If Shut Out of the Global Financial System, Will Russia Turn to Bitcoin?

In response to Russia’s invasion of Ukraine, Western countries have taken significant action to restrict Russia’s access to the global financial system. It remains to be seen whether Russia will face the ultimate sanctions.

Such a disruption with the Belgium-based Society for Worldwide Interbank Financial Telecommunication (SWIFT) would be a world historical turning point, arguably representing the end of the post-Cold War dream of a global democracy-neoliberal consensus. It would also likely push at least some new Russian and Russia-related financial activity toward decentralized networks such as Bitcoin, especially given the country’s deep involvement in the technology over the past decade.

Restrictions and sanctions on Russian institutions and individuals are coming at full speed. On February 24, the U.S. Treasury Department announced that it would cut off global dollar transactions for Russia's two largest banks, Sberbank and VTB Bank, and confiscate international accounts of Russian institutions and wealthy individuals. The European Union said last Thursday that it would confiscate the personal assets of President Vladimir Putin and his deputy, Sergei Lavrov.

Non-financial sanctions also came swiftly and fiercely, with the United States restricting technology exports and imposing financial restrictions.

One major issue remaining is SWIFT, the communications network that coordinates interbank transfers around the world. European international relations scholar Dóra Piroska called for Russian institutions to be removed from the platform. According to The New York Times, US President Joe Biden has the power to unilaterally kick Russia out of SWIFT. Iranian institutions have previously been removed from SWIFT.

However, some consider such a measure unlikely. Since its founding in 1978, SWIFT has tried to position itself as a neutral, nonpolitical entity, but the real obstacles are more complex. For example, according to Bloomberg's Javier Blas, Europe continued to buy Russian natural gas even as the invasion was in full swing. European countries, including Germany, rely on the fuel for winter heating and other energy needs. Cutting off SWIFT access could disrupt this important trade, something Russia surely weighed in its decision to invade Ukraine.

There are also humanitarian arguments for letting Russia continue to use SWIFT — a disruption could harm many relatively innocent people. According to one estimate, cutting Russian banks off from SWIFT would shrink the Russian economy by 5%, which could leave many Russians stranded.

Meanwhile, Russia has reportedly been developing its own SWIFT alternative, which former Prime Minister Dmitry Medvedev claimed was functional and could replace SWIFT if necessary. This suggests that Russia could potentially become the nexus of a second global banking network, one that is completely independent of Europe and the United States, and most likely not based on the dollar. Jared Bibler, a former Icelandic banking regulator, tweeted that the United States wants to maintain dollar dominance for a long time, making it unlikely that Russia will be delisted from SWIFT.

If it is cut off, Russia could also move some of its international financial activity to crypto networks. According to the World Bank, Russia’s total imports and exports are about $675 billion per year, a volume that the Bitcoin network can accommodate with relative ease. Bitcoin processes $20 billion in on-chain transactions per day, or more than $7 trillion per year.