Editor’s Note: Amidst the market implications of the conflict in Ukraine, the very real human cost is at the forefront of the world’s concerns. Our thoughts are with Ukraine and the people impacted by this war. All of the information in this article is public knowledge.
On Wednesday, March 2nd, the EU announced it would remove seven Russian banks from the SWIFT network as part of wider sanctions aimed at damaging the Russian economy to pressure Russia into withdrawing from Ukraine. The expelled Russian banks have 10 days to wind down their SWIFT activity before the network is completely shut off to them on March 12th (Time Magazine). Although kicking these banks off SWIFT will have some impact, it will not entirely halt the movement of money in and out of Russia because there are several alternatives to SWIFT.
Many are asking: why wait ten days? Before we can answer that, some basic information.
Global banks are highly interconnected
On a global level, banks are highly interconnected – tangled together, even. Let’s use the analogy of airlines.
You purchase a ticket from American Airlines traveling from New York City to Perth, Australia. You arrive at the gate and the side of the plane indicates it is a totally different airline – usually one that’s local to your final destination – because it is a codeshare. You might fly American Airlines from New York City to Los Angeles, but then Qantas takes you from Los Angeles to Sydney Australia, and a domestic codeshare partner like Jetstar takes you to your final destination in Perth, Australia. Big airlines and small airlines work together to get passengers to their destinations.
The same holds true with banks and companies that are moving money around the world. An example:
Sally Smith wants to send $10,000 to Alexander Ivanov in Russia. Sally banks with Citibank in New York City and Alexander banks with the Moscow Local Firefighters Credit Union. When she sends the money, it typically has a series of “layovers” at different banks before it arrives to Alexander’s account. At any point, the money could be hung up, delayed, or even lost at those layovers.
The only way that you might know the “layover banks,” called correspondent or intermediary banks, ahead of time is if you previously sent money from Citibank New York to the Moscow Local Firefighters Credit Union. But, even then, the route is not consistent. One day your payment could go through three layovers on its way to the destination, and the next day it only has two hops via totally different banks than before.
Impacts on corporate finance teams
Now, extend this example to corporations that make thousands of payments each day, many of them across borders. The only way corporate finance teams can avoid touching the sanctioned banks is if they pull a list of any past payments that may have had a layover or final destination at a now-expelled Russian bank, and then look for alternate routes to make that payment.
This is an arduous and imperfect task for two reasons. First, frequently, they don’t actually know the layovers that their payments have made because the end-to-end route is obscured. Unless they have bank API connectivity, they just know that it reached the final destination. Second, internal finance systems are not setup to track intermediary banks. There’s no filter for “show me all the payments or receivables in the last 12 months that had a layover in Russia.”
If you are traveling via plane to a smaller country or city, you will likely first have a layover at a nearby larger city, regardless of country borders. If you’re flying to Bratislava, Slovakia you may first stop in Vienna, Austria because it’s the closest, larger city. Money moves in a similar fashion. If your payment’s final destination is in Minsk, Belarus, it may first stop in Moscow.
Re-routing countless transactions
For Sally Smith and Alexander Ivanov, their alternatives are limited: Alexander must open a new account at a different, perhaps larger bank. Returning to the airplane analogy – Alex must try to find a more-direct flight from NYC to Moscow with fewer layovers.
For corporations, there are more options for re-routing. But re-routing hundreds or thousands of payments to countless different vendors, one by one, is highly time-consuming work and increases the risk of interruptions to the business.
Re-routing payments isn’t the only thing that corporate finance teams are scrambling to address right now. Aside from controlling for a crashing ruble and other counterparty risks from currency volatility, they must:
- Identify all outgoing payments that may have previously passed through now-sanctioned banks. As we’ve discussed, identifying the payments is not an easy process, nor is re-routing upcoming payments. Payroll is an especially complicated issue – what if an employee’s paycheck is setup to direct deposit into a sanctioned bank?
- Identify all incoming payments that may pass through now-sanctioned banks. Companies must determine what funds the company is expecting to receive in the short- and near-term that may be impacted by the sanctions. They must contact each counterparty and arrange for new payment routing to avoid failures, and if those funds are delayed because of the re-routing process, they’ll also need to adjust their cash forecast on the fly, perhaps needing to tap into different cash sources to keep the business running.
- Review all their bank accounts. Do they hold accounts with any soon-to-be expelled banks? What alternate accounts can be used to service payables instead? Do they need to open new accounts at different banks? How can they move the money in the now-sanctioned accounts to other accounts?
Besides the measures that corporations must take, banks themselves must also evaluate their correspondent or “layover” bank networks to determine where adjustments are required. In the case of Sally and Alexander, the Moscow Firefighters Credit Union needs to look at their correspondent banks and, if any are being expelled, they need to move quickly to arrange for alternate ways to keep money flowing in and out of their clients’ accounts.
On the surface, it may seem strange to give soon-to-be-expelled banks a 10 day waiting period before they’re booted out of SWIFT. But the lag time is actually put in place to give companies with exposure to the sanctioned banks an opportunity to take steps and hopefully keep their businesses running, and by extension, mitigate a negative ripple effect to economies around the globe.
FinLync is an expert in corporate bank connectivity. FinLync is a privately held, global fintech company transforming the insights and functionality of corporate finance and treasury offices through its world-class products. FinLync’s corporate bank API aggregator and bank API-powered suite of apps empower treasurers to optimize cash, make better, faster decisions, save time and reduce the resources needed to manage complex finance needs. FinLync’s largest clients include Fortune 500 and Fortune 2000 companies. The firm has employees from 18 different countries and offices in New York, Los Angeles and Singapore.