The international travel and health insurance sector had to adjust overnight to yet another major challenge on 24 February 2022 as Russia launched an invasion on Ukraine that triggered the West to subsequently impose some of the most severe sanctions in sanction compliance history.
What are sanctions and what are their implications?
Sanctions are tools of foreign policy used by governments and multinational bodies like the United Nations or the European Union. Their goal is to effect a change in behaviour when used in context with an overall strategy towards an opponent. Sanctions are meant to protect security interests of the governments that administer those regulations. Economic sanctions have become the tool of choice for the US, the European Union, and the United Nations to punish illegal activities by international actors or to push governments to reverse actions that damage foreign interests or foreign policy objectives. And yet, sanctions and their potential pitfalls are often misunderstood.
Businesses and communities are not prepared for sanctions announcements in advance; there are usually some hints or speculation, but they usually come with no prior notice unlike other legislation initiatives.
The number of sanctions seen in the past month or so is probably one of the most significant in sanction compliance history. The financial sector is learning how to implement these sanctions for cross-border payments as they are announced.
Western countries have been imposing the harshest package of sanctions on Russia, aiming to cripple its economy. The most impactful was the sanctioning of the Central Bank of Russia as well as sanctioning major financial institutions such as VTB Bank amongst others.
Even though sanctions can be imposed at short notice, reversing them is far more complicated; there are some sanctions in the US, for example, stemming from the 50s for Cuba, and we’ve seen subsequent presidential administrations struggle to lift them.
It is imperative to mention that there is still more room for sanctions. A full financial embargo is also to be expected, which lies at the far end of the sanction spectrum, and if implemented, would ban all transactions including exports and imports with Russia. This would be the final significant step to remove Russia from the global economy.
Another important factor to consider is businesses reputation. Big names like PayPal, American express, Ikea and McDonalds have publicly announced that they're leaving the Russian market as a way to protest Russia’s actions, but for some brands this proved to be complicated. Meta (previously knowns as Facebook) announced that they will leave Russia, but Russia is now is considering placing them on the terrorist organisation sanctions list, which means Meta’s assets will be frozen and will remain in Russia.
Russia no longer able to use SWIFT for Banking
What is SWIFT and why is it important?
According to CNBC: “SWIFT – or the Society for Worldwide International Financial Telecommunications – is a system that banks use to securely send messages to each other. It is one of the key pillars of the financial world, connecting more than 11,000 member banks in some 200 countries and territories globally.”
In recent years, Russia has become one of the top users of the SWIFT system as up to 300 Russian banks were using it up until the ban. SWIFT operates 24 hours a day, whereas the alternatives available currently have several limitations. As SWIFT is used by banks around 200 countries globally, banning SWIFT from Russian banks limits how money is transferred in and out, thus forcing Russian banks to find new ways to operate as well as isolating Russia from the world economy. This is another method of punishing Russia’s actions economically.
The Central Bank of Russia developed SPFS as an alternative to SWIFT, but it’s only operational during weekday working hours. In addition, SPFS has message size limitations, essentially making it less able to handle complex transitions. In theory, SPFS can be used to send international payments to a connecting bank, but these banks are in countries like Armenia, Turkey, Uzbekistan, Kazakhstan and within domestic Russia.
An alternative way of routing following the ban on SWIFT would be to use China’s platform. However, this can only be used for settling payments in Chinese Yuan and one should still consider that the US Dollar dominates about 40 per cent of all international payments whilst the Chinese Yuan is around 1.9 per cent.
How has the Russian Ruble performed since the invasion?
In the week following Russia’s invasion of Ukraine, the Russian rouble fell to record lows, depreciating by about 50 per cent against the British pound, and about 80 per cent against the US dollar and Euro. However, the Ruble has already recouped all its losses, defying predictions that the war would launch it into freefall. One of the reasons for the improvement in Russian finances is due to the surging energy prices. In addition, Russia raised interest rates to 20 per cent and imposed restrictions on selling RUB and buying foreign currency, along with banning foreign investors from exiting securities, all of which have helped prevent a deeper selloff. It is important to note that Ruble liquidity has slumped after the invasion and that current price setting is not done on international markets, which distorts the value of the currency.
Challenges for the insurance sector
For international travel and health insurance companies who deal in a large range of currencies, FX volatility has influenced budgets, forecasting, and the day-to-day cost of sending and receiving money around the world. The extent of the impact of this volatility has varied from business to business, but has provided significant challenges across the board.
Travel and health insurance companies have struggled to pay suppliers as a result of the sanctions. Many banks took a hard-line approach to payments into Russia, which has resulted in suppliers not getting paid even though their ownership structure is below the actual sanctions level. Some suppliers to the industry have been understanding of the situation, whereas others are angry that they are being penalised. Some suppliers to the industry have considered changing their banking relationships in an attempt to receive money owed to them.
In addition to the sanctions relating to the SWIFT network and the knock-on effect of FX volatility, we saw substantial effort from companies providing emergency assistance and security services in Ukraine to support their evacuation efforts. A popular way to do this has been to use a money transfer service provider with agents in the country as a way for security and assistance providers to send cash to individuals fleeing the conflict, and to specialists on the ground who are assisting with evacuations. Unfortunately, as the fighting in the East of Ukraine intensified, these types of services were impacted. However, there remains a strong network towards the West of Ukraine at the time of writing (13 April). There continues to be a growing need for cash with US Dollar, Euro and the Ukrainian hryvnia being in high demand as a result in banking infrastructure being significantly affected.
Sanctions have also led to increased scrutiny over incoming and outgoing payments made by insurance and associated companies, with additional due diligence questions being asked by financial institutions. The objective here is to ensure that institutions have taken the required measures to meet the applicable sanctions regulations and to avoid unnecessary monetary fines/or potential loss of operational licensing.
What to expect in the next 30 to 60 days
Over the next 30 to 60 days, we expect that sanctions are likely to remain in place, and we may see them go further, with more Russian Oligarchs added and public announcements of asset seizures. We may also see the blocking of the Russian Government, which would amount to the sanctioning of all Russian state-owned companies.
Conflicts like this cause heightened uncertainty and currency volatility. If the conflict eases, we may see risk appetite rebound and energy supply concerns and economic worries dissipate. On the other hand, if we see further sanctions imposed to further weaken the Russian economy, this may lead to Russia cutting energy supplies off to the West and potentially China becoming more involved.
What if the impact of sanctions on international payments escalates and complexities increase?
The market is moving very quickly, and global cross-border payments are complex as it is. If you’re feeling like those complexities are increasing, then consider consulting with a specialist provider of global payment solutions.
The information contained within this tool does not constitute financial advice or a financial recommendation, is general in nature and has been prepared without taking into account your objectives, financial situation or needs.