As Russia invades Ukraine, the talks about imposing sanctions and banning Russia from SWIFT have become more prominent. Until now, some Western countries have been reluctant to use this weapon against Russia. However, things might change.
In this article, we explain why SWIFT is so important for international banking. We also analyze how cutting off Russia’s access to SWIFT can damage Russia, and potentially prove a dampener for the West’s own economic interests.
For starters, this is not the 1st time that Russia has been threatened to be banned from SWIFT. The US had called for Russia to be cut off from SWIFT after Moscow’s annexation of Crimea in 2014.
What is SWIFT?
SWIFT – Society for Worldwide Interbank Financial Telecommunication – is like the “Gmail” of global banking services. It was founded in 1973 to end reliance on the telex system, an international system used especially in the past for sending written messages.
SWIFT delivers secure messages among more than 11,000 financial institutions and companies, in over 200 countries and territories. It is a member-owned cooperative, based in Brussels, the capital of Belgium.
SWIFT delivers an average of 40 million messages a day that includes orders and confirmations for payments, trades and currency exchanges.
Why is SWIFT so important?
Let’s put it this way, when some Iranian banks were cut off from SWIFT in 2012, Iran’s oil exports plummeted sharply from more than 3 million barrels a day in 2011 to about 1 million barrels a day a few years later.
When Russia was threatened to be cut off from SWIFT in 2014, Alexei Kudrin, Russia’s former finance minister, warned about a potential GDP contraction of 5% because of this sanction. Currently Russia accounts for 1.5% of total transactions on SWIFT.
When SWIFT comes into action?
SWIFT doesn’t hold any deposits. It’s overseen by the National Bank of Belgium and representatives from the U.S. Federal Reserve System, the Bank of England, the European Central Bank, the Bank of Japan, and other major central banks.
SWIFT bans countries or entities only if the EU passes a sanction. SWIFT has 40% of its payment done in US dollars, giving USA a strong voice on the system.
Is there an alternative to SWIFT?
Since 2014, Russia has started its own financial messaging system for Russian and foreign banks. It has developed an alternative messaging system called SPFS (Financial messaging system of the Bank of Russia) which handles about a fifth of domestic payments. However, it has only 400 domestic users. “This is a reliable and secure channel for sending electronic messages on financial transactions,” Russia’s central bank says in a note.
Why are some European countries reluctant?
To put it plainly, some European countries are cautious because of their dependence on Russia for oil and gas. Overall, the EU relies on Russia for around 40% of gas needs.
Russian politicians have warned that without payment, the flow of gas and oil would quickly stop. But some European lenders are nevertheless scaling back exposure to Ukraine and Russia, that represent a threat to the credit lines essential to trade between EU and Russia.
Will the West ban Russia from SWIFT? It remains to be seen…