Wednesday, January 28, 2015

Russia To Retaliate If Bank's Given SWIFT Kick

Russia plans to retaliate if its banks are banned from the international banking system’s standard line of communication.

Whether it’s official paranoia or a real possibility, Russia is convinced the West is out to get them. After last year’s sanctions, the next move might be limiting banks from sending and receiving messages through the Society for Worldwide Interbank Financial Telecommunications, known as SWIFT.  If that happens, Russia would look like a pariah state, comparable to Iran. A SWIFT ban, in any capacity, would also isolate Russian banking from its biggest market — Europe.

In September, Economic Development Minister Alexei Ulyukayev said it was unlikely SWIFT would punish Russian banks in any way. Regardless, Russia’s Prime Minister Dmitry Medvedev said Tuesday that if SWIFT limited Russian banks on its system, Russia’s reaction to the Belgium-based organization’s rules will be “unlimited”.

“Yet again discussions have started in limiting the so-called SWIFT payment system. We’ll wait and see what happens. Of course, if these decisions are made, I would like to note that our economic reaction as with any other reaction will be unlimited,” Medvedev said today.

If Russian banks are limited from participating in the SWIFT system, it will hurt investor sentiment worse than it already is.
Russia has been talking about harsh retaliations against the West since last spring. That’s when Brussels and Washington were threatening a tougher sanctions regime two months after Russia’s annexation of Ukrainian peninsula Crimea, and increased bloodshed in four eastern Ukrainian provinces on the Russian border. Both Brussels and Washington believe Russia is aiding and abetting pro-Russia separatists fighting against the Ukrainian military.

Russia was dealt a tougher hand in July when the West sanctioned energy and finance firms, and banned long term financing for all domestic companies. Russia retaliated by sanctioning food imports from Europe and the U.S. Nevertheless, Russia has yet to bring out its big guns: Gazprom Gazprom natural gas.

Gazprom, Russia’s state owned natural gas company, is the single biggest foreign supplier of gas to Europe.

Russia’s government never threatened to play its Gazprom hand. But if its banks were shunned by SWIFT, it would ostracize Russian business and finance from important markets. The embarrassment might cause Russia to over-react.

In September 2014, the European Parliament urged member states to consider excluding Russia from SWIFT as part of its sanctions. Russia’s Central Bank said the country might introduce alternative channels of interbank communications to replace SWIFT, meanwhile.

SWIFT is overseen by 10 central banks — Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, United Kingdom, United States, Switzerland, and Sweden — as well as the European Central Bank. SWIFT says it “is and always has been in full compliance with applicable sanctions.” The company is not a lending institution. And sanctions against Russia are rather specific, banning exports of equipment used in oil and gas exploration and production, banning cooperation with Russian energy firms on drilling projects, and banning financing longer than 90 days.

SWIFT has acted on broad-based sanctions in the past.

In March 2012, the European Union passed regulation prohibiting SWIFT from providing services between European and Iranian banks. SWIFT is incorporated under Belgian law and required to comply with its home government’s rules. SWIFT disconnected the EU-sanctioned banks from Iran.
Sberbank's over the counter shares in the pink sheets are trading well below their moving averages. Some find this attractive. But geopolitics continue to make Russia's biggest bank an unattractive investment. If sanctions worsen, Sberbank is likely to remain risky for the remainder of 2015.
Sberbank’s over the counter shares in the pink sheets are trading well below their moving averages. Some find this attractive. But geopolitics continue to make Russia’s biggest bank an unattractive investment. If sanctions worsen, Sberbank is likely to remain risky for the remainder of 2015.
In theory, the same could happen with Russian banks. A limitation on SWIFT’s messaging platform makes it harder for banks like Sberbank Sberbank to communicate with corporate and financial partners. Global bank communication can be like a Tower of Babel. SWIFT exists to get everyone speaking the same language. Russia getting slapped with limits sends a negative message to investors who will see it another step towards Russian isolation from its core markets.

Investor sentiment is already at all-time lows due to the Ukraine crisis.
Ukraine Strikes Back

The Ukraine variable is deteriorating. This is worse for Russia than SWIFT.

Local media in Ukraine have reported that pro-Russia rebels have begun a fresh front in the city of Mariupol, located on the Sea of Azov in Donetsk. The attacks have led to renewed calls for sanctions.
Mariupol is important for Russia strategically.  If taken over by the separatists, it could create a land bridge to Crimea further South. Crimea was annexed by Russia on March 17, 2014.

Both Washington and Brussels are not happy with the latest news of separatist fighting in Donetsk. Prolonged sanctions do not bode well for the Russian economy. SWIFT limits on Russian banking only serves to worsen investor sentiment.
The good news for Russia is that the E.U. is not totally all-in on prolonging sanctions, scheduled to expire in July.

German Foreign Minister Frank-Walter Steinmeier said on Monday about sanctions that, “A lot depends on how the next three days go. After the talks I’ve had in the last days with some European colleagues, nobody is desperately ambitious to meet in Brussels to impose sanctions.”

Meanwhile, the Ukrainian currency, the hryvnia, and Russian ruble continue to decline. Credit Default Swaps on 5-year sovereign debt for both countries continue to climb, adding to the negatives on Russia.

Russia’s fate as an investment right now is too connected to the whims of foreign governments, and ethnic Russians in Ukraine who have an ax to grind with Kiev. None of these actors are good news for holders of the Market Vectors Russia (RSX) exchange traded fund. Despite deep value in Russia’s stock market, investors will be a prisoner to the news flow out of Belgium and Ukraine for months to come.

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