December 6, 2022

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The chair of the world’s most powerful financial watchdog has called on global leaders to “think twice” before imposing crippling sanctions on Russia, warning that the most punishing penalties run the risk of undermining global financial stability.

Klaas Knot, chair of the Financial Stability Board, told the Financial Times that suspending Russia’s access to the Swift international payments system, which underpins trillions of dollars of transactions a year, could result in a “severe disruption in payment flows”.

“When applying severe measures, one should always think twice and also be aware of the consequences,” said Knot, who is also head of the Dutch central bank.

Knot’s remarks came as Joe Biden, US president, used a speech at the White House on Tuesday to repeat warnings that the west would impose financial sanctions to exert “intense pressure on [Russia’s] largest, most significant financial institutions” if the country invades Ukraine.

Hopes of a diplomatic resolution to the crisis were bolstered earlier on Tuesday when Vladimir Putin, Russia’s president, said the country’s military would draw down some troops on the Ukrainian border to enable dialogue with the West.

Biden responded by saying there was “plenty of room for diplomacy” but insisted that sanctions were “ready to go as soon [as] and if Russia moves”.

Cutting off Russia’s access to Swift, the Society for Worldwide Interbank Financial Telecommunication, is one of the potential sanctions being pushed by the US should the country attack its neighbour. EU officials say it is under discussion but unlikely to be included in the first round of measures.

Europe’s initial steps are more likely to be targeted sanctions on some of Russia’s biggest financial institutions, among them Sberbank, VTB, Gazprombank, Alfa-Bank and The Russian Direct Investment Fund.

Knot, who was speaking before flying to Jakarta for this week’s meetings of G20 finance ministers and central bank governors, acknowledged that “the ultimate decision” of what sanctions to deploy would be “taken on different grounds” than the risk to the global financial system.

“But it is clear that they might have some financial ramifications and I would urge policymakers to take those into account,” he added.

Removing access to Swift would create severe operational problems for banks that are cut off from the network, but it would not in itself prevent them from dealing with other lenders around the world.

Such a move might spur Russia to step up efforts to develop alternative systems. It has already formed an alternative messaging system called SPFS, although this is far less capable than the Swift network.

In a wide-ranging interview, Knot said financial regulators around the world had already started trying to estimate the impact of a Ukraine invasion on global banks but that it was “very, very hard to predict” the indirect effects.

He said that the scale of the fallout would determine “how much loss of confidence we will see in the market, how much increase in risk aversion takes place, how many investors will start to run from certain markets, et cetera”.

But Knot said that the economic damage might not be as bad as some feared. “Let’s see first how it develops. We’ve also had military conflicts in the past that at the end of the day had very little ramification on financial institutions. It all depends on the breadth and the scale of the conflict.”

Meanwhile, Knot said global banks were prepared for any shocks emanating from the Ukraine crisis.

He said: “A well-capitalised banking sector has proven its value over the last few years. I think if you look at the main difference between the pandemic shock and the global financial crisis, it was that this time around, the banks were absorbing rather than amplifying the shock.”

Additional reporting by Sam Fleming in Brussels