An Investor's Look at SWIFT and the Sanctions Against Russia

While some in the financial media are eager to draw quick and hard conclusions, there are still a lot of unknowns about the evolving situation in Ukraine.

In the podcast, Motley Fool analyst Bill Mann discusses:

• The impact of U.S. and E.U.ropean economic sanctions.
• SWIFT (the Society of Worldwide Interbank Financial Telecommunications) and why it's so important.
• Switzerland freezing Russian assets.
• His continued interest in the oil and gas industry right now.
• An important step anyone should take before making charitable contributions.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Feb. 28, 2022.

Chris Hill: Today on Motley Fool Money, we're talking Russia, economic sanctions, the impact for investors, and what in the world SWIFT is. That and more coming up right now. I'm Chris Hill joined by Motley Fool Senior Analyst Bill Mann. Thanks for being here.

Bill Mann: Hey, Chris. How're you?

Chris Hill: I'm doing all right on yet another strange day in the market. Topic A, B, and C is Russia.

Bill Mann: Yeah.

Chris Hill: That's what we're going to dig in today. Let's start with the economic sanctions. It was not like Russia's economy was in great shape to begin with. But now both the E.U. and the U.S. Treasury Department has essentially cut Russia off from its financial reserves.

Bill Mann: Yeah.

Chris Hill: There's no trading with Russia's Central Bank.

Bill Mann: Which is a big deal, right? There are a couple of things going on. One is that Russia's Central Bank has been cut off. But two: Russian banks, the biggest banks, have been cut off from a messaging system among banks called the SWIFT system. We sitting here in our houses in the United States of America, may not recognize just how important the SWIFT system is to the movement of money around the globe. It is a very simple way in which Russia's economy in some ways has been completely isolated. There are long-term downsides. But I think that this was about as close to the financial nuclear option as you could get.

Chris Hill: I like probably a lot of investors was unfamiliar with the SWIFT system. I learned that SWIFT stands for Society of Worldwide Interbank Financial Telecommunications, which is a clever way of saying what you said, which is, this is a messaging system.

Bill Mann: Yeah.

Chris Hill: This is banks' [laughs] way of interacting with one another. But to your point, when you consider Russia essentially can't get paid for their goods as a result of this. It was one of those things where I appreciate the nuclear option metaphor because I read this stuff this morning and thought to myself, this seems bad.

Bill Mann: Yeah.

Chris Hill: How bad is it? There's been a lot of talk over the past week or so leading up to the invasion of Ukraine regarding what sanctions will be imposed, and maybe not all of them, but certainly some of the most damaging ones.

Bill Mann: Yeah. I would say that for people who were not familiar with SWIFT, maybe one of the big outcomes right now for people who go in search is that for the first time in probably 15 years, if you type the word SWIFT in, the first 30 options aren't Taylor. People are getting up to speed very quickly on what SWIFT is. So maybe a little bit of an explainer might help you a little bit. Let's just say, Chris, you're bank in the U.S., and I'm a bank in Japan. I message you and say, hey, I have a customer who wants to send your customer 100 bucks. I've already converted that customer's Yen to Dollars, but it didn't my account. Then you message back and say, OK, I have converted dollar to Yen in my account, and so that we can do the switch whenever we want. But in terms of the customer, the transaction is done. It's a very simple messaging system. It may sound like the type of thing that could be recreated, but it is one of those things were truly each node on the system makes it that much more valuable, like people always talked about, oh yeah, sure, there are a lot of alternatives to Twitter, for example, but everybody is still on Twitter, right? There are plenty of alternatives to SWIFT but everybody is on SWIFT. That center of gravity really, really matters.

Chris Hill: Before we get to implications for different industries, then at some point I'd like to talk about stocks, it was not lost on me that Switzerland, famous for not taking sides, came out and said, yeah, we're going to freeze Russian assets as well.

Bill Mann: Yeah.

Chris Hill: Is that big from a symbolic standpoint? is that big from a financial impact standpoint?

Bill Mann: Both.

Chris Hill: So both?

Bill Mann: Yeah. Both because Switzerland's neutrality is something that, I don't want to say bad actors, but actors around the globe have essentially been able to weaponize prior to world war II. The fact that they have come out and said, yes, we are also on the side of taking these steps, means that one of the biggest release valves for Russia no longer exists. They can't use Switzerland as a way to bypass sanctions and restrictions from other countries.

Chris Hill: We talked some about Russia and their banking system. There are some big banks here in the United States. Citigroup getting some attention because it has, at least over a couple of months ago, somewhere in the neighborhood of $10 billion worth of exposure to Russia. If you are a shareholder in any of the major U.S. banks, are you worried right now?

Bill Mann: It's not so much the banks. Here's the deal: Every financial transaction, and transactions in commodities and a lot of ways are done on future contracts, those transactions have already been put into place. It's not so much the banks that have the exposure. This is why locking up the Russian banks out of the SWIFT system is going to have negative impacts in places where we don't understand and know yet, because we have already had supply chain issues throughout the world because of COVID, because of a slowdown in a lot of different manufacturing areas. But the financial system works the same way. It also can cause some real stoppages, not just on the banking side but also on the supply side. Because a lot of companies are about to find out that they have substantially more exposure to Russia than they thought. Even if it's not direct, if they've got a supplier who has exposure to Russia and suddenly the Russians can't pay their bills or the other way around, that's really going to cause some pain in a lot of places. I know a lot of people are very much in favor of this, and I have to say, I'm in favor of it as well. This is going to be scary for the global economy for as long as it is in place or until companies have the capacity to adjust.

Chris Hill: I'm tempted to ask how scary, but [laughs] I know the answer to that is: we don't know. You and I were talking earlier today. We talk a lot at The Motley Fool about being net buyers of stocks. There seem to be a lot of people in the financial community on Twitter, in the financial media, who are -- I don't want to say they are all doing this because they're not -- but some of them really seem to be in a big rush to draw firm conclusions. This is what this is going to mean for banking. This is what this is going to mean for U.S. banking, Russia, this is what this means for oil and gas, for the supply chain. Therefore, we're telling our clients. But it just seems like, one, we still don't know a lot. Which leads to two, because this is still happening. This is still ongoing. This is a real conflict that is happening in real time, and we're not close to a conclusion yet as much as we would like to be.

Bill Mann: Chris, as you know, I am a skeptical optimist. I like to believe that the best outcome is possible, but I also believe that you need to be careful about drawing lines that the best outcome is the most likely. I think a lot of people who are drawing those conclusions are doing so either because they want to sound smart or because they professionally have to. The great news about us, and the great news about individual investors everywhere, is that you don't have to draw conclusions yet. I mean, it bears remembering that the war in Ukraine, as we're recording, is something on the order of 72 hours old, which is not a very long time. A lot of things are going to happen. If you are nervous, if you are afraid, even if you are feeling greedy because the market right now is not discounting a whole lot of happiness, take a week. What's a week? Just to see what happens. If everything goes great, maybe you're buying at slightly higher prices. But who cares? Just take a deep breath. The old cliche is that the market hates uncertainty. The market hates dislocation, is really what is happening, and this is a dislocating time. The status quo that existed, I don't know, call it late January, has been broken and we don't really know how everything is going to be put back together again. Again, I'm an optimist. I believe it will be put back together and it will be put back together in some ways better than before. But it's OK to take a little bit of time to wait to see with your financial assets how things are going to shake out.

Chris Hill: But of course, you and I both understand the impulse. We appreciate people looking at, say, a Russian bank ETF [exchange-traded fund], shares being slashed, and thinking, well wait a minute. If this gets resolved soon, doesn't that go back up?

Bill Mann: I love the instinct. Was it Nathan Rothschild, who said buy on the cannon and sell on the trumpets? Well, the cannons are going off now, so I get it, and I get it at least in some ways because I'm trying to resist it myself. But I think waiting a few days just to see how this dislocating period of time, how Humpty Dumpty is starting to be put back together again, I'm not saying you need to wait for certainty. I am saying that this is a period of time in which probably doing nothing is your best course of action.

Chris Hill: If you're someone who is watching all of this play out, are there areas of the market where you think, OK, this is going to have less impact on a likely basis than others. If you're someone like me who's not inclined to look at big banks, not inclined to look at oil and gas companies for my investment dollars. Instead I'm looking at, I don't know, pick an industry, consumer goods, streaming video. It's like OK, is this really going to hurt Netflix? I guess what I'm asking is, are there parts of the market where you think, OK, we don't know what's going to happen. There is the potential for unanticipated ripple effects because that's how history works. But these are the parts of the market that seem like they are in better shape.

Bill Mann: Well, you pooh-poohed one of the places that I was going to say, I think the oil and gas industry is an ideal place to look simply because one of the biggest players has now been sidelined. I think something that's happened over the last couple of decades is that we've had a little bit of magical thinking about what the transition from petroleum-based energy products is going to be to renewables. I think that we're now seeing that, yes, there is going to be a long-term transition, but that long-term transition doesn't mean that we shut it off now. Russia matters really as a market because it has oil. That is what Russia brings to the table. The fact that we're here talking about this should point pretty clearly to the fact that oil does in fact matter.

Chris Hill: Two more things and then I'll let you go. Another thing you and I were talking about. Since we're waving the caution flag here, is that not only are we not going to know for a while how this all plays out. As a result of that, it seems like a time for all of us as investors to be even a little bit more careful than we usually are when it comes to the analysis that we are reading or watching or listening to.

Bill Mann: Yeah. Was there more?

Chris Hill: No [laughs] you can take that in any direction you want, my friend.

Bill Mann: Yeah. I think you've got to be careful in general whenever you hear people speaking in any analysis. We talk about this a lot at The Motley Fool that when you're investing in any company, somewhere close to 85% to 98% of what you're talking about is projecting into the future, is guessing that we really do have an illusion of control. Now we can make good guesses about where the future is going. We can back great people, but there is still very much an illusion of control. I think that right now it's a pretty clear time for us to recognize that we have even less control than we do normally, and that normally really does boil down to not very much. Be really careful of people who say this is going to happen and then that is going to happen, and then these companies will benefit or these markets will benefit, because that is guesswork, and they are either fooling you or themselves.

Chris Hill: One of our colleagues texted me over the weekend and said, and I'm paraphrasing, a lot of American investors are looking up from their portfolios, watching this and demonstrating empathy and compassion for a country that most of us admittedly didn't know that much about. This is one of those times when a lot of people are looking at helping any small way that they can. What advice do you have for them?

Bill Mann: I worked for a number of years, "worked" is overstating it a little bit, but I was a director of an international aid charity for a number of years, mainly based in Africa, but we still did get to observe a lot of how things happened on the backside once you contributed money. I would be really careful right now with your charitable money because unfortunately there is a cottage industry of entities that pop up that want to take advantage of the fact that you have feelings about giving. Some of them have no intention of actually deploying any of the money to the need. Other ones do have the intention, but they are still bad at it for a bunch of different reasons. One of the things that I would really recommend people do is look at some of the honest brokers in charitable giving, the best of which is a group called Charity Navigator, which is itself a charity. 

They give us star rating to charities. They make their tax forms available to you. Really what you want to look for on Charity Navigator would be a three- or a four-star rating because in that case, you are looking at charities that have most of the money that is coming in, is actually making it out to what they call the programs out into the field. Chris, you will see, and it infuriates me sometime because some of the most effective charities at raising money, 90% to 95% of the money that they raise goes back into fund-raising. Almost none of it makes it out into the market. Those are extreme examples, but there are lots of examples of charities that are good at raising money, but not so great at deploying it where you really deserve your money to go when you're giving to any cause.

Chris Hill: I love Charity Navigator. That's a site that I find to be incredibly helpful. In part because of the way that they lay out the information. It's not very easy to digest.

Bill Mann: Yeah, it's amazing. It's charitynavigator.org. There are others. GiveWell is one, The Life You Can Save is one, give you great information. But Charity Navigator is probably the most comprehensive in terms of you go in and you can type a word. Let's make up a word. Let's just say the word is Ukraine and it will spell out for you the charities that are doing work in Ukraine and what their ratings are. I always just honor people's willingness to give, but you want those dollars to go as far as humanly possible. I think we all do.

Chris Hill: We'll keep watching all of this play out. Bill Mann, thanks for being here.

Bill Mann: Thank you, Chris, take care.

Chris Hill: As always, people on the program who may have interest in the stocks they talk about in the Motley Fool may have formal recommendations for or against. Don't buy yourself stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow!