What is SWIFT?
SWIFT, or the Society of Worldwide Interbank Financial Telecommunication, is a high-security messaging network for banks and financial institutions. Based in Belgium, it’s sometimes described as the “Gmail of global banking.”
It was created in 1973, replacing the previous telex system for cross-border payments. The idea was to create a "common language" for banks from all around the world to move money and carry out other transactions.
It has since grown to serve more than 11,000 financial institutions in 200 countries and territories. In 2021, it averaged 42 million messages per day.
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Why is that important?
While the network doesn’t hold any assets or actually move money, access to SWIFT means funds can be exchanged between member institutions easily and securely. Other payment systems do exist, but SWIFT dominates the market.
In addition to payment instruction messages, it also transfers messages between institutions relating to everything from the trade of precious metals to traveller’s cheques. Its latest report shows categories other than straightforward payments now account for well over half of its transactions.
What does this mean for Russia?
Barring Russian institutions from SWIFT will certainly impact its economy. How much is hard to say, but former finance minister Alexei Kudrin estimated in 2014 that the country’s GDP could shrink by 5% under a SWIFT ban.
That’s likely a lowball estimate of the damage that would be done if Russia were cut off completely from the SWIFT system.
When Iran was blocked from SWIFT in 2012, it had a massive economic impact on the country. Oil exports reportedly took a sharp dive from more than 2.5 million barrels a day to just one million barrels within two years, and the country lost around 30% of its foreign trade.
The impact of those sanctions are believed to be a key part in what brought Iran to the table in the 2015 Iran nuclear agreement.
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Analysts have also speculated that Russia may partner with China, which uses its own Cross-Border Interbank Payment System, or CIPS. Or that it may rely on cryptocurrency, or a digital ruble.
Back in January, Nikolai Zhuravlev, the vice speaker of the upper house of Russian parliament, noted that Russia has alternatives to the SWIFT system. After the threat of sanctions in 2014, it began using its own financial messaging system, SPFS, or the System for Transfer of Financial Messages.
While SPFS will cushion the blow of being cut off, it has nowhere near the number of members as SWIFT. According to Russian news agency TASS, SPFS had 400 members as of February 2021, including institutions from Armenia, Belarus, Germany, Kazakhstan, Kyrgyzstan and Switzerland.
Russia's alternatives are not ideal, says Maria Shagina, a postdoctoral fellow at the Center for Eastern European Studies (CEES) at the University of Zurich. Shagina authored a paper last year analyzing the impacts removing Russia from SWIFT could have.
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“Russia is heavily reliant on SWIFT due to its multibillion exports of hydrocarbons denominated in U.S. dollars,” she wrote. “The cutoff would terminate all international transactions, trigger currency volatility and cause massive capital outflows.”
Shagina noted that only 20% of Russia’s domestic transfers are done through SPFS. And since it’s still limited to weekday working hours and transfer sizes are limited, it’s not yet a suitable alternative for most potential users.
However, the SWIFT ban currently only includes seven Russian banks, and excludes its largest lender, Sverbank, and Gazprombank, which are the country’s main channels for payment of Russian oil and gas.
But that volatility Shagina references could still be in the cards as the U.S. and other countries appear to be considering sanctions that would target its energy exports.
What happens next?
If member countries move to ban Russian banks connected with oil and gas, it will leave a number of European countries scrambling to find new sources for energy.
Russia is the third-largest producer of oil in the world and countries like Finland, Bulgaria, Germany and Italy rely heavily on imported Russian oil and gas for heating and transportation fuel.
Financially, the countries that stand to lose the most, according to Shagina’s paper, are the U.S. and Germany, since they carry out the most transactions with Russia through SWIFT.
In light of that, it seems certain that Russia – and, inevitably, some of its trading partners – will be in for a rough ride in the wake of the SWIFT ban.
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