SWIFT Sanction on Russia

What is SWIFT

Founded in Brussels on May 03, 1973, it stands for “Society for Worldwide Interbank Financial Telecommunication” legally called as S.W.I.F.T. SCRL, and serves as the intermediary and executor of financial transactions between banks worldwide. Overseen by the central banks of Belgium, Canada, France, Germany, Italy, Japan, Netherland, UK, USA, Switzerland and Sweden as well as the European central Bank. It doesn’t facilitate fund transfer, rather sends payment orders through secure messaging system spread over around 11,000 financial institutions in over 200 countries, which must be settled by correspondent accounts that the institutions have with each other.?To exchange banking transactions, each financial institution must have a banking relationship by either being legally organised as a bank or through its affiliation with at least one bank. As stated, it only transport financial messages in a secured manner only & is not involved in any type of clearing or settlements of funds. Further, it’s a cooperative society under Belgian Law & is owned by its member financial institutions.

What is so crucial about SWIFT

As majority the financial transactions flows through SWIFT, which makes it the economic lifeline of the country. Similarly, Russian banks and financial institutions rely on it too, to do business with and receive payments globally. As Russia being world’s largest provider of oil and gas, so it also depends heavily on such mechanism to receive funds for its commodity sales worldwide. Thus, cutting off Russia from SWIFT can disrupt its economy. Taking instance of Iran, when all of its banks were cut off from SWIFT as part of sanction between 2012 and 2016, resulted in near collapse of its economy as the oil exports plummeted sharply from more than three million barrels a day to about one million barrels a day.

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Impact of Sanctions on Russia

As the Russia invades Ukraine, the talks of banning Russia from SWIFT becomes prominent taking point, as part of the west induced sanctions. As USA and its allies are reluctant about launching this minuteman missile like sanction against Russia but for them, cutting Russia out of the SWIFT would be the one of the toughest financial steps they could take, damaging the Russia’s economy immediately and in long term. The move could cut Russia off from most international financial transaction, including profits from oil and gas production, which accounts for more than forty percent of the country’s revenue. And due to this cutting Russia off from the payment network will be one of the toughest way to weaken Russia in response to its attack on Ukraine.

It is not the first time that Russia is being threatened to be barred from SWIFT. Allies on both sides of Atlantic also dangled the SWIFT option in 2014, when Russia annexed Crimea and backed separatist forces in eastern Ukraine (now Donetsk & Luhansk). Then Russia declared that kicking it out of SWIFT would be equivalent to a declaration of war, resulting in shelving the idea by the allies.

Alternative to SWIFT

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Since 2014, Russia has its own financial messaging system (like SFMS of India, Ripple & Staller of USA, INXTCS of EU & SIPS of China) called SPFS (Financial messaging system of the Bank of Russia) which handles about a fifth of their domestic payments.

Will SWIFT be used in Russian Sanctions

Some of world leaders pushing for Russia’s access to the SWIFT payment system to be revoked as part of sanctions while, others appear reluctant to use the measure too soon amid fears over increased aggression or disruption to global energy supply chains. Earlier USA has succeeded in persuading SWIFT system to kick out Iran, over its nuclear program, but kicking Russia out of SWIFT would hurt other economies, including those of the key allies like Germany.