What is SWIFT?
SWIFT (short for Society for Worldwide Interbank Financial Telecommunication) is the global financial artery that allows the smooth and rapid transfer of money across borders. It is a sort of secure instant messaging system that informs users when payments have been sent and arrived.
Created by American and European banks in 1973 and based in Belgium, SWIFT links 11,000 banks and institutions in more than 200 countries and territories, acting as a critical and highly trusted hub to enable international payments.
The network is jointly-owned by more than 2,000 banks and financial institutions. It is overseen by the National Bank of Belgium, in partnership with major central banks around the world - including the US Federal Reserve and the Bank of England.
Last year, the system averaged 42 million messages a day, including orders and confirmations for payments, trades and currency exchanges. More than 1% of those messages are thought to involve Russian payments.
How SWIFT works?
The SWIFT system itself does not makes payments. Instead, it provides users with the necessary information to make a foreign payment. With SWIFT, users have the guarantee that an announced transaction actually takes place. If, for example, you make payments to Russia, the SWIFT system provides tables with the details of the Russian recipient. If the Russian tables are removed from SWIFT, the system cannot make a connection. Without this control system, you cannot make or receive payments with an automatic guarantee.
Before SWIFT, an international payment had to pass through a bank that mediated between two banks in different countries. This was known as an intermediary bank. The banks communicated with each other, often by telex communications, before transferring money to each other. SWIFT made it possible to connect various international banking systems. From then on, international payments were faster and easier.
What the SWIFT ban means for Russia?
These joint western sanctions are the harshest measures against Moscow since its forces went into Ukraine and are expected to badly hit a country that is heavily reliant on the SWIFT for its key natural resources trade, especially the payments for its oil and gas exports. Cutting off a country from SWIFT in the financial world is equivalent to restricting Internet access of a nation.
Excluding Russian banks from the SWIFT system essentially prevents them from conducting cross-border transactions. In the words of the White House, it will make the country rely on “the telephone or a fax machine” to make payments. The intention of the moves is to “further isolate Russia from the international financial system”, a joint statement stated.
The aim is for Russian companies to lose access to the normal smooth and instant transactions provided by SWIFT. Banks would be likely to have to deal directly with one another, adding delays and extra costs, and ultimately cutting off revenues for the Russian government.
In addition to SWITF sanctions, the EU has prohibited investing in projects co-financed by the Russian Direct Investment Fund. The provision of euro-denominated banknotes to Russia has also been prohibited.
Alexei Kudrin, Russia's former finance minister, suggested being cut off from SWIFT could shrink Russia's economy by 5%.
Which banks are banned?
The European Commission has announced that 7 Russian banks will be disconnected from the SWIFT network. These include Russia's second-largest bank VTB, Novikombank, Bank Rossiya, Vnesheconombank, Promsvyazbank, Sovcombank and Bank Otkritie. Disconnected from SWIFT, the technical security controls between banks will no longer be in place. Depending on Russia's behavior, the Commission is prepared to add further Russian banks at short notice.
Two major Russian banks, Sberbank and Gazprombank, were not on the list because they are the main facilitators of payments for EU gas and oil imports.
When these measures will take place?
It will take effect as of 12 March 2022. SWIFT and other operators had a ten-day transition period to implement the measure, thereby mitigating any possible negative impacts for EU businesses and financial markets.
Are there alternative networks Russian banks can use?
In response to Western sanctions on Russia following the invasion of Crimea in 2014, Russia established SPFS (System for Transfer of Financial Messages), a regional alternative to SWIFT. However, financial experts say it is an inadequate replacement. The Russian central bank holds that there are more than 400 participants from 23 countries on the network. While most of these member banks are located within Russia, many can also be found spread across the former Soviet Union.
On its own, SPFS will fail to provide an adequate replacement for SWIFT. That is why, since as early as 2016, Russia has advocated plans to integrate its systems with that of China’s CIPS (Cross-Border Interbank Payment System). Backed by the People’s Bank of China, CIPS launched in 2015. This system is significantly larger than SPFS: CIPS processed around $12.68 trillion worth of transactions in 2021. As of year-end, CIPS reported that 1,280 financial institutions in 103 countries and regions are connected to the system.
Of course, CIPS is far away from replacing SWIFT itself. While CIPS is aiming to operate independently in the future, it is still working closely with SWIFT in order to access its wider network.
Are there more countries that have been banned from SWIFT?
Iran was banned from SWIFT in 2012, after the European Union imposed sanctions on the nation over its nuclear program. It lost almost half of its oil export revenues and 30% of foreign trade.
Iranian banks regained access after the country signed onto a 2015 agreement to limit its nuclear activities. They were cut off again in 2018 after the Trump administration killed the deal and pressured SWIFT to follow suit.
While Russian has attempted to reduce its dependence on the SWIFT, it remains vulnerable. Combined with enhanced sanctions on technology that Russia cannot obtain from China, financial sanctions and other sanctions would have a serious long-term impact.
Meanwhile, the war continues as Western allies prepare new sanctions.
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