The US, UK, Canada, and their European allies on February 26 announced that they are blocking select Russian banks from the SWIFT network that is used by banks to facilitate international money transfers, a joint statement by the countries stated.
Many have taken to social media to describe this as a devastating move for Russia, but some are arguing that it might hurt the very nations that imposed the sanctions and that Russia is shielded because it has alternatives. Here’s an explainer on the implications of this move.
What is SWIFT and how does it work?
Founded nearly 50 years ago, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a Belgian-based cooperative society owned and controlled by thousands of member banks and serves as an intermediary of financial transactions between banks worldwide. It connects more than 11,000 banks in over 200 countries to process over 35 million transactions per day.
SWIFT is a secure messaging system and it does not directly facilitate funds transfer in the form of clearing and settlement. The way SWIFT works is that if you are sending a payment using your Indian bank account to a US bank account, the Indian bank will debit the money from your account and send a secure message with the transaction details to the US bank. The US bank receives the money from the Indian bank’s Nostro/Vostro account held with the US bank and transfers the money to the recipient bank account. This process can get more complicated and involve more intermediaries if, for example, your bank does not have a Nostro/Vostro account with the recipient bank and has to rely on another bank that does.
Apart from transmitting messages between banks, SWIFT is also known for setting syntax standards for financial messages. Messages using these standards can be processed by financial processing systems even if they are not sent over the SWIFT network. SWIFT also provides services and software that allow banks to participate in the SWIFT network.
SWIFT’s operations are overseen by the National Bank of Belgium along with the central banks of G10 nations such as the US and UK.
Why are western countries blocking Russian banks from SWIFT?
Blocking banks from SWIFT is one of the many economic sanctions that western countries are imposing on Russia for its invasion of Ukraine. More than 300 Russian financial institutions are said to be part of SWIFT.
“We stand with the Ukrainian government and the Ukrainian people in their heroic efforts to resist Russia’s invasion. […] As Russian forces unleash their assault on Kyiv and other Ukrainian cities, we are resolved to continue imposing costs on Russia that will further isolate Russia from the international financial system and our economies.” – Joint statement
Why is this move bad for Russia?
Ursula von der Leyen, President of the European Commission, said:
“This [move] will ensure that these bank are disconnected from the international financial system and harm their ability to operate globally. SWIFT is the world’s dominant interbank payment system. Cutting the banks off will stop them from conducting most of their financial transactions worldwide and effectively block Russian exports and imports.”
Won’t it harm nations importing from Russia?
The nations that instituted the move to block Russia from SWIFT, along with many other countries, import oil and other essential goods from Russia and make payments for the same using SWIFT. The EU, for example, imports 40 percent of its oil from Russia and without this supply, there can be an oil crisis that might even lead to a global depression. This was one of the reasons why governments were initially reluctant to go ahead with this move, but a US official clarified that the governments are working to determine a way to exempt energy transactions perhaps by excluding certain banks that conduct most of the energy-related transactions. But this is a double-edged sword because this exception will offer the Russian economy a reprieve despite the sanctions.
“SWIFT is a settlement system, it is a service. Therefore, if Russia is disconnected from SWIFT, then we will not receive [foreign] currency, but buyers, European countries in the first place, will not receive our goods – oil, gas, metals and other important components of their imports. Do they need it? I am not sure.” – Nikolay Zhuravlev, vice-speaker of Russia’s Federation Council, said in January according to Al Jazeera.
Has this been done before?
Yes. In 2012, the US and EU forced SWIFT to cut off all Iranian banks from its network as a sanction for pursuing a nuclear programme. This, along with other sanctions, is reported to have cut off half of Iran’s oil export revenues and 30% of foreign trade. Most of these banks were reconnected in 2016 following the lift of sanctions, but there were renewed calls to block Iranian accounts in 2018.
Which banks are blocked from SWIFT?
The announcement did not specify the names of the banks, but it will be focused on the Russian banks that are already sanctioned by the international community and can be expanded if necessary, an official told Bloomberg. The list of banks is crucial because it will indicate the impact of the ban.
What will I be watching for? The names of the "selected" banks. If the banks include the big fish—Sberbank, VTB, and Gazprombank—this is an absolutely huge deal. Let's wait and see.
— Eddie Fishman (@edwardfishman) February 26, 2022
Are there SWIFT alternatives?
Back in 2014, UK and US tried to block Russia from the network as a punishment for the country’s intervention in Crimea, but this move did not materialise. Russia, nevertheless, started work on a backup payments network called System for Transfer of Financial Messages (SPFS) for the very situation they now find themselves in, but the global adoption of SPFS is nowhere compared to SWIFT.
Other alternatives include China’s CIPS (Chinese Cross-Border Interbank Payment System), EU’s INSTEX (Instrument for Supporting Trade Exchanges), and US-based Ripple. But like SPFS, these don’t have the global reach of SWIFT and are thus not immediate solutions.
However, the blocking of banks from SWIFT might give rise to alternatives especially Russia’s SPFS and China’s CIPS. Russia may work more aggressively in getting foreign banks onboard SPFS, and driven by business interests, banks might make Russia’s task easy. Moreover, SPFS could also integrate with China’s CIPS, to give the network even more reach.
Russian banks and their partners can also go back to the olden days and do transactions through telephones and fax but this is obviously not a scalable, efficient, or long-term solution.
Are there any implications for India?
There is unlikely to be a major impact on trade between Russia and India because the two countries have a rouble-rupee trade arrangement and can find ways around SWIFT, but the more significant implication of the western countries’ action is that calls for an alternative to SWIFT are likely to gain momentum.
As part of the BRICS grouping, Russia, China, and India have in the past proposed an alternative to SWIFT because of the control western countries have over the network, these efforts will likely gain more steam now.
Additionally, the Joint Parliamentary Committee on the Personal Data Protection Bill recommended in its report tabled in Parliament on December 16 that India develop an alternative to the SWIFT payment system. This too will now gain impetus.
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