Western Sanctions: Impact & Ways Around Them

News: Western countries have put several type of sanctions on Russia against invasion of Ukraine.

In one of the more severe sanctions, Russia’s assets worth $300 billion have been frozen. These assets are held abroad in the Federal Reserve (US central bank) and the European Central Bank (ECB).

Other sanctions might be excluding Russian banks from the SWIFT network.

About SWIFT

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a global messaging system that enables safe transfer of funds and allows banks to communicate with each other in a secure manner.

It has 11,000 international banks as members and is based in Belgium.

How exclusion from SWIFT will affect Russia?

It will disconnect Russian banks from the international financial system. It will hinder their ability to operate globally, which means Russia will not be able to pay for its imports or get paid for its exports through the normal payment routes.

It is very important considering the fact that overall exports of Russia amount to nearly 30% of its GDP.

Last time, Iran was excluded from SWIFT and it lost almost half of its oil export revenues and 30% of foreign trade.

How all these developments will impact India?

Even though neither Russia nor Ukraine are major trading partners, there will be macroeconomic repercussions:

– First, due to hinderance in Russia’s ability to oil exports, global crude oil prices will rise further. It will have consequences for India, considering the high dependency on imports for oil and high retail inflation, which is already at 6%.

– Second, it will negatively affect the $11. 9 billion India-Russia bilateral trade.

– Lastly, Russia is India’s biggest arms supplier, accounting for more than half of India’s total arms imports. De-swifting will potentially impact defense deals between India and Russia.

What are the suggestions?

The following are a few ways that can be used to bypass the sanctions:

– Firstly, countries could use their respective currencies for trading. A part of India-Russia trade already takes place in Indian rupee and not in US dollars.

– Second, Russia has been developing its own alternatives to SWIFT, called SPFS (System for Transfer of Financial Messages). Indian banks could register on this network for carrying out financial transactions.

– Third, new digital currencies can be brought into use.

However, India must be cautious in bypassing the sanctions, as it could attract punitive measures from the US and Europe.

Source: This post is developed based on the article “Western Sanctions: Impact & Ways Around Them” published in “Times of India” on 28^th Feb. 2022.