believes that excluding Russian banks from SWIFT presents some challenges.

Given SWIFT’s automated structure, it seems unlikely that specific exceptions to such payment arrangements will be incorporated into the system and it is therefore more likely that an alternative payment system will be used to manage these transactions.

At the same time, the EU has also imposed additional sanctions on the energy sector, following measures in 2014, aimed at banning the sale, supply and export to Russia of related goods and technologies in oil refining, while limiting the provision of related services.

Economic and financial impact: Initial assessment

The financial risk of EU sanctions on European countries has at least three dimensions, according to Goldman. Firstly, it depends on the exposure of EU banks to cross-border investments with the Russian banking system. With the exception of Austria and, to a much lesser extent, Italy, France and the Netherlands, the exposure of the banking system seems to be quite limited. Therefore, possible interruptions from this channel seem unlikely and their impact will probably be small. However, the growing degree of uncertainty about assets previously considered safe (such as secured repos and cash at central banks) could hamper the ability of Russian entities to make payments in dollars and euros and thus cause losses in the European Union. financial system, emphasizes the American bank.

The second risk concerns long-term investments and not credit relations. Goldman notes that even the EU countries with the largest foreign direct investment in Russia have a relatively limited share of GDP. In addition, there has been a sharp decline in Russian foreign direct investment since 2014, when the first package of sanctions was implemented amid the annexation of Crimea. In this respect, the bankruptcy of Nord Stream AG announced on 1 March indicates, in GS’s view, more of a local financial risk than the onset of a global systemic failure.

Finally, it is important to note that the ban on SWIFT does not mean that international financial transactions will suddenly become impossible in Russia (with the exception of Russian financial institutions, which are also subject to asset freeze sanctions). Prior to its creation in 1973, banks exchanged telex, fax and other means to carry out such transactions. SWIFT’s main contribution was to enable faster, more secure and efficient execution of orders and, therefore, the most likely consequence of this sanction is a sharp reduction in the number of financial transactions.

The immediate consequences of SWIFT disconnection therefore seem more limited for current transactions. On the other hand, in terms of new transactions and risk over the short term, it is likely that financial flows will be reoriented to alternative payment systems, such as the National Payment Card System (Mir) instead of the Visa and MasterCard systems and the Financial Messaging System. (SPFS).

The main risk to the EU economy, therefore, is possible retaliation by the Russian government. The consequent risk of major supply disruptions for Europe will be most pronounced in the European GDP in the short term, despite the fact that the share of gas imported from Russia has halved in the last six months, which is set at a reduction of 1% up to 3%. The risk of retaliation seems to be greater for the European economy than the limited direct impact of financial disintegration between the EU and Russia caused by sanctions.