The political relations of Russia with Ukraine dramatically turned their directory in 2000s and worsened in 2014 with the separation of Crimea from Ukraine. In February 2022 after months of posturing and mobilization along the eastern borders of the Donetsk and Luhansk oblasts, the Russian government formally recognized the independence of the Donetsk People’s Republic (DPR) and Luhansk People’s Republic (LPR), which had declared independence from Ukraine in 2014, and authorized a military intervention on 24th of February.
The American and European response to this crisis has been equally as momentous. Between the remilitarization of German government spending, support for NATO membership among traditionally neutral countries, a new formal applications for EU membership by Ukraine and Georgia has been organised.
However, what distinguishes this recent round of sanctions is the disconnection of several Russian financial institutions from a network known as “SWIFT”. This article will examine what SWIFT is and how blocking Russia from accessing it could impact the Armenian economy. This article will also explore SWIFT’s sister networks, such as CIPS and SPFS, and look to Iran as an example of what trade with a post-SWIFT state may look like.
SWIFT what is it?
SWIFT refers to an international network developed in the early 1970s that is used to facilitate the movement of money between banks and financial institutions. SWIFT is a protocol, that is used to establish mutual communication between financial institutions and provide destinations for the delivery of money in wire transfers, bank payments and everyday transactions. Western Europe is particularly overrepresented among the network’s board members, it’s worth noting that SWIFT is used for virtually all international financial transactions throughout the world, even if both banks involved are located outside of the G-10 or the jurisdiction of the European Central Bank.
On February 24, 2022, the United States and European Union announced that a collection of Russian banks and corporate entities would be disconnected from the SWIFT network in response to the ongoing invasion of Ukraine. This decision and its associated sanctions package have had a severe impact on the Russian economy. At the time of writing, the exchange rate is 3.74 AMD to 1 RUB (or 130 RUB per 1 USD), reflecting a nearly 37.6% decrease in value over the span of two weeks.
As part of this strategy, sanctions are levied against specific individuals and institutions, rather than the entirety of Russia. The purpose of this model of economic countermeasure is to focus on the impact of sanctions on a select few decision makers in the Russian government.
Services like ApplePay have stopped working in Russia, and many Russians are unable to use online marketplaces, while the price of food and other necessities skyrockets across the country.
Armenia benefits from a strong Russian economy. Years of high economic growth in Russia are reflected in higher remittance rates (Armenian workers sending money to their families back home), a greater volume in trade, and higher amounts of Russian Foreign Direct Investment (FDI) in the Armenian economy. In years where the Russian economy has underperformed or contracted, the Armenian economy slows down as well. Examples of this include 2014 and 2015, when the contraction of the Russian economy following the implementation of sanctions by the European Union and United States was reflected in a sluggish Armenian economy.
Russia remains Armenia’s largest trading partner and is heavily represented in virtually every section of the Armenian economy. Additionally, despite the disparities in size between both countries’ economies, Armenia’s trade balance with Russia is relatively equitable. When we consider that Armenia’s trade with its second-largest trading partner, the European Union, is based almost entirely on the extraction of rare metals by a small collection of corporate entities, we can see that a shock to the Russian economy could impact nearly all elements of Armenian commercial activity.
With the improvement of sanctions against Russia a huge emigration stream is observed from Russia to Armenia. The visitors are from different sectors and among them, the IT sector workers are dominant. This sector is highly connected to international partners and hence international transfers, which means Armenia is seen as an oasis to bypass from SWIFT sanctions. On the other hand, Armenia has developed a good infrastructure and legal, taxation conditions for this sector to thrive and be competitive in the international markets.
Over the span of 8 years of sanctions imposed on Russia and the threat to disconnect Russia from the SWIFT, the Eurasian Union has developed their own means of money transfer to replace SWIFT in case of disconnection from SWIFT. A total of 23 foreign banks have joined the SPSF network. Members of the network include banks in Germany, Switzerland and the five members of the EAEU, along with potential linkage with CIPS and expansion into Turkey and Iran.
We shall note however, that not all the Russian banks have been disconnected from SWIFT. Neither Gazprom Bank nor its Armenian subsidiary are mentioned in the Treasury Department’s statement, although Gazprom as a whole is mentioned.
Another option to replace SWIFT is “Cross-Border Interbank Payment System” (CIPS), is used in mainland China as a means of processing bank transactions, with which Russia cooperates after the sanctions imposed in 2014.
Sanctions and Iran
When analysing what trade with a disconnected and heavily sanctioned Russia may look like, Armenia only needs to look toward Iran. While Tehran has been under heavy sanctions for decades, minor commercial activity and commerce between Armenia and Iran is still possible. This is because, while the Iranian border is one of Armenia’s two open international crossings, Yerevan still complies with the sanctions regime levied by the United States and international community.
Tehran was disconnected from SWIFT in 2012 in response to the Iranian Nuclear Program and only partially reintegrated to the network in 2016. With these factors in mind, there is a noticeable sense of caution in how the Armenian government facilitates major transactions with the Iranian government. Natural gas purchased from Iran via the Armenia-Iran Gas Pipeline is paid for by Yerevan through the transfer of electricity through both countries’ shared power grid. For Armenia and Iran, this exchange of energy is a viable means of handling such a transaction, as it neither violates elements of sanctions law related to money transfers, nor is dependent on networks like SWIFT. Should Armenia find itself unable to purchase Russian gas through traditional financial means due to sanctions levied against Gazprom, perhaps this commodity-based trade could be used with pre-existing pipeline infrastructure.
Ride the storm
It is crucial that Yerevan works to prevent the potential extension of SWIFT limitations and sanctions to Armenia. This means balancing the continued movement of funds between Armenia and Russia while ensuring that SPSF and SWIFT remain distinct networks that are insulated from one another. It is of the utmost importance that Armenia does not position itself as a willing partner in sanctions evasion. This is a role that has been taken by Belarus in the past and that some believe Azerbaijan may try to emulate in the near future.