The United States, the European Union, the United Kingdom and Canada in a joint statement on Saturday said they would cut off “selected” Russian banks from the SWIFT and punish Russia for invading its neighbor.
“This will ensure that these banks are disconnected from the international financial system and that their ability to operate globally is compromised,” Western powers say.
The Telecommunication Telecommunication Society of the World Bank was established in 1973 to replace Telex, and is now used by more than 11,000 financial institutions to send secure messages and pay orders.
SWIFT does not move money around the world. This is to allow banks to send instructions to each other on what to do and how to transfer funds across borders. With no globally accepted alternative, it is essential plumbing for global finance.
Disconnecting an entire country from the SWIFT is seen as a nuclear option of sanctions.
But even limited action can have a big impact. Any bank disconnected from SWIFT will find it very difficult to send money to other financial institutions and its customers will find it difficult to run their business.
Why only ‘selected’ banks?
The removal of every Russian bank from the SWIFT will have a huge impact.
Maria Shakina, a colleague at the Finnish Institute for International Affairs, wrote in an article to the Carnegie Moscow Center last year that “cutoffs will end all international transactions, trigger currency fluctuations and cause large capital outflows.”
If Russia is excluded from the SWIFT, its economy will shrink by 5%, estimates former finance minister Alexei Kudrin in 2014, when the permit was last considered in response to Russia’s annexation of Crimea.
But such dramatic action will affect the West as well.
According to Shakina, the United States and Germany would lose out if Russia was cut off altogether because their banks often use SWIFT to communicate with Russian banks.
Senior Russian lawmakers have said oil, gas and metals exports to Europe will be halted if the communications channel is shut down.
“If Russia disconnects from the SWIFT, we will not get it [foreign] Currency, but first-time buyers, European countries, oil, gas, metals and other vital components will not receive our goods, “said Nikolai Zhuravlev, Deputy Speaker of the Russian Parliament recently, according to state media TASS.
This helps to explain why the West is moving to cut off only certain banks. How many banks are targeted – and which – will ultimately determine the economic impact of sanctions on Russia and the countries in which it trades.
Neil Shearing, chief economist at Capital Economics, said investors should look into whether Cosprombank is being targeted because it plays a major role in Russia’s energy exports.
What does SWIFT say?
SWIFT is based in Belgium and is governed by a 25-member panel, including Eddie Aston, chairman of the executive committee of Russia’s Central Opposition Clearing Center.
It describes itself as a “neutral application”, incorporated under Belgian law and in compliance with EU rules.
“We are working with European authorities to understand the details of the companies subject to the new measures and are preparing to comply with legal advice,” SWIFT said in a statement over the weekend.
Has this ever happened before?
There is a prototype for removing a country from the SWIFT.
In 2012, SWIFT cut off EU-approved Iranian banks over the country’s nuclear program. According to Shakina, Iran lost almost half of its oil export earnings and 30% of foreign trade.
Are there any alternatives to SWIFT?
Russia has taken steps in recent years to blunt sanctions, including on SWIFT.
Moscow set up its own tariff system, SPFS, in 2014 after being hit by Western sanctions following the annexation of Crimea. According to the Central Bank of Russia, SPFS now has about 400 users. According to Shakina, twenty percent of domestic transfers are currently done through SPFS, but the amount of messages is limited and operations are limited to weekdays.
China’s emerging cross-border interbank payment system, or CIPS, could provide another alternative to SWIFT. Moscow may also be forced to use cryptocurrencies.
But these are not attractive alternatives as no organization has a significant global presence.
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