On February 24, 2022, Russia decided to attack Ukraine with its military forces. In retaliation, Western countries decided to opt for a set of economic and financial measures, including the disconnection of Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) or swift network. The SWIFT network is indeed a very sophisticated messaging system that connects a very large number of high-level financial actors on a global scale to facilitate their transactions. Its mission is to provide its members with a network for communicating and processing international financial and commercial transactions on a global scale: transit of orders to buy and sell securities, confirmation of transaction execution, settlement instructions for fund transfers, payment orders. It is not a bank in the sense that it does not hold funds or manage client accounts.
This banking and financial messaging network swift, which was born in Belgium in 1973, has over the years become one of the driving forces of international finance. It has become useful for banking exchanges on a global scale, since it allows the transit of payment orders between banks, fund transfer orders from bank clients, and orders to buy and sell securities. In Russia, about 300 banks and institutions are members of the swift network, more than half of which are Russian credit institutions. This economic retaliation measure cannot be without consequences for global financial stability, as Russia is the second largest user of this system after the United States. Moreover, as the world’s 11th largest economy by Gross Domestic Product, Russia has strong trade relations with the rest of the world.
Trade Relations Between Russia and the Rest of the World
Trade relations between Russia and the rest of the world have intensified over time. Russia alone accounts for 12.1% of world oil production, 17.3% of gas. Minerals and metals represent a significant part of Russia’s exports. In 2020, Russia was the world’s largest producer of palladium, the 3rd world producer of nickel, and the 2nd world producer of aluminum, to name a few (Statista, 2022). The country also exports some key agricultural products, such as wheat, of which it is one of the world’s largest producers (FAOSTAT, 2020).
According to the Ecofin Agency (2020), Africa imports seven times more products from Russia than Russia imports from Africa. Among these products, cereals accounts for about 30% of all African imports from Russia. Of these grains, wheat accounts for about 95% of Russian exports to Africa. In addition to wheat, mineral fuels such as coal, oil products and gas, which account for 18.3% of African purchases, Russia also supplies almost half of the military equipment of African armies.
In 2020, the European Union (EU) became Russia’s largest trading partner. EU exports accounted for 40.6% of Russian goods and services, ahead of China (14.6%), the Commonwealth of Independent States (14.4%), the US (only 3.2%), and the rest of the world (27.2%). In 2021, Russian exports amounted to $494.025 billion, half of which came from hydrocarbons, resulting to a trade surplus of $67.6 billion (Statista, 2022). Also, according to Federal Customs Service of Russia , the European Union remained Russia’s largest supplier with 34% of its imports, ahead of China (23.7%), Belarus (5.4%), US (5.7%), South Korea (3.1%), Türkiye (2.2%), Kazakhstan (2.2%), and the rest of the world (36.5%).
In contrast, Russia accounts for only 2% of Africa’s trade with the rest of the world, or USD 20 billion per year. The main products exported by Africa to Russia are edible fruits and vegetables, aquatic products, organic chemicals and precious metals. Due to the COVID-19 pandemic, trade between Africa and the rest of the world declined sharply in 2020 (WTO, 2020). More specifically, Africa’s exports to the rest of the world in 2020 fell by 8.1% year-on-year while imports from the rest of the world in 2020 fell sharply by 8.8% year-on-year.
Overall, Africa’s share of world trade fell from 2.9% of world GDP in 2019 to -2.9% of world GDP in 2020, a drop of about 6 percentage points in one year (WTO, 2020). However, Africa’s exports to Russia over the period increased by 2% (Trade Map, 2020). African countries sold only $1.6 billion worth of goods to the Russian Federation in 2020, compared with $1.57 billion in 2019. In contrast, imports from Russia fell from $13.21 billion in 2019 to $12.4 billion worth of goods in 2020, a year-on-year decline of 6.5% (Trade Map, 2020).
Russia’s Disconnection from the Swift Network and the Risk of Worldwide Uncontrolled Inflation
Russia’s disconnection from the swift network, contrary to Western expectations, should not have a significant impact on Russia’s financial stability. According to Carroué, the reasons for this can be summarized in three main points:
- Russia is marginally involved in the swift network, with only 1.5% of the 42 million daily financial messages passing through the network
- Two of the three largest Russian banks have been able to escape Western sanctions because they have become indispensable for the payment of Russian hydrocarbon deliveries, which Europe cannot do without today. These include Sberbank, the largest Russian lender, and Gazprombank, which is part of the Gazprom group
- Russia has an alternative to the global Swift network, namely to connect to the Chinese network China UnionPay, which was founded in 2002 and comprises 175 Chinese banks and financial institutions and is present in 180 countries
However, the decision to disconnect Russia from the SWIFT network could affect to some extent the financial stability of other countries, especially those that rely on Russia for energy, minerals and agricultural products (IMF, 2022). One of the main disturbances is the upheaval of the commodity markets, by strong price fluctuations of energy products, minerals and agricultural products (grain, sunflower oil, etc.), as Russia is one of the world’s export giants.
Continued volatility in the prices of these commodities is likely to increase tensions in the financial and commodity derivatives markets (already under stress due to the COVID-19 pandemic) and amplify the disruption of global value chains. These also include: the risk of increased counterparty risk, lack of liquidity, not to mention funding difficulties in some markets, cyber-attacks, and the increased use of crypto assets (IMF, 2022).
Faced with the sudden rise in commodity prices, central banks will have no choice but to raise interest rates in order to contain expectations of rising local prices and prevent inflation from taking hold. However, by pursuing a restrictive monetary policy, financing and liquidity conditions will be tightened, which would contribute to reducing investment. In the event of high capital mobility, countries witnessing inflation may benefit from an influx of capital, which in turn could lead to serious fiscal imbalances and severe financial tensions such as those experienced during the sovereign debt crisis in 2010. In this context, it is important for financial stability authorities to take effective macroprudential policy measures to counter the rise in global commodity prices and avoid a prolonged deterioration of financial conditions.
Potential Policy Recommendations to Strengthen Global Financial Stability Amidst the War in Ukraine
In order to prevent the surge in commodity prices, including energy, minerals and grains, from seriously affecting global financial stability, it is essential that central banks (whose primary objective is to ensure price stability) and financial stability authorities (whose task is to ensure the financial stability of the economy) take coordinated action. In other words, only a better combination of macroprudential and monetary policy would promote financial stability and reduce the risk of conflicting monetary policy objectives.
For monetary unions (Euro zone, CEMAC, WAEMU) where monetary policy is single and centralized at the regional level, macroprudential policy provides a set of instruments, which can be modulated by each country. Macroprudential policy will therefore be likely to correct or mitigate the asymmetries generated by the single monetary policy or, in other words, to restore a macroeconomic stabilization capacity that states no longer have when they lose their monetary policy autonomy in one way or another (Couppey-Soubeyran & Dehmey, 2016).
Thus, in order to avoid the risks of banking contagion and to ensure greater resilience of economies while making them stronger, banking, monetary and financial authorities can decide in a coordinated manner to increase key rates while limiting the growth of banks’ assets and forcing them to tighten credit conditions.
It mainly appears that Russia’s disconnection from the swift network in retaliation for its military invasion of Ukraine would not have serious economic and financial consequences on the Russian economy as the Western countries had expected, but on the contrary would have a significant impact on financial stability of countries that depend on Russia for their energy supplies.
Faced with global financial stability undermined by the rise in prices of certain commodities on the international markets and the consequent increase in key interest rates to counter inflationary pressures, it is appropriate for monetary, banking, and financial authorities to take coordinated action. In this context, a real policy mix between monetary and macroprudential policies is likely to counter the magnitude of the inflationary shock on global financial stability in the long term.
Jean Cedric Kouam is the Senior Policy Analyst, Deputy Director-Economics Affairs Division and the Head of Fiscal and Monetary Policy Sub-section at the Nkafu policy Institute. He holds a doctorate in economic policy and analysis (monetary and financial macroeconomics) from the University of Dschang in Cameroon. Since obtaining the Diploma of Advanced Studies in Mathematical Economics and Econometrics at the University of Yaoundé II in 2012, he has provided courses in economics, finance, and macroeconomic modeling in several private higher schools in Cameroon.