The Role of Economic Restrictions in Ukraine-Russia War

The invasion of Ukraine by Russian troops has caused uproar in Europe and around the world. As the devastation in Ukraine continues to dominate the news, many countries have taken action through sanctions and other economic ramifications. But what does it all mean? What purpose does it serve? As part of FLIT Invest’s aim to increase financial literacy and make economics more accessible, we’ve created an article explaining sanctions, SWIFT and how you can make an impact.

What are sanctions?

Sanctions are a tool that countries can employ to apply economic pressure on a foreign country, corporation, or individual in a certain political direction. They involve a series of tactics such as limiting the import/export of certain goods from a foreign adversary, constraining investment into a foreign adversary, or preventing transfers of money and other monetary exchanges within the foreign adversary. Global economic interdependence necessitates peace. If a nation depends on another nation’s support through trade, they are strongly incentivized to maintain positive and peaceful relations. Sanctions are typically used when diplomacy has failed to render peace, but war is untenable or an overreaction. In essence, sanctions are the use of the economy as a conflict resolution tool.

What is SWIFT?

SWIFT stands for “Society for Worldwide Interbank Financial Telecommunication.” It is a messaging system using encrypted codes that banks use to send money to each other. More than 11,000 financial institutions use it in more than 200 countries. By analyst estimates, over 90% of international transactions go through SWIFT every year. For example, if a company in Germany wanted to buy oil from a company in Russia, the German company would have their bank use SWIFT to securely send money to the bank of the Russian company receiving the payment.

How does removing Russia from SWIFT support Ukraine?

SWIFT enables international transactions between banks and is the financial backbone behind most importing and exporting worldwide. Therefore, participating in SWIFT is essential for countries wishing to participate in global trade. With major Russian banks being removed from SWIFT, the country will no longer be able to make payments for most trade and financial activities. This measure effectively prevents Russia from exporting oil, coal and natural gas to its largest trading partners, a large blow to its economy where oil and other energy account for over 60% of the country’s exports.

Cutting Russia from SWIFT is effective because it is the biggest and most straightforward option for international transactions, and there is not an abundance of choice otherwise. If a foreign bank still wanted to buy Russian oil without using SWIFT, they would need the infrastructure to transact in some other way like cryptocurrency or other interbank payment systems. However, most banks don’t have the infrastructure to send or receive international payments in any other way besides SWIFT, and building out that infrastructure would be enormously expensive and risky. In effect, through these sanctions, Russia is being cut off from a huge chunk of international trade, dealing a devastating blow to their economy. Without funding from their oil and energy exports, it will be much more challenging to finance their war with Ukraine.

What’s the big deal with freezing Russia’s Central Bank foreign currency reserves?

In an effort to prevent Russia from financing its war with Ukraine, the international community is applying unprecedented economic pressure on Russia. In addition to widespread sanctions, G7 countries also announced that they would freeze most of Russia’s international reserves, including foreign currencies and gold. These central bank assets are mostly held outside Russia and are now stuck there.

Most countries hold foreign currency reserves as a backup in case their local currency significantly weakens (a.k.a. devaluation). Ahead of its invasion of Ukraine, Russia had stockpiled over $500 billion of foreign currency reserves. Freezing the central bank’s assets means that Russia won’t be able to rely on its foreign currency reserves for protection. Without foreign currency backing, the Russian Ruble has gone into freefall, dropping over 20% over the past few days. In an effort to stop this currency freefall, the Russian central bank has had to enact drastic measures that will, unfortunately, have huge negative impacts on Russian population.

Will it succeed?

There is mixed historical evidence that sanctions are effective in preventing war. However, sanctions provide a buffer between tension, declaring conflict, and outright war, which is not to be undervalued. We are more globally interdependent than ever before, and with international solidarity, there is great potential for collective action to succeed. It is important to note that not all countries are in the same position to place such sanctions on Russia — the sanctions seem to be a primarily Western approach where economies are some of the richest and most stable in the world. Countries like India, United Arab Emirates, and Israel have refrained from participating in these sanctions, citing that whilst they oppose Russia’s actions, they need to maintain a good relationship with Russia for their economy and development. 

What can I do?

It’s not just local governments that can take action — everyone can do something to support those living in Ukraine and those affected by the events of the last week. Here are 10 ways you can help:

  1. Donate to organizations like the International Rescue Committee and other credible groups.
  2. Show your support online. Stand in solidarity and let everyone know that – share resources and raise awareness. Use the hashtag #StandWithUkraine
  3. Learn. Get informed on the current situation in Ukrainethe history of Ukraine and live updates. Knowledge is power.
  4. Contact your local representative. Urge the Biden Administration to provide safety for refugees. To find your local representative in the U.S., see the U.S House of Representatives.
  5. Attend a peaceful protest or vigil. If you don’t have money to offer but have time, empathy and care, then consider joining a demonstration near you. You can find your nearest demonstration at Stand With Ukraine.
  6. Book AirBnBs in Ukraine and do NOT go. This gets money to individuals more directly than donations to large NGOs (but to fewer individuals)
  7. Buy digital items from small businesses based in Ukraine on websites like Etsy as another direct route to getting money to citizens. Etsy has waived the selling fee for Ukrainian citizens.
  8. Host a family fleeing Ukraine. If you have a second property, know people in Europe, or have a spare room in the U.S., consider offering temporary accommodations to refugees. You can register through AirBnB.
  9. Fund temporary accommodation through AirBnB – if you don’t have somewhere to offer but have the funds to pay for someone’s short-term stay, consider financial support this way.
  10. Reflect. Think about the things in your life that you are grateful for, the people in your life that support you and the things in your environment that make you feel safe. To support others, we must support ourselves and start from a place of self-compassion. We must fill our own cup before sharing with others, or else we have nothing to give.

FLIT Invest stands in solidarity with the people of Ukraine and those who are affected by the ongoing invasion.

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Prior to founding FLIT Invest, Alejandro worked at J.P. Morgan’s Private Bank in New York, where he oversaw and managed investments for ultra-high net worth families. Before J.P. Morgan, he was an investment analyst at Northwestern Mutual, responsible for developing comprehensive financial plans and asset allocation models. Alejandro is a CFA charterholder and former professional soccer player.

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