The Swift cut-off is happening. But its impact is unpredictable – especially for the prestigious Swiss banking subsidiaries in Russia.

The title itself is a mouthful: «Council Regulation (EU) 2022/345 of 1 March 2022 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilizing the situation in Ukraine». Indeed, at first glance, it does not leave an impression of much historic significance. But as finews.com has reported – it is. The EU decided on Wednesday to cut-off seven Russian banks on 12 March from the Swift intra-bank messaging system, which is typically used for money transfer instructions.

Until now, that option was considered as «going nuclear» when it came to Russian sanctions and taking the step had been a controversial one within the EU.

Enormous Wealth

It is probably because of the unknown consequences of the step that Brussels allowed for a ten-day transition. Some institutes have been left out, such as Sberbank and Gazprombank, given their importance to the commodities sector. Still, a direct consequence of the sanctions is that Sberbank's continental subsidiary has already pulled out of the European market.

The branch and representative offices of Swiss banks in Russia could share the same fate, an expert told finews.com. Because of the enormous wealth built up since the fall of the Soviet Union, many of the players are active in Russia's onshore market, and the preferred destination for business is Moscow.

In 2020, major Swiss bank UBS said its objective was to double invested assets in Eastern European markets. It was a waymarker set for the offshore teams based in London, Monaco, Singapore and Switzerland. And Moscow.

Russian Reaction

UBS currently has about 50 people located in Moscow, ostensibly stuck given the massive sanctions that have been leveled against the country and with no way to book a flight out. The bank declined to comment when asked about the situation by finews.com. But voices familiar with the bank are saying that UBS adheres to all sanctions worldwide, and this would include those leveled against Russia. Besides that, there is an additional source of uncertainty – further potential countersanctions by Russia given it has already banned sales of securities abroad.

The UBS bankers are not alone. According to some, Credit Suisse has about 100 employees in Moscow. That likely includes private bankers, investment bankers and support services. Sources indicate that the bank has done everything it can to ensure the safety of its teams there.

The Problem with Correspondent Banks

Officially, Credit Suisse is saying that it adheres to all legislation and regulation when managing clients and this includes any sanctions leveled by the respective authorities. Geneva-based Lombard Odier, which has a representative office in Moscow, does not expect a «particularly significant impact» from the Ukraine crisis and Russian sanctions on its own activities. It also maintains that it strictly adheres to all valid sanctions and regulations in markets that it operates.

But while the sanctions against Russian individuals and companies are tricky enough to manage, the consequences from the Swift step are unpredictable. That is what Andreas Ita believes in any case. He was once a high-level UBS banker and is now the co-founder of Zurich-based company Orbit36, which advises banks and insurances about risk and capital management.

Orbit36 has compiled a report on the Swift sanctions, telling finews.com that little thought had been given to the fact that Russian institutions affected by the Swift sanctions are also correspondent banks for western institutions.

Technically Insolvent

That could prove fatal for the Swiss branches in Russia. «It is possible that the offices of the main Swiss banks, and the private banks, become technically insolvent should they lose access to their own internal sources of funding», said Ita. «If the Swift connection is cut off to the correspondent bank, then the transactions need to be figured out in some other way, with difficulty.» That could become a problem quickly if it involves thousands of transactions daily.

But the Swift exclusion also bodes uncertainty for banking in general, even outside Russia. «Every transaction with a ruble could be impacted even if the business is between two western banks», Ita warns. That does not bode well for cash management. «We are only looking at the now. But this also affects payments due in several months and they may possibly not be settled on time», the former banker said.

No Trust in Interbank Market

That is potentially dangerous should any uncertainty extend to the interbank market. «If an institution suspects the other of having sustained significant losses from its exposure to Russia, that could significantly impact levels of liquidity between banks.»

Certain Swiss and Liechtenstein institutions are positive about the outlook for their Eastern European business. «The clients in wealth management are mostly medium-sized and not the kind of people found on sanctions lists», said Swiss bank and investment manager Vontobel. Its Geneva-based competitor, Pictet, emphasized that it has no staff located in Russia and that the bank «continues to manage Ukrainian and Russian clients in adherence to all valid laws, regulations and sanctions» from desks in Geneva, Zurich and London.

LGT Creates Special Unit

Liechtenstein-based bank LGT, when asked, maintained that its «proportion of Eastern European clients was comparatively small». That is why the current situation will only have a marginal impact on the investment and currency side of the business. It will also implement all relevant EU, U.S. and UN sanctions and has a team of specialists in place following the conflict closely and prepared to take further measures if needed.

The impending Swift cutoff is likely to give that team a great deal more work very soon.

Additional reporting: Jade Cano, Andreas Britt, York Runne