By Kirstin Ridley and Karin Strohecker
LONDON (Reuters) - The European Union aims to cut off Sberbank, Russia's largest lender, from the SWIFT international payment system as Western allies seek to further isolate Moscow from financial markets over its war in Ukraine.
The latest proposal forms part of the EU's sixth and toughest round of sanctions, which also includes an embargo on crude oil in six months. The measures still have to be approved by the governments of the 27 member states.
The EU had previously spared Sberbank from what is seen as the harshest measure because it, along with Gazprombank, is one of the main channels for payments for Russian oil and gas, which EU countries have been buying despite the conflict in Ukraine.
The latest step could mark a watershed for the EU, which remains reliant on Russian oil and gas as energy prices surge.
WHAT HAS THE EU PROPOSED?
The EU's executive Commission on Wednesday proposed to cut Sberbank and two other Russian banks - named by two EU sources as Credit Bank of Moscow and the Russian Agricultural Bank - from the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
SWIFT is the messaging system underpinning global financial transactions. Being removed from SWIFT makes it very difficult for a lender to make or receive international payments.
Sberbank did not immediately respond to a request for comment. The lender, which exited almost all its European markets in early March, has previously said further sanctions would not have a significant impact on its operations.
WHAT WERE PREVIOUS SANCTIONS ON RUSSIAN BANKS?
Russia's economy, including most of its banks, has been subject to sweeping Western sanctions since the start of what Moscow calls its "special military operation" in Ukraine on Feb. 24.
Punishments meted out by various Western capitals saw Russian banks promptly frozen out of the global financial system in which they had been well integrated.
In early March the EU named seven banks it would bar from SWIFT: Russia's second-largest bank VTB along with Bank Otkritie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank and VEB. However, lenders handling energy payments were spared.
Britain sanctioned another wave of Russia's banks in late March, including Gazprombank and Alfa Bank.
After Ukrainian and U.S. officials accused Moscow of committing war crimes in the town of Bucha near the capital Kyiv in early April, the United States also slapped Russian banks with a fresh round of sanctions.
Those measures saw Sberbank, which holds one-third of Russia's total banking assets, and Alfa Bank, the country's fourth largest financial institution, subject to "full blocking sanctions" that would freeze all their assets "touching the U.S financial system," the White House said at the time.
WHY DO BANKS NEED SWIFT?
SWIFT connects more than 11,000 entities worldwide and is the dominant messaging system in cross-border transactions, with recipients contractually liable if they fail to respond to the secure messages.
Russia has become one of the top users of the system, having had a board seat since 2015 and with more than 300 Russian banks using it as their primary method of communicating with domestic and international banks.
Asset manager Fidelity International warned last week that banning banks from SWIFT could prompt Russia to create a parallel system, hindering globalisation. However, some experts have said SWIFT could be hard to replace, especially in the short term.
While the exact impact on Russian banks being removed from SWIFT is hard to gauge, the hit from the sweeping measures is being felt across the financial sector and is unnerving for clients' of those lenders.
"Today even those banks that have not been formally cut off from SWIFT are facing substantially slower transactions through this system," said Roman Prokhorov, head of the Financial Innovations Association. "Often there are returns of funds from beneficiary banks and correspondent banks just without any reasons, because of the Russian origin (of banks)."
IS THERE AN ALTERNATIVE?
Russian banks can move to a messaging system developed by Russia's central bank - System for Transfer of Financial Messages (SPFS). Last year the central bank was reported as saying domestic interbank traffic could easily be transferred to this platform.
However, it lacks international connectivity and only operates during weekday working hours, while SWIFT operates 24 hours a day, every day. Also, SPFS messages have size limits which make it less able to handle more complex transactions.
Russia's central bank announced in mid-April it would no longer publish the names of banks connected to SPFS.
Russian banks could also connect to China's CIPS payment platform. However, that can only be used for settling payments in yuan and itself relies on the SWIFT network for its operations, so piggybacking on CIPS could also be seen as a breach of a SWIFT ban, according to analysts.
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