Bankers in the Bunkers: Why Sanctions Against Russia put Banks in the Front Line

A new law came into effect in the UK. It allows the UK government to sanction individuals and impose limits on access to capital markets, military technology and energy supply without any tangible or attributable action by Russia. Using the Sanctions and Anti-Money Laundering Act (SAMLA), it is using secondary legislation to extend the Russia Regulations that allow the government to seize assets and sanction individuals in case of adverse action by the Russian State.[1]?In other words, the UK has just given itself unilateral power to take constraining action against Russia by weaponising its financial services sector.

This is not to say that the UK government will act unilaterally. If it did, it would be playing into the hands of a Russian administration that is testing the cohesiveness of NATO and the EU to withstand its constant brinkmanship. If one player goes it alone, it demonstrates to Russia that it can, indeed has, destroyed the post-war Western strategic alliance. This would be a massive miscalculation and would achieve precisely the objective that Mr. Putin wants, so it isn’t worth the attempt.

However, it points to something much more significant about conflict in the modern, digital era. Military options are extremely limited – not least because Russia’s “Basic Principles of the Russian Federation on Nuclear Deterrence’[2] which loosen the circumstances under which Russia might feel sufficiently threatened to warrant a pre-emptive nuclear strike. Its scope is vague; but it includes in its list of potential threats, military activity in adjacent territories (like Ukraine) and conventional weapons like short and medium-range missiles without a nuclear warhead.[3] Mutually Assured Destruction is more likely if NATO uses conventional means to limit Russia’s ambition in the region and this is a concept that Russia may well be trying to test as well.

So modern warfare is not just military – in fact, as the UK’s Integrated Operating Concept discusses, “warfight” is a final resort when all other options to “protect”, “engage” and “constrain” an adversary have been exhausted.[4] Russia is a past master at this approach. It has been engaged in “hybrid” or “all means” or “sub threshold” warfare for many years, and certainly since 2014. The oft-forgotten conflict in Donbas between Ukraine and Russian-backed insurgents, the frequency of cyber-attacks, misinformation and troop build-ups all create a “fog of war” or more precisely, “a realm of uncertainty”[5] where decision-making is clouded by imperfect knowledge about the problem as well as its solution.

This makes the use of weapons other than military ones a necessity and the current Russia-Ukraine crisis is the perfect illustration. Does Russia really want war? It has territorial claims in Ukraine, and could use the Donbas conflict as a pretext for invasion; it is building up troops and saying it is withdrawing troops; there have been cyber attacks on Ukraine’s Ministry of Defence, two of its banks and 12 government websites in the last few weeks but these cannot be attributed directly to Russia; there are rumours of a new Ukrainian government in waiting.

So the only possible response by the West is to weaponise its trade and financial institutions by embargoing energy supplies and sanctioning individuals and limiting access to capital markets .

There are manifest issues with this, not least the fact that any “nuclear option”, such as removing Russia from the Swift payments network would also undermine the hegemony of the dollar, and cripple the West’s financial system and put it at risk of secondary sanctions. More worryingly, it would accelerate the decoupling of the global payments systems into Sino-Russian axis - run through the Russian System for Transfer of Financial Messages (SPFS) and the Chinese Cross Border Interbank Payments System – and a “Western” system run through Swift. An economic Cold War in the making.

But the biggest risk is that it effectively puts regulators and banks in the front line of national strategy. It will be the Financial Institutions of the West that have to implement the new restrictions on companies and individuals, on payments and on access to markets. Banks as the foot soldiers in modern warfare has been something that has been emerging as self-evident since Anti-Money Laundering and Know Your Client regulations tightened after the last financial crisis.

Now the Banks’ role has become one of national security in a world where the lines between peace and war are increasingly blurred. Russia is well-equipped to fight back – the SPFS is increasingly functional across Eurasia and has 23 foreign bank members, including Swiss and German.[6] China’s capacity to compete in this space is well-documented.[7] Both play strategic games – Chess and Go respectively; and both are used to being several moves ahead. The Munich Security Conference starts at the weekend and the crisis will be at the top of the agenda. Let's hope the consequences for the global financial system of any action by the West are carefully considered too.

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[1] https://www.macfarlanes.com/what-we-think/in-depth/2022/russiaukraine-conflict-what-might-the-uk-s-unprecedented-package-of-sanctions-look-like/

[2] https://archive.mid.ru/en/web/guest/foreign_policy/international_safety/disarmament/-/asset_publisher/rp0fiUBmANaH/content/id/4152094

[3] https://rusi.org/explore-our-research/publications/commentary/russias-new-nuclear-strategy-unanswered-questions

[4] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1014659/Integrated_Operating_Concept_2025.pdf

[5] https://www.clausewitz.com/readings/OnWar1873/TOC.htm

[6] https://www.russia-briefing.com/news/spfs-russia-s-alternative-to-swift.html/

[7] Harding, R and Harding, J (2019): Gaming Trade: Win-Win Strategies in the Digital Era London Publishing Partnership, London.