What are Sanctions?

Sanctions are a political and diplomatic instrument for effecting change, applying pressure and preventing damage or funding of certain transactions and activities. Sticking with the metaphors, they can be used like a scalpel (extremely specifically), a sledge hammer (such as a relatively blanket ban on dealing with an entire jurisdiction or industry, such as North Korea), or even perhaps a feather duster (which might best describe the 'secondary sanctions' adopted against Russia previously, in some commentator's views).

The important thing to understand with Sanctions is that they are extraterritorial in scope, particularly when enforced by OFAC in respect of dealing with the US dollar. They aren't to be lightly disregarded, lest an institution ends up on the receiving end of extreme fines or, worse, Sanctioned themselves. Because of the nature of correspondent banking relationships, being sanctioned would prevent a lot of other financial institutions from dealing with you, cause significant negative press, and reduce your utility to both service your customers and continue to make money through your established correspondent banking channels.

Cutting off a country from SWIFT is not the same as Sanctions, which apply separately. Sanctions prevent parties from legally dealing with a person/counterparty/industry/country, and SWIFT exclusion prevents information about payments being shared. Both, in effect, cut off correspondent banking access, however the difference is basically "revoking someone's license" versus "impounding their car". And just like in this example, while "alternative transport" may still be available (ie, transactions in spite of both sanctions and SWIFT exclusion), they would be far less convenient to someone who relies on their car.

Are there alternatives to correspondent banking and SWIFT which allow Sanctions to be bypassed?

Now that we have touched on the three concepts, it's relevant to consider any alternatives that allow correspondent banking, SWIFT and possibly Sanctions to be avoided and evaded. Aside from building an alternative and seeking mass adoption of new correspondent banking networks (in direct defiance of Sanctions - referred to above as the "carrier pigeon network"), there are technically options which avoid SWIFT already, those being non-SWIFT international service providers and cryptocurrency. These are unlikely to offer any meaningful solutions though, and many of the first and harshest condemnations of the recent Russian invasion are FinTechs and cryptocurrency providers.

Due to the nature of correspondent banking and SWIFT, which is extremely resource intensive for compliance reasons, SWIFT payments are simultaneously quite expensive and quite slow. They're very often a long and complicated chain, and each entity involved still needs to be assured as to the legitimacy of the transaction for it to go all the way through.

As a result, an entire cottage industry has sprung up around circumventing SWIFT, not for the purpose of allowing illicit transactions but for offering cheaper and faster alternatives to end users. Remittance companies are not new, with the likes of Ria, MoneyGram and Western Union having been around for a long time, and an exciting wave of FinTechs have also emerged in recent times, with my personal favourites being Wise (formerly TransferWise), Airwallex, and NIUM. Despite this, though, and as we have discussed above, SWIFT and Sanctions are not the same, so even transactions undertaken by alternative means are not free from Sanctions compliance.

Another possibility being discussed is cryptocurrency, and while transactions and some level of adoption are certainly possible, it is insufficient for wholesale replacement of the SWIFT system for a large Sanctioned jurisdiction at this stage. While the decentralised nature of cryptocurrency makes it possible to avoid detection on a small scale, especially when mining new coins, cryptocurrency exchanges are invariably involved, particularly when dealing with counterparties in the rest of the world. Geopolitically, it is also worth noting that while China is considered a likely trade partner for Russia in contravening Sanctions and establishing a 'home grown' SWIFT replacement, and they have made cryptocurrency transactions illegal.

Lastly, Bitcoin's entire market cap is worth 1.72 trillion US dollars at time of writing, while Russia's last known GDP in 2020 was approximately 1.5 trillion, implying that Russia would need to essentially take over a very, very large amount of the entire Bitcoin supply to find it useful at a societal level. Even assuming they somehow do manage to pull this off, becoming Russia's official currency of choice would likely lead to a collapse in the recognised value of Bitcoin, similar to the catastrophic devaluation that the Ruble has seen in the last week, which resembles someone who played and lost a game of Russian Roulette.