As yet another international economic sanction against Russia, in response to its war on Ukraine, leading Western nations have pledged to bar several large Russian banks from using the SWIFT system. The upshot of this would be to cut Russia off from much of the international financial system.
The goal, according to a joint statement issued by the United States, the European Commission (the executive branch of the European Union, or EU), France, Germany, Italy, the United Kingdom, and Canada on Feb. 26, 2022, is to “hold Russia to account and collectively ensure that this war is a strategic failure for Putin.”
“This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally,” the joint statement said. A day earlier, French Finance Minister Bruno Le Maire characterized the exclusion of Russia from SWIFT as “the financial nuclear weapon.”
Key Takeaways
- Leading Western nations pledge to bar key Russian banks from the SWIFT global interbank messaging system.
- This would severely hamper, if not block, Russia’s exports and imports, as well as its ability to tap reserves held abroad.
- France’s finance minister calls this “the financial nuclear weapon.”
Significance of SWIFT
SWIFT, which stands for the Society for Worldwide Interbank Financial Telecommunication, is an independent enterprise based in Belgium that provides a messaging system linking more than 11,000 banks and financial institutions in over 200 countries and territories. Founded in 1973, SWIFT allows banks to send money to each other. It uses standardized, secure codes that allow institutions to send and receive information, such as instructions for transferring money across borders.
Impact on Russia
“This [barring key Russian banks from SWIFT] will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally,” according to the joint statement referenced above.
Ursula von der Leyen, president of the European Commission, said that cutting Russian banks out of the system will stop them from conducting most of their financial transactions worldwide and effectively block Russian exports and imports.
More specifically, Russian banks would be unable to make and receive payments for trade and financial activities, severely hampering, if not blocking, its exports of commodities such as oil, coal, and natural gas. Russia’s imports of key technologies such as semiconductors and machinery for its industries also would be disrupted, if not blocked.
Russian financial institutions handle about $46 billion worth of foreign exchange transactions per day, about 80% of which are denominated in U.S. dollars. SWIFT handles 42 million remittances per day, of which Russian financial institutions accounted for 1.5% as of 2020.
In 2014, when the UK appealed to European leaders to consider cutting off Russia’s access to SWIFT in response to the Russian annexation of the Crimea, Russia’s finance minister estimated that this move would shrink his country’s gross domestic product (GDP) by 5%. A cutoff not only would terminate all international transactions, but it also would trigger currency volatility and cause massive capital outflows.
In 2014, barring Russia from SWIFT was considered to be a major escalation that the Western nations chose to avoid. Russia’s prime minister at the time, Dmitry Medvedev, called it tantamount to “a declaration of war.”
Impact on Other Countries
Barring Russian banks from SWIFT will inflict collateral damage on other countries, mainly by disrupting Russian oil and gas exports. The EU, for example, relies on Russia for 40% of its natural gas imports.
European banks are among the biggest creditors to Russia, accounting for a significant portion of the $121 billion that Russia owes in total to foreign banks, according to the Bank for International Settlements (BIS). Removing Russia from SWIFT will impair its ability to make repayments on that debt.
‘Chilling Effect’
The Western powers also announced that they will impose measures that seek to prevent the Russian central bank from using its international reserves to circumvent economic sanctions.
According to a senior Biden administration official who held a call with reporters on conditions of anonymity: “This will show that Russia’s supposed sanctions proofing of its economy is a myth. The $600 billion-plus war chest of Russia’s foreign reserves is only powerful if Putin can use it.”
This official added: “You will immediately see a chilling effect fall over the Russian banking sector even beyond what’s already occurred. We’ve now targeted all 10 of Russia’s largest financial institutions, holding nearly 80% of the Russian banking sector’s total assets.”
Uncertain Effectiveness of the SWIFT Cutoff
The impact of the SWIFT cutoff is uncertain. Russia has faced economic sanctions since seizing the Crimea from Ukraine in 2014, but that has not prevented its current war against Ukraine. North Korea is completely cut off from the international economic system, but its ruling regime continues to survive and keeps expanding its weapons arsenal. Meanwhile, Russia could expand its trade with China to bypass the U.S. dollar-based international transaction network.
Russian Countermeasures
Since 2014, Russia has enacted several countermeasures to minimize the risks and potential economic damage from a cutoff from SWIFT. If Russian banks are removed from the Visa and MasterCard payment systems, all domestic transactions could be processed through the National Payment Card System, known as Mir (“World”), which now handles about 24% of all domestic card transactions. Performing international transfers, however, would be arduous.
In the medium term, SWIFT could be replaced for domestic purposes with the Russian equivalent System for Transfer of Financial Messages (SPFS), set up by the Russian central bank in 2014. In 2020, SPFS traffic doubled to almost 13 million messages, but it is small compared to SWIFT. More than 400 financial institutions have joined SPFS, mostly Russian banks, but key foreign banks operating in Russia have yet to join. About 20% of all domestic transfers go through SPFS. Also, SPFS operates only during weekday working hours (SWIFT works 24/7) and it limits messages to 20 kilobytes.
The Chinese Cross-Border Interbank Payment System (CIPS) might be an alternative for Russian banks. However, the share of the Chinese renminbi in international finance is marginal: under 2% of global payments, versus 40% in U.S. dollars, and also far behind the euro, the British pound, and the Japanese yen. The CIPS payment system is about 0.3% of the size of SWIFT.