How Russia's war in Ukraine has weaponized payments

The speed and depth of the financial services industry's response to Russia's invasion of Ukraine was unlike anything the world has seen in the time since World War II for a market of Russia's size, turning transaction rails into tools of battle.  

"The weaponization of finance is something that has come out of this. When you have the U.S. financial system and the influence of the dollar, there is leverage," said Elina Ribakova, deputy chief economist for the Institute of International Finance, speaking at American Banker's Payments Forum last week in Phoenix. "The U.S. has used that leverage."

About 1,000 companies have cut ties to Russia since the invasion began in February, according to a Yale University tracker. That includes dozens of payment companies and financial institutions. The result is a distinctly financial front wherein the U.S. is playing an active role.

The severity of Putin's invasion has played a role in the breadth of the sanctions and corporate moves. 

"One country has sought a change of regime and of borders by force, which is a very pre-1945, WWI or II thing to do," Robert Hockett, a law professor at Cornell University, said in an interview. "And the upping of the aggression has drawn a counterpart upping of the sanctions ante."

Western countries have been largely united in imposing sanctions, which have included isolating Russia's central bank. The willingness to make united dramatic moves is not lost on other countries, according to Ribakova. 

"What the U.S. administration has done is frozen more than $300 billion together with international partners in the European Union and elsewhere," Ribakova said, adding there is talk of diverting these funds to pay for Ukraine's reconstruction. 

"That would be an extremely serious step," Ribakova said, likening it to moves the allies made during World War II. It's possible Russia would view such a step as similar to a direct attack, she said. 

The pressure on Russia could extend indirectly to other nations. China UnionPay, for example, has stopped working with Russian banks that are on Western sanctions lists. Ribakova said there is a worry in China about getting on the bad side of the U.S. in the Russia-Ukraine war.  

"China is treading very carefully," Ribakova said. "It is concerned about what would happen, what the U.S. would do if China were to have a border dispute with a neighbor," she said, though she did not mention China's stance on Taiwan specifically. 

Russia, which likely anticipated U.S. and European sanctions as a response to the invasion, has taken measures to shield its own economy. 

Russia has its own equivalent of SWIFT, the international bank messaging system that bumped Russia off of its network following the invasion. Called the System for Transfer of Financial Messages, it is not as robust as SWIFT — it doesn't process payments at all times and has more limits on transaction size. Russia also has its own card network called Mir, which launched after the sanctions that the West imposed on Russia when it annexed Crimea in 2014. The Mir card covered about 25% of the Russian card market before Visa and Mastercard pulled out of Russia this year. 

It's also possible Russian officials or oligarchs could try to use cryptocurrency to circumvent sanctions, though cryptocurrency companies are subject to U.S. regulations, and the size of Russia's economy would make it difficult to turn to a limited asset such as cryptocurrency to offset economic losses, Ribakova said. 

Russia is also a much larger country than other nations that the West has financially isolated as a result of sanctions, such as North Korea and Iran.

"Russia has built a financial fortress. That brings more insulation but also more isolation," Ribakova said, adding Russia's financial system does not have the leverage to sanction European or U.S. financial markets.

The financial battle has costs on both sides, contributing to inflation in the U.S. and potentially wiping out 15 years of GDP in Russia. The sanctions also create a compliance challenge for U.S.-based firms. 

"A more pervasive and wider array of sanctions naturally complicates compliance in ways that narrower sets of sanctions would not," Hockett said. "Moreover, because sanctions on some essentials, mainly fuels, have been lighter because they are essentials, the sanctions regime has had something of a 'patchwork' quality to it, further complicating compliance."

While there is economic pain, the total impact of sanctions is still limited, according to Eric Grover, a principal at Intrepid Ventures, noting that not all companies have boycotted Russia and not all Russian banks have been tossed out of SWIFT.

The sanctions also reveal the influence of the U.S. on the international financial system, Brian O'Toole, a nonresident senior fellow at the Atlantic Council, said in an interview. "It's not a new aspect of war, but a realization of just how asymmetric U.S. financial power is, perhaps even more so than military power," he said. 

Financial sanctions are politically easier than more direct military alternatives, Grover said. "I can’t think of an instance, however, where sanctions caused a determined bad actor to bend the knee," Grover said.