Disconnecting From SWIFT? No, We Did Not Hear About It

The European Parliament has adopted another resolution on Russia. It reflects the key political claims against Moscow which have recently been on the Union’s official agenda. These include the aggravation of the situation in Ukraine, the “Navalny case”, the diplomatic scandal between Russia and the Czech Republic concerning the explosion of a military warehouse in 2014. The resolution contained radical proposals. Disconnect Russia from SWIFT and stop imports of energy resources in the event of an aggravation of the conflict in Donbass, reconsider relations between Russia and the EU, develop new sanctions regimes, etc. These proposals generated headlines in the media. However, the stock markets ignored them. The resolution did not cause any fluctuations of the ruble or Russian blue chips. Why did this happen and should the resolution be taken seriously?

First, the period of aggravation of the situation in Donbass is clearly over. Yes, the problem itself has not been resolved. The conflict will smoulder for a long time, and new rounds of escalation will be still felt. There are no prospects for the implementation of the Minsk agreements. However, the prospect of an open military clash, which loomed on the horizon a month ago, has receded into the background.

Second, the radical proposals of the European Parliament are unlikely to find a response in the European Commission and the EU Council. The head of EU diplomacy, Josep Borrell, has already noted that decisions on restrictions on SWIFT and Nord Stream 2 are not within the competence of the European Union. It is obvious that disconnecting Russia from SWIFT will lead to colossal losses for both Russian business and EU companies doing business with Russia. Manipulation with SWIFT will hurt Brussels’ plans to promote the euro globally.

Finally, thirdly, the real magnitude of the political contradictions between Moscow and Brussels is clearly not up to such radical steps.

The only innovation that currently has a political perspective is the proposal for a new sanctions mechanism on corruption. A similar mechanism has recently been established in the UK. It involves freezing the assets of persons suspected having ties to corruption. The European Commission may well develop proposals for such a mechanism and submit it to the EU Council for consideration. The chances of its approval are very high. However, even if it is used against Russian individuals, its impact on economic ties between the EU and Russia will be extremely low.

The European Parliament has adopted another resolution on Russia. It reflects the key political claims against Moscow which have recently been on the Union’s official agenda. These include the aggravation of the situation in Ukraine, the “Navalny case”, the diplomatic scandal between Russia and the Czech Republic concerning the explosion of a military warehouse in 2014. The resolution contained radical proposals. Disconnect Russia from SWIFT and stop imports of energy resources in the event of an aggravation of the conflict in Donbass, reconsider relations between Russia and the EU, develop new sanctions regimes, etc. These proposals generated headlines in the media. However, the stock markets ignored them. The resolution did not cause any fluctuations of the ruble or Russian blue chips. Why did this happen and should the resolution be taken seriously?

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At first glance, the resolution confirms that high consensus of one of the key (along with the EU Council) legislative bodies of the EU. It was adopted by 569 votes in favour, 67 against, and with 46 abstentions. Kiev and Prague welcome the resolution. Their political positions are uncompromisingly reflected in the document, although, for example, in the case of the explosion at a Czech military depot, there is no consensus, even in the Czech Republic itself. Not to mention the situation around Donbass, where the military build-up was carried out on both sides. According to an already established tradition, Russia is declared guilty of all obvious and perceived problems. Naturally, the document also reflects the “Navalny case”. Earlier, the European Parliament had already issued two resolutions. One in connection with the alleged poisoning, and the other after the arrest of the Russian opposition YouTuber Navalny. Tough measures against Moscow were proposed in previous resolutions as well. In some ways, their intention is consistent with American bills on “draconian sanctions”, such as DASKA: to designate a “lowest denominator” and possible measures that the European Union could potentially take. The threat of disconnection from SWIFT was the “icing on the cake”, which, as expected, was popular in the media success.

However, the markets ignored the resolution of the European Parliament. There are several reasons for this.

First, the period of aggravation of the situation in Donbass is clearly over. Yes, the problem itself has not been resolved. The conflict will smoulder for a long time, and new rounds of escalation will be still felt. There are no prospects for the implementation of the Minsk agreements. However, the prospect of an open military clash, which loomed on the horizon a month ago, has receded into the background. Ukrainian diplomacy was unable to achieve progress towards the revision of the Minsk agreements, although it temporarily returned the topic of Donbass to the political and media mainstream. Russia has shown that it is ready to balance the military build-up in Donbass without hesitation and to respond to a possible attempted military solution. The next round of exacerbation has so far fizzled out without leading to qualitative changes in the sanctions regime against Russia, or in the political positions of the parties.

Second, the radical proposals of the European Parliament are unlikely to find a response in the European Commission and the EU Council. The head of EU diplomacy, Josep Borrell, has already noted that decisions on restrictions on SWIFT and Nord Stream 2 are not within the competence of the European Union. It is obvious that disconnecting Russia from SWIFT will lead to colossal losses for both Russian business and EU companies doing business with Russia. The refusal to purchase Russian energy resources will also lead to significant costs. The Nord Stream 2 project remains in the interests of the European Union and Germany. Moreover, the disconnection from SWIFT, taking into account its consequences for the Russian economy, can simply be perceived by Moscow as an act of aggression with all the ensuing political consequences. The EU is losing the opportunity to strengthen and promote the role of the euro as a more desirable instrument for international payments. In particular, the share of the euro is likely to grow in trade between Russia and the PRC, ousting the US dollar. Manipulation with SWIFT will hurt Brussels’ plans to promote the euro globally.

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Finally, thirdly, the real magnitude of the political contradictions between Moscow and Brussels is clearly not up to such radical steps. Yes, relations between Russia and the EU are in a deplorable state. The political dialogue periodically breaks down amid mutual accusations. There are no ways to resolve the most serious contradictions so far. However, the “level of support” of the existing, albeit bad, relations is still strong and its “breakdown to the bottom” has not yet taken place, even despite a number of recent local shocks. The “warehouse case” in the Czech Republic has not generated a pan-European chain reaction and has mostly damaged bilateral relations between Moscow and Prague. Most of the EU members are not eager to get involved in this scandal. The Navalny case will remain a toxic asset for a long time to come. But it, too, has not yet led to fundamental shifts. As for Ukraine, Moscow is clearly not eager to get involved in a military conflict, although it has demonstrated its force. To a certain extent, such demonstrations even reduce the likelihood of a violent scenario in the resolution of the conflict. At the same time, they do not bring political solutions closer. In general, the existing problems are large-scale. Their cumulative effect will increase. But its weight for the measures proposed in the European Parliament resolution is clearly not enough.

The only innovation that currently has a political perspective is the proposal for a new sanctions mechanism on corruption. A similar mechanism has recently been established in the UK. It involves freezing the assets of persons suspected having ties to corruption. The European Commission may well develop proposals for such a mechanism and submit it to the EU Council for consideration. The chances of its approval are very high. However, even if it is used against Russian individuals, its impact on economic ties between the EU and Russia will be extremely low. This may be the reason for the possible success of such an idea. The European Commission and the EU Council will show that they are loyal to at least some of the requirements of the European Parliament. At the same time, the use of the mechanism will remain in their hands, and the risks for the business will be minimal.

Moscow will also draw its conclusions from the rhetorical exercises of the European Parliament. Despite the fact that the risks of it implementing the recommendations of parliamentarians are negligible, this is another incentive for the Russian authorities to continue working on an alternative financial infrastructure in partnership with their foreign partners, who are also the target of unilateral restrictive measures.

First published in the Valdai Discussion Club.