As economic sanctions remain a prevalent tool in the crisis unfolding in Ukraine, for financial firms involved the obstacles are increasing as the importance of serving consumers grows. 

Payment Expert spoke to Saeed Patel, product and tech expert at Eastnets about the challenges faced by financial firms in the current climate and the importance of flexibility. 

Payment Expert: How important is it that financial firms remain flexible in times of regulatory turbulence? 

Saeed Patel: Financial firms, especially those operating on the two sides of the conflict, have a difficult balance to maintain between flexibility of services and changing regulations.

The European Commission announced the deepest level of sanctions on Russian banks ever, subjecting 70 per cent of them to new restrictions and freezing assets. Furthermore, Russians cannot now place any new deposits over €100,000 in EU banks or £50,000 in their UK counterparts.

International coordination of sanctions on Russian banks has taken place with vigour. The collective action of the EU, US and UK has meant that Russian banks are now excluded from raising funds on the financial markets. This will eventually hurt the Russian banking system and lead to a dire economic situation.

As a result, international banks dealing with Russian ones need to assess their risk exposure and reduce the impact of sanctions restricting business. With new regulations being announced by the hour, this must continuously take place, with immediate corrective action to limit their risk exposure and adhere to legal obligations.

In short, financial firms’ flexibility at times of turbulence is paramount to both maintain clients and abide by rules.

Payment Expert: Can blockchain tech play a role in supporting firms as they adapt to a time of crisis? 

Saeed Patel: The distributed and resilient nature of blockchain is increasingly seen as an important technology in times of crisis to ensure secure and reliable transfer of information, in addition to digital assets.

With Elon Musk’s announcement that the SpaceX satellite-internet system is being made available in Ukraine, blockchain-based solutions might be the only electronic payments means that people inside Ukraine can access as the war escalates.

Blockchain is the underlying technology for cryptocurrency, so if cryptocurrency becomes a means of money exchange due to war in Ukraine or sanctions in Russia, more firms will embrace blockchain in this time of crisis and after it.

Payment Expert: Will economic and transactional turbulence lead to a spike in engagement from digital currencies across Eastern Europe? 

Saeed Patel: Eastern Europe in general, and Ukraine in particular, are already among the most avid cryptocurrency users worldwide. Ukraine is seen as a leading crypto hub. It currently ranks fourth on the Global Crypto Adoption Index by Chainalysis. In line with this, Ukraine’s government has asked for donations in cryptocurrencies to support it.

Ukraine, just prior to the Russian invasion, passed regulation legitimising crypto currencies. These new rules ensure businesses are protected against crypto-related fraud or abuse. Legalising the currency will ensure exchanges are better protected.

National currencies have sharply declined in value on both sides of the conflict, which might lead some to prefer crypto currencies. Nevertheless, the situation is very volatile at this stage, so even crypto-currency values slumped when hostilities broke out.

Payment Expert: How important for banks are sanction watchlist database providers during times of uncertainty?

Saeed Patel: They’re vital. The leading sanctions watchlist providers will aim to update their databases the moment a government body issues a revision. However, it’s incumbent on banks to ensure they receive those updates in real-time.

Traditional update procedures within banks simply take too long and would leave them exposed to the risk of allowing transactions that should be blocked or investigated.

One way of avoiding this is to use blockchain technology, which ensures banks receive sanctions list updates as they’re made, in a secured way.

Payment Expert: In terms of cross-border transactions, how impactful will the latest economic sanctions be for the West? 

Saeed Patel: Cross-border transactions are executed using the SWIFT network, so many firms that have dealings with Russia will be affected by the latest SWIFT related sanctions, even more than the first set of sanctions imposed. However, selecting certain Russian banks (and not all of them) may reduce the impact on European businesses by allowing them to continue to collect their money from their Russian business partners and pay for Russian gas imports.

Payment Expert: How can banks best prepare for imminent cyber-attacks, a trademark of international tension? 

Saeed Patel: Cyber-attacks were the prelude to the current conflict and are likely to continue as a means of retaliation to sanctions.

Banks should immediately contact their providers to ensure the latest security patches are applied and seek their expert recommendation. Even if the best technology is used to protect against such attacks, banks still need a contingency plan in case of major disruption.

Banks should also be wary of fraudulent activities which increase in such times. If fraud detection systems are not in place, banks should contact their vendors immediately.

Payment Expert: How significant are sanctions involving SWIFT, the global network? 

Saeed Patel: The exclusion of some Russian banks from SWIFT is now implemented for the first time, though previously considered as a last resort. 

The impact on the Russian economy would be enormous. SWIFT is the railway of international payments that Russia relies on for its international banking system and energy sector, which is reliant on oil and gas exports.

While the economic consequences for Russia would be dire, the political and military consequences could be even worse. It is unimaginable that Russia would not retaliate to this very extreme economic measure.