What is SWIFT? How a Belgian Financial Communication System is Sanctioning Russia
Given the current crisis in Ukraine, many countries are imposing financial restrictions on Russia. One of the largest actions to date has been the removal of seven key Russian banks from the financial communication service, SWIFT. As one of many actions taken to pressure Putin to remove troops from Ukraine, this has put significant stress on Russia’s economy.
While there is no telling what Russia’s leadership will do next, the SWIFT ban has caused extensive economic ramifications both for Russia and the rest of the world. To fully understand the current situation, let’s take an in-depth look at SWIFT, what it does, and how this financial institution affects the entire global economy.
What is SWIFT?
SWIFT (Society for Worldwide Interbank Financial Telecommunication) is the standard messaging system for financial institutions, connecting over 11,000 financial institutions in over 200 different countries. SWIFT operates out of Belgium, but is jointly owned by major banks in Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States. This joint ownership between central banks of multiple countries means that SWIFT is rarely used as a political tool.
Banning a country from SWIFT would require the cooperation of all, or many, of the countries above. As such, it can not only be used as a sanctioning tool but also as a signal of international censure.
How Important is SWIFT, really?
SWIFT is essential for the global financial system, as there is no globally accepted alternative to send payment communication. While SWIFT does not move money, it is key to international money transfers as it enables communication about payments being transferred across borders.
Cutting a bank off from SWIFT keeps them from using its network to communicate with other banks. Disconnecting a country from SWIFT would not keep businesses in that country from connecting with the financial institutions through other means, but it does make it exceedingly difficult.
Russia became aware of its reliance on SWIFT back in 2014 when similar measures were taken over Russia’s annexation of Crimea. Since then, they have attempted to create an alternative, the SPFS (System for Transfer of Financial Messages). While this may have the same functionality as SWIFT, it has nowhere near the range or global impact of the SWIFT system. Even within Russia, it is not the standard for financial institutions.
Consequences of a SWIFT ban
Banning a bank, or country, from SWIFT disables its ability to interact with the rest of the world’s financial institutions. This not only causes issues for the country’s banks but its entire economy at large. Even a few banks being banned from SWIFT has a major impact on the economy.
SWIFT also enables transactions through major cards, like Visa and Mastercard. Banning Russia from SWIFT, then, disrupts domestic payments as well as international payments.
Banning a bank, or country, from SWIFT also pressures other institutions to decline business with them. While not the equivalent of legal sanctions, removing a bank from SWIFT has extensive ramifications for the country’s economy. It acts not only as a major roadblock for global commerce but also signals a severe stance toward the country. Other financial institutions that have the ability to connect with these banks outside of SWIFT may decline to do so out of fear of being banned from SWIFT themselves.
Current Domestic Ramifications
Economic sanctions quickly followed Russia’s attack on Ukraine, but the nature and extent of SWIFT bans have yet to be seen. On March 2, the EU declared that seven Russian Banks would be restricted or removed entirely from SWIFT. This is to go into full effect by March 12, with additional Russian banks to be added if needed.
This news, along with other actions taken by global leadership, has already sent Russia’s economy into a spiral. The news of financial sanctions, and a potential SWIFT ban, led to a run on Russian banks and stores in the last few weeks. The Russian people withdrew almost a trillion rubles in the last days of February alone.
As of Monday, March 7, the Russian Ruble has lost 90% of its value since the beginning of 2022. This is largely due to the economic sanctions Russia has faced as a result of its actions in Ukraine.
International Ramifications of Russia’s SWIFT ban
Although Russia is a large world power, it only makes up a small part of the global economy as Putin has insulated it further and further in the last few years. The largest international economic concerns surround the price of oil, which has skyrocketed despite sanctions designed to avoid disrupting the energy industry.
As Russia loses the ability to interact with the global economy, industries that rely on their exports will likely see steep rises in price. Industries to look out for are oil, natural gas, wheat, corn, and metals like palladium, aluminum, and nickel. The changes in these key industries could lead to price changes for many grocery store staples, as well as transport and technologies like cellphones and cars.
It is still unclear how Russia’s economy will respond to SWIFT’s ban in the long term. However, the last few weeks have shown how SWIFT can radically affect the global economy. So far, only seven banks have been banned from SWIFT, although more could follow in the coming days or weeks. SWIFT has already had a significant impact on global financial institutions and will continue to do so as the situation with Russia unfolds.