This Is How The Russian Invasion Could Crash The Euro.

Graham Charles Lear
7 min readFeb 26, 2022

The EU must choose. Expel Russia from the banking system or put the Euro ‘in play’

For most readers banking is not interesting, but you need to read this as it explains a lot of

Here I try to tell you what you need to know when it comes to an important impact of the Russian invasion of Ukraine. The choice is rapidly becoming stark for Germany and EU supplicants. US sanctions will infect the Eurosystem and risk crashing the Euro, says a prominent banking and payments specialist.

With no Western nation willing to put ‘boots on the ground’ or provide other support such as air cover, the opposition to Vladimir Putin’s actions now centres on economic sanctions. To make any real impact the focus is now on expelling Russia from the banking transfer system known as SWIFT.

Will Germany ever agree? Is refusal possibly a worse outcome?

Banking and payments specialist Bob Lyddon briefs readers on the situation and it ultimately comes down to the EU — and that effectively means Germany in this case — making a decision to go along with the sanctions coming out of the United States. The alternative is the EU’s current policy of refusing, and putting at risk not just the Euro currency but the EU itself.

German Chancellor Olaf Scholz

Asked specifically at a press conference on Thursday about cutting Russia off from the SWIFT system of interbank payments which keep everything moving,

German Chancellor Olaf Scholz said:

“In terms of unity and determination, it is very important that we decide on the measures that have now been prepared over the last few weeks, and reserve everything else for a situation where it is necessary to do other things as well.” -

- Olaf Scholz, German Chancellor, 24 Feb 2022

Scholz specifically did not mention SWIFT and nor did he explain what level of intensification of Russian hostilities might change his mind.

Why SWIFT is key to the Western response to Putin

Germany has rejected the proposal that Russia be cut off from the SWIFT international banking payments system as a punishment for its invasion of Ukraine. The Guardian has disseminated misinformation that it would anyway do little damage. This is wrong and I explain here why.

If Russian financial institutions are sanctioned by the US, all American financial institutions will have to withdraw from their participation in TARGET2 (the real-time gross settlement system for the Eurozone, which is available to non-Eurozone countries.)

What is SWIFT — in layman’s terms?

  • SWIFT is a vital financial messaging system principally carrying payment orders, asset movement orders, statements, advice and updates to members’ static data
  • It is integral to the efficient running of the Western financial system, and to the complexes of systems, processes and controls embedded in Western financial institutions and market infrastructures
  • It is a huge disadvantage and highly problematic not to have access to or be embedded in it
  • SWIFT is in particular integral to high-value payments, in that it is embedded into the world’s Real-Time Gross Settlement (RTGS) payment systems. The US$ Fedwire RTGS has its own internal message format, but this is fully compatible with SWIFT.
  • Likewise, the UK CHAPS system both use SWIFT IT components and SWIFT messages, and CHAPS messages are transmitted over the SWIFT network.

How the West could cut off Russia’s economy at the knees

It would be quite easy for SWIFT to cut off Russia: the network is in essence an email system where each SWIFT member has an address, called their Business Identifier Code, or BIC. If SWIFT disconnected all such BICs, their owners could not send any messages into the network or receive any. If other members attempted to send messages to that BIC, they would be rejected.

But it need not stop there. The BICs of dozens of other SWIFT members would have to be disconnected, such as subsidiaries and branches of Russian financial institutions outside Russia; and Russian corporates participating in SWIFT Corporate Access but from a processing centre in the UK, Ireland, Poland or wherever.

Banks like State Street and Bank of New York Mellon in Luxembourg — who are major players in the safe custody of Euro securities — and JPMorgan, Citibank and Bank of America in Frankfurt — whose German operations act as the funnel for their group’s entire EUR payments business — are equally linked up.

The US Treasury Dept is acting fast

On Thursday the US Treasury Dept acted. VTB Bank (Europe) SE, a Russian state-owned bank acting through a branch in Vienna — is amongst the institutions sanctioned by the US government. US financial institutions will have to quit any financial market infrastructure of which VTB is a member, and its Vienna branch is a member of TARGET2. That means VTB (and others) either have to be kicked out of the eurozone’s TARGET2 or the US institutions must leave.

US Secretary of the Treasury

“The US Treasury is taking serious and unprecedented action to deliver swift and severe consequences to the Kremlin and significantly impair their ability to use the Russian economy and financial system to further their malign activity,”

“Our actions, taken in coordination with partners and allies, will degrade Russia’s ability to project power and threaten the peace and stability of Europe. We are united in our efforts to hold Russia accountable for its further invasion of Ukraine while mitigating impacts to Americans and our partners. If necessary, we are prepared to impose further costs on Russia in response to its egregious actions.”

- US Secretary of the Treasury, Janet L. Yellen, 24 Feb 2022

This happened before with Bank Melli AG, the German subsidiary of the Iranian Bank Melli. Bank Melli AG had an account at the Bundesbank — obligatory as a German-incorporated bank, which meant it was a TARGET2 member and directly addressable. It had to be shut off.

The full list of US sanctioned entities is available here, and these will doubtless be added to. In essence, US financial institutions will cancel any financial correspondence they have with VTB and other Russian banking entities through SWIFT.

How the US actions could impact the Euro hard

This process will be repeated in European institutions that have US banking licences in their group, like Société Générale, BNP Paribas, Deutsche Bank — and so on. They will not take the risk of having dealings with sanctioned entities for fear of losing their US banking licence, or of having the USA’s Financial Crime Enforcement Network (FinCEN) tag them as a bank that is supporting the circumvention of sanctions — which could cost the bank its ability to make and receive payments in US$.

That would be an existential issue for any bank.

There has been a great deal of talk about individuals or corporates being sanctioned but that really is not the issue — workarounds can be and undoubtedly have been devised, by Putin’s regime and his supporters. The key to sanctions is to degrade the ability to make international financial transactions involving Russia at all.

Germany faces a decision to join Johnson or join Putin

The German Chancellor Olaf Scholz must ask himself, what does he think happens when the major European banks are faced with the choice of quitting TARGET2 or being themselves sanctioned in the USA and possibly losing their banking access there?

Does Chancellor Scholz really believe the Eurosystem is strong enough to withstand the loss of players like Goldman Sachs, Citibank, Bank of America Merrill Lynch and JPMorgan as market makers in Eurozone government securities, or of State Street and Bank of New York Mellon as custodians of Euro-denominated shares and bonds for global investors?

The Euro cannot survive such an outcome, and in that eventuality, the EU would likely break up as well. Chancellor Scholz may consider he has pursued a path of less risk — but he has not.

The results of all of that could bring the Euro down, and if the Euro goes down, then the EU probably goes down with it.

Simply cutting Russia off SWIFT would not only show solidarity with the Western alliance and be far less messy but would also protect Germany, the Eurozone and the EU from colossal risk. It is distressing to see politicians of Germany put their own currency, and that of many other countries — and so much else — in such dire peril, all because they cannot stomach standing up to Russia.

The big question for Germany

German politicians and German politicians alone have brought their country to this difficult choice. Angela Merkel’s legacy lays obliterated in disgrace only a few months after her departure into retirement.

They need urgently to think through the consequences of not expelling Russia from SWIFT. In the meantime, the British people must resolve to unite behind the Prime Minister’s defiance of Vladimir Putin. Whatever the origins of the war in Ukraine, to do anything else is to countenance a violent hegemony that will befall not just the Ukrainian people, but then those in the Baltics and beyond, leading ultimately to the subjugation of Europe. If not at the end of a gun then through the bullying of a despot.

Sources: US Treasury Dept | Lyddon Consulting | UK Parliament | Reuters



Graham Charles Lear

What is life without a little controversy in it? Quite boring and sterile would be my answer.