As a last resort to end the Russia-Ukraine Crisis, the western leaders have announced cutting off the Russian banks from SWIFT. This will make it harder for Russian companies and citizens to trade with the rest of the world.
But, what exactly is Swift? How severely will the ban affect Russia’s economy? And what’s next?
What is SWIFT?
Formed in 1973, SWIFT is a Belgium-based financial system run by its member banks and overseen by the National Bank of Belgium along the European Central bank and the U.S. Federal Reserve System. The system handles millions of daily payment instructions.
It connects over 11,000 financial institutions across more than 200 countries. However, Iran and North Korea are cut-off from SWIFT.
SWIFT routes messages with instructions from one bank to another, allowing them to know where the money should ultimately land. The system is needed because moving money from one account to another often bypasses multiple banks before landing in their final destinations, particularly foreign currency.
Davis Center for Russian and Eurasian Studies’ executive director, Alexandra Vacroux at Harvard University, says, “It doesn’t move the money, but it moves the information about the money.”
As trillions of dollars are traded between governments and companies, SWIFT sends over 40 million messages daily. 1% of which involves Russian payments.
How Will the SWIFT Ban Affect Russia?
Russia’s exclusion from SWIFT would damage the country’s economy right away and cut off the country from a wide range of international financial transactions in the long run. This includes oil and gas profits from global sales, which account for more than 40% of Russia’s revenue.
Sergei Aleksashenko, former deputy chairman of the Russian Central Bank, commented: “There will be a catastrophe on Monday.” According to the president of the European Union, Ursula von der Leyen, the decision to paralyze the assets of the Russian central bank would prevent the Kremlin from utilizing its forex reserves.
This is the toughest sanction against Moscow since its forces entered Ukraine, and it will likely have a serious impact on a country because of heavy reliance on the SWIFT platform for the payment of oil and gas exports. In the financial world, cutting a country off from SWIFT is equivalent to preventing a nation from using the Internet.
The only country to have been cut off from SWIFT prior to this was Iran. This resulted in the country losing a third of its foreign trade. At present, only some Russian banks are covered by the sanctions. However, the U.S. and its allies are holding back on the option of expanding it even further to a pan-country ban as an escalatory move.
What Does the Move Aim to Achieve?
It is expected that excluding Russian banks from the SWIFT platform will drastically impact its economy, and it will force the country to rely on telephones and fax machines to make payments.
The decision to target only some Russian banks seems intended to keep the option of further escalation open while ensuring that Moscow will suffer the maximum impact of the sanctions while preventing a major impact on European companies that deal with Russian banks for payments for gas imports. Moreover, the curbs will prevent Russia’s central bank from tapping into its forex reserves to limit the effects of sanctions.
Russia has been accumulating foreign exchange reserves since the previous round of sanctions in 2014, hitting a record high of $630 billion in January 2022. However, due to the new measures, the country’s central bank’s reserves will be significantly reduced.
SWIFT Ban: Is There an Escape?
Although there have been workarounds for SWIFT, none have proven successful. In the last seven years, the Central Bank of Russia has developed an equivalent of SWIFT, the financial transfer system designed by the World Bank. According to reports, the Russians and Chinese are collaborating on an upcoming venture to challenge SWIFT.
Moscow may use this platform to some degree to circumvent the partial ban, which could soon become a complete ban.
It may take some time for the ban to impact, but what is important is that Western nations demonstrate a firm resolve. Ukraine’s Prime Minister Denys Shmyhal said the latest economic sanctions were “a real help during this dark time.”
Russia Banned From SWIFT: Ripple Effects on the Global Economy
Blocking Russian banks from SWIFT has been fraught with difficulties.
Even as Ukraine has been urging Western nations to kick Russia off the payments system and has the backing of countries such as the United Kingdom, others, such as Germany, have been concerned about the impact on their economies and businesses.
French Finance Minister Bruno Le Maire called the SWIFT ban a “financial nuclear weapon.” He told reporters:
“When you have a nuclear weapon in your hands, you think before using it.”
Despite the multiple ways in which geopolitical tensions between Russia and Ukraine can negatively affect the international economy, including tighter global financial conditions, increased uncertainty, and a weakening of global demand, higher commodity prices, especially oil, are the most important transmission channel.