Removing Russia from the Worldwide Interbank Financial Telecommunication (SWIFT) network could undermine Russia’s ability to trade with most of the world and deal a heavy blow to its economy.
But on Thursday, the United States and the European Union chose not to cut Russia off SWIFT while leaving the door open to reconsider the possibility.
The Exquisite Post takes a look at the payment system and its relevance to the crisis in Ukraine.
What is SWIFT and what does it do?
SWIFT is a network banks use to send secure messages about money transfers and other transactions.
More than 11,000 financial institutions in nearly 200 countries use SWIFT, making it the backbone of the international financial transfer system.
Who owns SWIFT?
SWIFT is a cooperative company under Belgian law. On its website, it says, “owned and controlled by its shareholders.” [financial institutions] It represents approximately 3,500 companies from all over the world”.
The system is overseen by the G10 central banks as well as the European Central Bank, and its lead auditor is the Belgian National Bank.
What is the relationship between SWIFT and Russia?
According to the Russian National SWIFT Association, Russia is the second country with the most users, after the United States, with approximately 300 Russian financial institutions belonging to the system.
More than half of Russia’s financial institutions are members of SWIFT.
Alicia García Herrero, Asia Pacific chief economist at Natixis in Hong Kong, said that banning Russia from SWIFT would be a serious blow to the country.
“[It’s a big deal] because no debt or trade finance payments can be made. It’s bigger than stopping the EU’s gas imports from Russia,” García Herrero told Al Jazeera.
What did Russia say?
Nikolay Zhuravlev, vice-chairman of the Federation Council, acknowledged in January that the country’s removal from the network is a possibility.
“SWIFT is a barter system, a service. Therefore, if Russia leaves SWIFT, we will not receive [foreign] currency, but buyers, European countries in the first place, will not buy our goods – oil, gas, metals and other important components of their imports. Do they need this? I’m not sure,” said Zhuravlev, according to the Russian agency TASS.
Zhuravlev also noted that while SWIFT is appropriate, it is not the only way to transfer money, and a decision such as suspending a country would require unanimity among members.
“SWIFT is a European company, an association spanning many countries,” said Zhuravlev.
It takes a single decision from all participating countries to decide on the disconnection… I’m not sure other countries, especially those with a significant share of trade with Russia, will support the shutdown.
Is Russia’s removal from SWIFT a credible threat?
Tactically, “the advantages and disadvantages are debatable,” Guntram Wolff, director of the Brussels-based Bruegel think tank, told AFP news agency.
In practical terms, being excluded from SWIFT means that Russian banks cannot use it to make or receive payments with foreign financial institutions.
Western countries had threatened to exclude Russia from SWIFT after it annexed Crimea in 2014.
But excluding such a large economy – Russia is a major oil and gas exporter – could have significant ramifications for other countries as well.
Dutch Prime Minister Mark Rutte acknowledged on Thursday that the ban is “sensitive” for some EU countries because it would have “an enormous impact on ourselves”.
“It would be a real headache operationally,” Wolff said, adding that the impact would be particularly large for European countries that do important trade with Russia, which supplies 41 percent of the continent’s natural gas.
Herrero said excluding Russia would be “costly for bondholders, EU banks and energy importers”.
Such a ban could also encourage Moscow to accelerate the development of an alternative transfer system with China or other countries, potentially weakening US dominance over the financial system.