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Global Economy

How strong are the new EU sanctions?

After the attack on Ukraine, the Baltic EU states called for Russia to be excluded from the global bank payment system SWIFT. Czech President Milos Zeman also brought this measure into play. But the European Union is apparently still reluctant to take this step.

An EU crisis summit is to discuss further sanctions against Russia in the evening. However, a SWIFT exclusion is currently not on the agenda, reports the Reuters news agency. There is currently no agreement among the EU countries on this. This step would have very far-reaching consequences – also in Europe.

SWIFT exclusion would also affect Europe

According to the Bank for International Settlements (BIS) – the central bank of central banks – European institutions hold the largest part of the foreign commitments of international financial institutions in Russia, which is estimated at almost 30 billion dollars in total. Some EU countries recently emphasized that a SWIFT exclusion would hit Russian banks and companies hard. But even European creditors would then find it difficult to get their money.

The abbreviation SWIFT stands for "Society for Worldwide Interbank Financial Telecommunication". Founded in 1973, the organization is headquartered in Belgium. SWIFT is actually a network for the exchange of electronic information between banks and is used by around 11,000 financial institutions worldwide. The system was introduced in order to be able to offer a secure international payment standard. In international transactions, a SWIFT code is used to confirm the identity of the bank or financial institution. This security measure ensures that the money ends up in the correct account.

system for international trade

So if you are excluded from this network, you can hardly send payments abroad or receive international money transfers. While the Americans seem open to sanctions banning Russia from the SWIFT system, European countries are reluctant. Because Germany and other European countries have significantly more trade relations with Russia. A few days ago, CDU leader Friedrich Merz made a drastic comparison with regard to the sanctions against Russia: "Challenging SWIFT could be the atomic bomb for the capital markets and also for goods and services relations."

EU Commission President von der Leyen announced earlier this morning that the Europeans would impose tougher sanctions on the Russian attack. She said they wanted to freeze Russian assets in the European Union and stop Russian banks from accessing European markets. According to the dpa news agency, there should also be export controls for high-tech products. Industry and the energy sector are apparently to be hit, as are members of the leadership in Moscow and influential oligarchs. An export ban on natural gas is apparently just as little planned as a SWIFT exclusion for Russia.

"Sanctions do not stop the attacker"

However, it is considered controversial how effective the measures are. Even the previously announced sanctions did not stop Russian President Putin from ordering the invasion of Ukraine. Lithuania's ex-President Dalia Grybauskaite is skeptical about its effectiveness. "Sanctions will not stop the attacker, only punish. War criminals could only be stopped on the battlefield," she tweeted.

Experts like Vasily Astrov from the Vienna Institute for International Economic Comparisons also doubt the effect of the extended trade ban that the EU decided before the Ukraine invaded. This also included a ban on trading in Russian government bonds. The Russia expert told the "Handelsblatt" that Russia is hardly dependent on funds from abroad. The country has extremely low national debt and can borrow money from its own banks. According to the International Monetary Fund, Russia's national debt is around 18 percent of gross domestic product.

High foreign exchange reserves

Commerzbank chief economist Jörg Kramer points to foreign exchange reserves of 630 billion dollars that Putin's government has at its disposal after years of very restrictive budgetary policy. "That would be enough to pay for all imports for a year without Russia having to export anything," Kramer told the Süddeutsche Zeitung. And it is also clear that with every new sanction, the West is pushing Russia one step further into China's arms. And the Asian country is just waiting to be able to further strengthen the economic and political front against the USA.

Many market observers assume that the sanctions against Russia will lead to appropriate countermeasures. Bastian Hepperle from the private bank Hauck Aufhäuser Lampe speaks of a "sanction spiral". Carsten Brzeski, chief economist at ING-Bank, told the ARD stock exchange studio: "We have to be prepared for Russia to respond to the sanctions." We know how Germany and Europe can be hit hardest, says Brzeski: through the heavy dependence on Russian gas and oil.

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