Meaning of SWIFT and the economic implications of its ban in Russia

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Russia’s invasion of Ukraine has intensified calls to impose sanctions that would devastate the Russian economy and target leaders in its government.

One of the key demands put forward by the Ukrainian government is for Russia to be barred from SWIFT – the world’s most-used interbank communications system.

“I will not be diplomatic on this. Everyone who now doubts whether Russia should be banned from SWIFT has to understand that the blood of innocent Ukrainian men, women and children will be on their hands too. BAN RUSSIA FROM SWIFT,” Ukraine’s foreign minister Dmytro Kuleba tweeted on Thursday.

But what is SWIFT, and why hasn’t Russia been banned from using it?

What is SWIFT?

SWIFT, short for the “Society for Worldwide Interbank Financial Telecommunication”, is a secure messaging system that facilitates rapid cross-border payments.

Its standardised system of secure messages is highly trusted, and allows banks to process high volumes of transactions very quickly

The Belgium-based system was set up in 1970 as a co-operative made up of the thousands of financial institutions that use it.

It has become the backbone of international finance. In 2020, around 38 million messages were sent each day over the SWIFT platform, according to its Annual Review. Each year, trillions of euros are transferred using the system.

While there are alternatives – for example, Russia and China operate their own systems that work in similar ways – SWIFT is the most-used worldwide.

Why would a SWIFT ban matter?

If Russia’s banks were banned from SWIFT, they would find it much harder to access financial markets around the world.

As a result, it would be much harder – although not impossible – for Russian businesses and individuals with bank accounts in the country to import and export goods, and borrow and invest abroad.

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Some 300 Russian banks and financial institutions use SWIFT for interbank transfers.

A ban on Russian financial institutions would not be a world first. Some Iranian banks were barred from SWIFT in 2019 following US sanctions. The country as a whole had its access suspended between 2012 and 2016.

Why not block it?

While blocking Russian access to the system would impact the country’s economy, it would also have knock-on effects in Europe – leading some European leaders to withhold their support for such a measure.

German finance minister Christian Lindner told broadcaster ARD that blocking Russia’s SWIFT access would bring with it “a high risk that Germany would no longer receive gas and other raw materials” from Russia, a concern reportedly shared by fellow EU states Italy, Hungary, Cyprus and Latvia.

In the United States, there are also concerns over the potential destabilising effects of such a move.

Brian Frey, a former US Justice Department prosecutor during the Trump administration, told the Associated Press that while SWIFT is the primary messaging system for financial payments, “there are alternatives to the system” and cutting Russia off would create a “splashback and immediate problems for the international community”.

Locking Russia out of SWIFT could push it into alternative options like China’s own payment processing system or even a blockchain-based solution.

What are countries doing instead?

On Thursday the European Union revealed what it called its “toughest sanctions package ever” against Russia.

EU banks will be banned from accepting deposits from Russian citizens of more than €100,000 and several Russian state-owned companies will be blocked from accessing EU funding.

New sanctions including measures like freezing EU-based assets will be imposed on powerful Russian individuals and those close to its president, Vladimir Putin.

“The impact will be maximum on the Russian elites,” European Commission president Ursula von der Leyen said, adding, EU sanctions “will drive up inflation, accelerate capital outflows and gradually erode the industrial base”.

In the United Kingdom, Prime Minister Boris Johnson – who supports banning Russia from SWIFT – announced the former EU country’s own package of sanctions, focused on limiting access to its important financial markets for Russian banks and companies.

“Nothing is off the table,” Johnson said.

In the United States, President Joe Biden announced sanctions targeting Russia’s two largest banks, Sberbank and VTB Bank, blocking them from making transactions in US dollars.

The US Treasury Department said the sanctions overall “target nearly 80 per cent of all banking assets in Russia and will have a deep and long-lasting effect on the Russian economy and financial system”.

Responding to a question on SWIFT, Biden said the package of financial sanctions he had would be even more damaging to Russia and suggested that a decision on a SWIFT ban would be up to European countries.

“It is always an option but right now that’s not the position that the rest of Europe wishes to take,” Biden said.

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