Pound Falls as UK Wants to Expel Russia from SWIFT

Britain's intention to expel Russia from the SWIFT international payment system is said to be one of the factors that hit the pound exchange rate.

The pound sterling fell sharply to a two-month record low of 1.3273 versus the US dollar in yesterday's trading. Britain's intention to expel Russia from the SWIFT international payment system is said to be one of the factors that hit the pound exchange rate. Thankfully, that move was ultimately not included in the package of sanctions recently imposed on Russia. When the news was written (25/February), GBP/USD was trying to rise around 1.3375.

GBP/USD Daily chart via TradingView

The Financial Times reports that UK PM Boris Johnson is pressing "very strongly" for Russia to be removed from SWIFT. The reason is that this step will be effective in hitting Russian banking and international trade.

SWIFT is a financial platform that connects more than 11 thousand banking and financial institutions around the world, and is a vital instrument for payment of imported/exported goods to and from Russia. Thus, Russia's withdrawal from SWIFT has the potential to become a "nuclear option" in the West's efforts to punish Russia's invasion of Ukraine.

"This is the most drastic option available, as Russia's disconnect from SWIFT essentially isolates the country and its businesses from Western markets," said Rich Kelly, an analyst at TD Securities.

Fortunately, the European Union yesterday rejected Johnson's recommendation. There was a split between the pro and contra member countries of the European Union. Poland, Estonia, Latvia and Lithuania support it. However, the final sanctions decision from the European Union did not include this "nuclear option" due to objections from Germany, Italy, Hungary and Cyprus, which have closer economic ties with Russia.

"Getting approval for a break (Russia's ties with SWIFT) would require a sufficient majority on SWIFT's board which is dominated by European players," Kelly said, "(However) European countries need access to Russia's banking system to send payments for oil and gas supplies, and as such, will be very reluctant to force Russia out (of SWIFT)."

Kelly stated further that if Russia leaves SWIFT, all Russian assets will no longer be tradable. This will result in a permanent increase in the prices of oil, gas and various other commodities.

Such an extreme move also has the potential to backfire on the euro, pound and Western currencies. The reason is that Russia can overcome this by switching to other currencies such as the Chinese Yuan to complete its international trade transactions.