The disputed referendums in eastern Ukraine give President Vladimir Putin time to take stock and choose between two very different paths. The first involves grabbing more territory for Russia, attempting to rebuild an empire in the old Soviet sphere, and accepting a prolonged confrontation with the west. The second is more pragmatic – and involves attempting to pocket his Crimean winnings and rebuild relations with the US and the EU.
Which path he chooses depends on events on the ground and, crucially, on the resistance that he encounters from the outside world.
The Kremlin has reason to pause and take stock because future rounds of economic sanctions aimed at Russia are potentially very damaging. Western governments have the power in effect to exclude Russia from the world’s financial system. The key to that system is based in Brussels. It is the Society for Worldwide Interbank Financial Telecommunication, otherwise known as Swift.
Even the sanctions enacted so far have come as an unpleasant surprise to the Kremlin. After all, far more blood was shed in the Russian invasion of Georgia in 2008 than the annexation of Crimea. Yet the west barely reacted to the Georgian war. (America’s diplomatic “reset” with Russia came just a few months later.) By contrast, the annexation of Crimea swiftly provoked sanctions – with the threat of more to come.
Moscow has tried to give the impression that it is unconcerned by the travel bans and asset seizures enacted. Prominent Russians who are on the banned list profess to be delighted.
The reality is that some in Mr Putin’s circle are genuinely dismayed by the restrictions on their ability to travel and move their money. Even more important, there is real anxiety in the Kremlin about what a third stage of sanctions could entail. In particular, the Russians fear the kinds of measure that cut off Iran from the global financial system.
In private, officials fulminate against the possibility of being shut out of the Swift system of international banking payments, a measure that was taken against Iran in 2012 and that would hugely complicate efforts to do international business from Russia. Without access to Swift it will become extremely difficult to transfer money in and out of Russia.
Swift is a private institution, owned by its member banks, and based in Brussels. But, as the Iran case illustrated, it is susceptible to pressure from the EU and the US. European and American financial sanctions against Iran forced Swift to take action last time. Similar measures against Russia are on the list of possible sanctions.
Nonetheless, western officials are also aware of the downside of using the Swift weapon. It is advantageous to the west that such a significant part of the world’s financial structure is run from Europe – and indeed, based in the same city as the EU and Nato. The fact that Russian people and institutions use Swift for their financial transactions makes it easier for western governments to monitor how they are moving their money around. Cutting Russia out of Swift would cause chaos in Moscow in the short term.
In the longer term, however, it might hasten the day when Russia and, more significantly, China establish alternative systems for moving money between international banks. This is no easy task – otherwise it would have been done already. But it is something that the Russians and Chinese are known to be looking at.
Just as it is not in the west’s interests to fracture the governance of the internet, so it might be damaging in the long term to block the financial pipes that are needed to sustain a global economic system, particularly when those pipes are routed through the west.
However, even if the US and the EU decided that including Swift in a stage-three sanctions package would be too drastic a step for now, there are other ways of hitting Russia with severe financial sanctions. Indeed, America could act alone, without the need for similar measures by the more cautious EU, by forcing international financial institutions to choose between doing business in Russia and doing business in America.
Even though Russia is the eighth- largest economy in the world, it is hard to think of any big financial institution that would voluntarily cut itself off from the dollar system so that it could keep its Moscow office open.
Would the US really go this far? Not as things stand. But if the Russian government is intent on annexing more of Ukraine and threatening other independent nations that were once part of the Soviet Union – such as Moldova, Georgia or the Baltic states – it is inevitable that there will be further sanctions packages. At some point on the ladder of escalation, serious financial sanctions, probably involving Swift, would move from pulp fiction to reality.
Of course, if Mr Putin really imagines himself as a new emperor, intent on reclaiming for Moscow the old territories of the Soviet Union – whatever the cost – then these kinds of risk will not deter him. However, the evidence of the Putin years suggests that while the Russian president is bold, he is not mindlessly reckless.
The west should now make it very clear to Mr Putin, preferably in private, just how damaging stage-three sanctions could be. Frank messages now may help the Russian president to decide which path to take.