The world watched in shock as Russian troops launched a full-scale invasion of Ukraine. After initial hesitations, countries around the world seem to be mobilizing and are starting to impose economic sanctions on Russia. Among these severe sanctions is also Russia’s exclusion from a system called SWIFT — but what is SWIFT, and how impactful would be such a ban?
If you’re reading this, the odds are that at some point you’ve sent money to another country. Maybe you bought something, maybe you subscribed to some service or donated to a charity. If you’ve done this, you’ve probably used SWIFT.
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a society whose main goal is to serve as the messaging network for initiating international payments. Think of SWIFT as a key component of the international payment system, an intermediary for international bank transfers. It does not manage accounts and it does not hold funds from third parties, but if you want to send money internationally, there’s a good chance you’ll need it.
In 2019, over 11,000 SWIFT member institutions sent a whopping 33.6 million transactions per day through the network. Over half of all high-value cross-border payments worldwide use SWIFT, and the number continues to grow. Around 1% of these transactions are thought to involve Russian payments.
So banning a country from the system would make it much more difficult to make international transactions. In some instances, it would make it almost impossible.
Is Russia actually getting banned from SWIFT? Not just an empty threat…
SWIFT has been used in sanctions before. In 2012, the US pushed for the removal of Iranian banks from SWIFT, a move that was opposed at the time by most European governments — even though Iran is a much smaller economy than Russia. Nevertheless, ultimately, countries agreed to shut down Iran from the system, though after a few years, several Iranian banks were allowed back in.
Russia was threatened with a SWIFT ban once before: in 2014 when it annexed Ukrainian Crimea. At that time, Russia tried intimidating world leaders by saying the move would be tantamount to a declaration of war. The ban didn’t happen at the time, but now, it seems bound to.
“Putin embarked on a path aiming to destroy Ukraine, but what he is also doing, in fact, is destroying the future of his own country,” EU Commission President Ursula von der Leyen said.
Initially, the US, UK, and some European countries supported this expulsion, while other European countries (most notably, Germany and Italy) were hesitant, especially considering that Russia provides an important chunk of their oil and gas imports. But after seeing the invasion unfolding in Ukraine, everyone is on board now.
Now, it’s official: at least some select Russian banks will be banned from the SWIFT system. The ban is expected to come into full effect in the following days.
The fine print of the sanctions is still being ironed out, it’s not clear if all Russian banks will be banned eventually and for how long — but if the ban is enforced quickly, it would put a massive strain.
“You deny Russia access to SWIFT and Russia has been completely isolated from the global economy,” says Edgardo Pappacena, Professor of Strategy & International Business at Florida International University’s Graduate School of Business who also worked as a senior partner in PricewaterhouseCoopers.
Pappacena sees Russia’s expulsion from SWIFT as one of the two sanctions that could really hurt Russia and erode Putin’s domestic support (the other being blocking Russia’s fossil fuel exports). Any sanctions that don’t include these would embolden Putin and essentially serve as an invitation for more military aggression, he adds.
Sanctions are a double-edged sword, Pappacena adds. They will hurt Russia, but there will be an economic recoil to those imposing sanctions as well. However, serious problems call for serious measures, and this is the price we have to pay if we want to obtain peace.
Can’t Russia simply bypass SWIFT?
A Swift expulsion would be very disruptive to Russia. There is an alternative system called SPFS that Russia set up after they annexed Crimea in 2014, but it hasn’t been popular. China also has a secondary system called the Cross-Border Interbank Payment System or CIPS.
Many fear that expelling Russia from SWIFT may push it closer to China and may solidify a China-Russia alliance against the west. However, China seems unwilling at this stage to help Russia and is unlikely to get involved in any economic war that doesn’t serve its interests directly.
Even as US and European officials are working to keep Russia’s oil and gas exports out of the sanctions, this expulsion from SWIFT would be one of the toughest levied on a nation in modern times. It would hurt Russia — a lot.
Perhaps even more damaging to Russia is another move announced by the European Union, the US, and Japan to cut out Russia’s central bank, essentially preventing it from using its $630bn foreign currency reserves to support the ruble. The U.S. The Treasury Department announced on Monday that it would immobilize Russian Central Bank assets that are held in the United States and impose sanctions on the Russian Direct Investment Fund, a sovereign wealth fund that is run by people in Putin’s inner circle.
The effects are already being seen even before the big sanctions come into effect. The ruble lost more than 30% of its value to the dollar in a single day, and the Moscow stock market was closed to prevent a complete collapse. Basically, as sanctions start slamming Russia’s economy, a financial meltdown becomes more and more likely.
Coupled with measures to cut off Putin and his inner circle’s “war chest“, these measures could be a strong deterrent against future escalation, and a way to limit Putin’s current and future military expansion.
These are severe measures and it’s the Russian population that will, unfortunately, bear the brunt of this economic damage. But according to Pappacena, it’s high time for something like this to happen.
We’re at a stage where we need to start thinking about preventing global conflicts, and economic action is preferable to military action. We’re at a stage where even a global war, a “worst nightmare” possibility, is on the table, Pappacena concludes.
“Unfortunately, I see some patterns that remind me of how World War Two actually started with the UK wanting to appease Hitler instead of taking a strong stance against him. And as we know, that led to the invasion of Czechoslovakia Poland,” the geopolitics expert says.