Russia-Ukraine conflict: What is SWIFT and how cutting off Russian banks could affect Moscow

The United States and European nations on Saturday agreed to block select Russian banks from SWIFT, the global financial messaging system, in response to Moscow’s continued military assault against Ukraine.

In a joint statement with leaders of the European Commission, France, Germany, Italy, the United Kingdom, Canada, the officials said Russia being excluded from SWIFT ensures “that these banks are disconnected from the international financial system and harm their ability to operate globally.”

These joint sanctions are the harshest measures against Moscow since its forces went into Ukraine.

But what exactly is SWIFT? And what effect would a ban have on Russia? Here is everything you need to know about it.

What is SWIFT?

The Society for Worldwide Interbank Financial Telecommunication, also known as SWIFT, is a secure messaging system that facilitates rapid cross-border payments, making international trade flow smoothly.

It is important to note that SWIFT doesn’t transfer funds. Rather, it acts as a secure messaging system that links more than 11,000 financial institutions in over 200 countries and territories, alerting banks when transactions are going to occur.

Alexandra Vacroux, executive director of the Davis Center for Russian and Eurasian Studies at Harvard University, explained to NPR, "It doesn't move the money, but it moves the information about the money."

In simple terms, financial institutions connected to SWIFT use its messaging system to establish relationships with other banks and make payments. The secure messaging system allows banks to honour the payment instructions without question, subsequently helping banks process high volumes of transactions at speed.

SWIFT said it recorded an average of 42 million messages per day last year, an 11 per cent increase from 2020, when Russia accounted for 1.5 per cent of transactions.

SWIFT was founded in 1973 and is based in Belgium. It is overseen by the National Bank of Belgium, in addition to the US Federal Reserve System, the European Central Bank and others.

According to its 2020 Annual Review, SWIFT made a profit of $36 million in 2020.

Has any country ever been banned from SWIFT in the past?

The ban on select Russian banks from SWIFT isn't the first time that such a harsh measure has been implemented.

Iran lost access to SWIFT in 2012 as part of sanctions over its nuclear program, though many of the country's banks were reconnected to the system in 2016.

When it lost access, Iran lost almost half of its oil export revenues and 30 per cent of foreign trade.

How will SWIFT ban affect Russia?

Banning Russian banks from SWIFT would be a major blow to the banks and damage the country’s economy right away and, in the long term, cut Russia off from a swath of international financial transactions.

Russian companies and individuals will find it harder to pay for imports and receive cash for exports, borrow or invest overseas.

Britain's Conservative MP Jonathan Djanogly was quoted as telling National World that a SWIFT ban would effectively return Russia to “the economic dark ages”.

Former Russian Central Bank deputy chairman Sergei Aleksashenko was quoted as saying: “There is going to be a catastrophe on the Russian currency market on Monday”.

Ursula von der Leyen, president of the European Commission, said the decision to paralyse the assets of Russia’s central bank would stop the Kremlin from “using its war chest”, referring to its forex reserves.

Edward Fishman, an expert on economic sanctions at the Eurasia Center of the Atlantic Council think tank, was quoted telling Reuters that the actual impact of a SWIFT ban on the banks could be gauged only after its announced which banks have been selected.

If the list covered the largest Russian banks, such as Sberbank (SBER.MM), VTB (VTBR.MM), and Gazprombank, it would be "an absolutely huge deal," he wrote on Twitter.

A senior banker in Russia told Reuters that the impact could be blunted if the listed banks were limited to those already sanctioned and Russia's central bank was given time to transfer assets elsewhere.

"If it is the banks that are already sanctioned, it doesn't really make a difference. But if it is the top 30 Russian banks then that is an entirely different matter," he said.

"It all sounds very loud and everyone is very glad, but in reality it is a political statement."

Will SWIFT ban on Russian banks affect other countries?

If one thinks about it, the SWIFT ban will not just affect the Russian banks, but also other countries that carry out trade with Russia.

As a report in Moneycontrol said, exporters would find selling goods to Russia riskier and more expensive.

Foreign buyers of Russian goods would also find it more difficult, potentially prompting them to seek alternative suppliers.

Moreover, a ban on Russian banks from SWIFT would affect Germany and Italy quite adversely.

Adam Tooze, a history professor at Columbia University in New York and director of the European Institute in a report to CBC News, said, "Both Germany and Italy are very heavily dependent on imported gas from Russia. So comprehensive sanctions against Russian banks or a blanket exclusion of the entire Russian financial system from SWIFT would mean that they couldn't pay their gas bills."

Is there a way around SWIFT?

While this is the first time that some Russian banks have been excluded from the SWIFT system, Russia has been threatened with similar sanctions when it annexed Crimea in 2014.

Since then, Russia has been working on alternatives, including the SPFS {System for Transfer of Financial Messages} — an equivalent of the SWIFT financial transfer system developed by the Central Bank of Russia.

As of February 2020, more than 400 Russian banks had joined SPFS, exceeding the number of Russian banks enrolled in SWIFT, according to Harley Balzer, an expert on Russia and Russian-Chinese relations, and professor emeritus at Georgetown University in Washington, DC.

The Russian government has subsidised banks to try to encourage use, which has made banks in the country want to be part of SPFS because it lowers their fees, Balzer said.

China too has its own version of SWIFT, launched in 2015, called Cross-Border Interbank Payment System {CIPS} to internationalise the use of Yuan.

With Russia being excluded from SWIFT, there’s a rising concern that China and Moscow would join hands and the two countries are in talks to collaborate on a venture to combat SWIFT.

This would be disconcerting as both countries have emerged as rivals of the West in Europe and the Indo-Pacific, respectively.

With inputs from agencies

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