What is SWIFT and why has the west booted Russia off it?

Removal of Russia from the international payments network was reportedly designed to send the rouble into ‘freefall’.

What is Swift?

Belgium-based Swift (Society for Worldwide Interbank Financial Telecommunication) is a secure messaging system used by banks to make rapid cross-border payments, enabling international trade to flow smoothly.

It is now the main mechanism for financing international trade.

About 38 million transactions were transmitted each day over the Swift network in 2020, facilitating trillions of dollars worth of deals.

Who owns Swift and how does it work?

Swift was founded in the 1970s as a member-based cooperative. It works by assigning each member institution a unique ID code which identifies the bank name and its country of origin, city and branch.

What is Russia’s share of Swift transactions?

About 1.5 per cent of Swift transactions came from Russia in 2020, according to the Financial Times.

What happened over the weekend?

After initially hesitating, the US and the leading countries of the European Commission announced on Saturday they would disconnect “selected Russian banks” from Swift to remove them from the international financial system and “harm their ability to operate globally”.

US Ambassador to the United Nations Linda Thomas-Greenfield said on Sunday that sanctions on Russia’s energy sector were not yet off the table.

“We have not taken anything off the table. We’re continuing to look at this,” she said, when asked if such sanctions would put a burden on the US economy.

Restrictive measures would also be imposed to prevent the Russian central bank from deploying its international reserves.

Ukrainian Foreign Minister Dmytro Kuleba speaks at the General Assembly 58th plenary meeting in New York on February 23. Picture: TIMOTHY A. CLARY / AFP

What impact will the moves have?

Payments for Russian products — albeit excluding energy — will be significantly disrupted because banks will have to deal directly with each other, creating delays and extra costs.

Russia has also amassed one of the world’s largest war-chests of foreign reserves — about $US500bn. If access is effectively blocked to those reserves, Russia’s ability to circumvent sanctions would be limited, and its capacity to support the rouble as it plunges in value would be constrained.

US officials reportedly said that Saturday’s steps were framed to send the rouble into “freefall” and promote soaring inflation in the Russian economy. They noted that previously announced sanctions have already had an impact, with the Russian currency at a record low against the dollar and the stock market reporting its worst-ever week.

European Commission president Ursula von der Leyen said: “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.”

Why did the west hesitate?

Leading European countries, including Germany, France and Italy, were reluctant to kick Russia out of Swift, primarily because Russia is the European Union’s main provider of oil and natural gas.

The former finance minister of Russia, Alexei Kudrin, has said that exclusion from Swift could shrink the country’s economy by 5 per cent.

But there are also doubts about the lasting impact, with possible workarounds including China’s Cips (Cross-border Interbank Payment System) alternative to Swift.

The head of a large Russian bank, VTB, said recently that he could use other channels for payments, such as phones, messaging apps or email, and transmit payments through countries which have not imposed sanctions.

Originally published as What is SWIFT and why has the west booted Russia off it?