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Explained: What is SWIFT, and what shutting Russia out of it means

The United States and European Union are cutting off a number of Russian banks from the main international payment gateway, SWIFT. What is SWIFT, and what does the move aim to achieve?

SWIFT is a secure platform for financial institutions to exchange information about global monetary transactions such as money transfers. (Photo: Reuters)

The US and European Union (EU) have decided to partially exercise the nuclear-weapon option as far as economic sanctions are concerned: cutting off a number of Russian banks from the main international payment gateway, SWIFT. The assets of Russia’s central bank are also expected to be frozen, constraining Moscow’s ability to access its overseas reserves.

The intention of the moves is to “further isolate Russia from the international financial system”, a joint statement stated.

These joint sanctions are the harshest measures against Moscow since its forces went into Ukraine and are expected to badly hit a country that is heavily reliant on the SWIFT platform for its key natural resources trade, especially the payments for its oil and gas exports. Cutting off a country from SWIFT in the financial world is equivalent to restricting Internet access of a nation.

Prior to this, only one country had been cut off from SWIFT — Iran. It resulted in it losing a third of its foreign trade. The move against Russia is only partly implemented for now, with only some Russian banks being covered. The option of expanding it further to a pan-country ban is something that the US and its allies are holding back as a further escalatory move.

What is SWIFT?

The SWIFT system stands for the Society for Worldwide Interbank Financial Telecommunication and is a secure platform for financial institutions to exchange information about global monetary transactions such as money transfers.

While SWIFT does not actually move money, it operates as a middleman to verify information of transactions by providing secure financial messaging services to more than 11,000 banks in over 200 countries. Based in Belgium, it is overseen by the central banks from eleven industrial countries: Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States, besides Belgium.

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What does the move aim to achieve?

Excluding Russian banks from the SWIFT platform is expected to hit the country’s economy hard — and in the words of the White House, it will make the country rely on “the telephone or a fax machine” to make payments.

According to former Russian Central Bank deputy chairman Sergei Aleksashenko: “There is going to be a catastrophe on the Russian currency market on Monday”. Ursula von der Leyen, president of the European Commission, said the decision to paralyse the assets of Russia’s central bank would stop the Kremlin from “using its war chest”, referring to its forex reserves.

The banks affected are “all those already sanctioned by the international community, as well as other institutions, if necessary”, a German spokesman was quoted as saying by the BBC. Targeting only some Russian banks seems to be aimed at both keeping the option of further escalation open, while ensuring that the sanctions have the maximum possible impact on Moscow, but prevent a major impact on European companies dealing with Russian banks for payments for their gas imports. Plus, the curbs on Russia’s central bank will prevent it from dipping into its forex deposits to limit the effect of sanctions.

Moscow has been building up a cushion of foreign currency in the wake of the previous round of sanctions in 2014, with reserves touching a record high of $630 billion in January 2022. The new measures will significantly decrease the reserves available to the country’s central bank, according to experts.

While workarounds to SWIFT have been tried, none have proven to be effective. During the last seven years, Russia, too, has worked on alternatives, including the SPFS (System for Transfer of Financial Messages) — an equivalent of the SWIFT financial transfer system developed by the Central Bank of Russia. The Russians are reported to be collaborating with the Chinese on a possible venture which will be a potential challenger to SWIFT.

It needs to be seen if Moscow can leverage this platform to some extent to get around the partial ban, which could soon be escalated to a complete one.

While it may take a while for the ban to make an impact, what is important is that they exhibit a strong resolve from Western nations. Responding to the latest economic sanctions, Ukraine’s Prime Minister Denys Shmyhal termed them a “real help during this dark time”.