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Today at a Glance:

Economic sanctions fall into the category of economic statecraft—the use of financial levers to drive desired geopolitical outcomes. They can be broadly defined as any planned commercial or financial penalties applied by one or more countries on another country, group, organization, or individual.

The goals of the sanctions include constraining cross-border money flows that are necessary for financing a long-term war effort, punishing the oligarchs who support Putin and his war efforts, depleting Russia’s financial reserves, and creating political unrest within Russia that puts Putin under pressure.

While the base package of sanctions was considered standard, the weekend announcements of a cutoff from SWIFT and a Central Bank reserve freeze is potentially much more damaging to Russia and Putin.

A Primer on SWIFT & Sanctions

“There are decades where nothing happens, and there are weeks where decades happen.” — Vladimir Lenin

The world is in a dramatically different state since you last received a deep-dive piece from me just one week ago. Russia’s invasion of Ukraine has tragically plunged countless lives into chaos and encouragingly rallied much of the world to support the besieged Ukrainians. In the vein of support, I will be donating the proceeds from today’s newsletter to UNICEF: Protect Children in Ukraine.

The situation is an intensely complicated one. There are two wars being waged here: a military war and an economic war.

Today, I’d like to talk about that economic war and provide a simple breakdown of the most important weapons involved. I hope this piece makes you feel more well-informed in the days and weeks ahead.

A Brief History of Sanctions

Economic sanctions have become a staple of modern statecraft.

Economic sanctions fall into the category of economic statecraft—the use of financial levers to drive desired geopolitical outcomes. They can be broadly defined as any planned commercial or financial penalties applied by one or more countries on another country, group, organization, or individual.

They are not new.

Most historians agree that the first formal economic sanctions were in 432 B.C., when Athens restricted merchants from a rival city-state called Megara from participating in its marketplaces. The action choked off economic activity in Megara—the sanctions were highly-effective.

Fast forward several millennia to World War I and economic sanctions had become a core tool in the geopolitical toolkit. A prolonged naval blockade by the Allies was used to restrict the flow of goods to Germany and the other Central Powers.

As the 20th century progressed, sanctions were used time and again—the industrial logic was that their potential dire impact on an economy would cause would-be aggressors to think twice before taking military action.

Unfortunately, this didn’t take into account the human impact of the collateral damage of these sanctions, which was often devastating.

In the post-9/11 world, the increased awareness of this human impact gave rise to so-called “targeted” sanctions—sanctions specifically designed to mitigate collateral damage and have precise impact. If general sanctions had been a shotgun blast historically, targeted sanctions were designed to be a sniper shot.

This is largely where we are today and how we got here. The U.S. and Western world continue to make heavy use of sanctions due to broad global reliance on the dollar for trade and commerce.

With that history in mind, let’s turn to our present situation…

The Russia Sanctions

Over the weeks preceding Russia’s formal invasion of Ukraine, as its military aspirations became increasingly well-understood, the U.S. and Western world began preparing its financial response.

There are several interconnected goals of the sanctions package here:

Constrain cross-border money flows that are necessary for financing a long-term war effort.

Punish the oligarchs who support Putin and his war efforts, many of whom live and work outside of Russia.

Deplete Russia’s financial reserves (reduce its cushion).

Create political unrest within Russia that puts Putin under pressure.

Increase the cost—actual and perceived—of an international company doing business in Russia.

I would segment the potential response into two core tiers:

Tier I: Sanctions on Russian banks, companies, and oligarchs.

Tier II: A cutoff from SWIFT and Central Bank reserve freeze.

Tier I was table-stakes—effectively the standard operating procedure of the West in such a situation. Tier II was considered much less likely, with many media outlets calling the cutoff from SWIFT the economic “nuclear button” in this situation.

After the invasion began, when it became clear that Putin planned to press forward, the U.S. and EU quickly progressed from Tier I to Tier II. Over the weekend, plans were announced to cut many Russian banks off from the SWIFT system and freeze Russia’s access to foreign currency reserves held in the West.

Let’s talk about what this all means and why it’s so impactful…

SWIFT

SWIFT is short for the Society for Worldwide Interbank Financial Telecommunications. It’s a global cooperative of financial institutions based in Belgium.

SWIFT was formed in 1973 when 239 banks from 15 countries came together to establish a way to handle cross-border payments. Today, SWIFT connects more than 11,000 financial institutions across 200+ countries.

SWIFT doesn’t actually do any funds transfer or holding of funds, but it’s a critical part of the communication infrastructure that enables cross-border money flows. The best way to think about SWIFT is like a simple email or messaging collaboration system enabling secure messages across its member banks—like a sort of Slack for international banks.

SWIFT sees an average of 40 million messages a day—including around orders, payment confirmations, FX exchanges, and trades. These messages provide a form of reliable, safe communication for international banks to execute tr...