Analysis | Why SWIFT Ban Is Such a Potent Sanction on Russia

SWIFT — the Society for Worldwide Interbank Financial Telecommunication — is the Gmail of global banking. It delivers secure messages among more than 11,000 financial institutions and companies in over 200 countries and territories, handling trillions of dollars in transactions. The message traffic — 42 million a day on average last year — includes orders and confirmations for payments, trades and currency exchanges. A member-owned cooperative, based just outside Brussels, SWIFT was founded in 1973 to end reliance on the telex system. 

2. Why is losing SWIFT access such a big deal? 

A country cut off from SWIFT can suffer significant economic pain. That’s what happened to Iran in 2012, when its banks lost access as part of European Union sanctions targeting the country’s nuclear program and its sources of finance. (Many of the banks were reconnected in 2016 after the EU took them off its sanctions list.) When Western nations threatened Russia’s access to SWIFT in 2014, Alexei Kudrin, a onetime finance minister close to Putin, estimated that it could reduce Russia’s gross domestic product by 5% in a year. 

The U.S. worked with European Union partners on cutting off seven Russian banks from SWIFT. They include state-controlled VTB, Bank Rossiya and Bank Otkritie. Many were already facing other sanctions. 

4. Who hasn’t been banned?

Germany has resisted adding Russia’s biggest bank, Sberbank PJSC, to the list, out of concern for what that would mean for energy-related financial transactions, Bloomberg has reported. Germany relies on Russia for more than half of its gas supplies and more than a third of its oil. Chancellor Olaf Scholz called deliveries of oil and gas of “essential importance” to the European economy. Gazprombank JSC is another entity that has so far been allowed to stay on SWIFT. Sberbank has twice as many assets as any other bank in Russia; Gazprombank is a key bank for Russia’s energy conglomerates.

5. What’s been the impact on Russia?

Russia’s economy and society are being hit by so many different sanctions, and by the mere nature of being at war, that it’s difficult to disentangle their effects. Inflation has risen to levels not seen since the government’s debt default in 1998. The Russian central bank was forced to hike interest rates to the highest in almost two decades and has warned that output will contract over the coming quarters. Russia has put capital controls in place and temporarily shuttered its stock market; investors in Russian bonds are keeping a close eye on their accounts for when coupon payments arrive from paying agents and custodians that normally handle the transfers away from the public eye. 

6. Why the initial reluctance to impose a SWIFT ban?

U.S. President Joe Biden cited the lack of unity among European nations, including Germany, as a reason. Another was a fear among Western officials that banning countries from SWIFT would encourage development of alternative systems. 

7. Is there an alternative to SWIFT? 

Not really, or at least not yet. Since 2014, the Bank of Russia has run its own financial messaging system for Russian and foreign banks, known by the Russian-language acronym SPFS. It had only about 400 users last year. Russia is said to be urging India to use the system as a way to continue making for payments for oil and weapons. Digital currencies and the underlying technology have been touted as a threat to SWIFT for several years, but they’re nowhere close to replacing it. China has a payment system known as the Cross-Border Interbank Payment System, or CIPS, but it’s mainly a settlement system for renminbi transactions that also offers some communication functions. Most banks that use CIPS still communicate via SWIFT. And CIPS is minuscule compared to SWIFT: As of February, it had about 1,300 participants, primarily in China, and processed about 13,000 transactions a day.

Since it doesn’t hold deposits, SWIFT isn’t regulated the way a bank is. It’s overseen by the National Bank of Belgium and representatives from the U.S. Federal Reserve System, the Bank of England, the European Central Bank, the Bank of Japan and other major central banks. Generally speaking, SWIFT would cut off access only if the European Union passed sanctions against a particular entity or country. SWIFT suspended certain Iranian lenders in 2018 after the U.S. imposed a new round of sanctions, although it says that was “an isolated event” that was “taken in the interest of the stability and integrity of the wider global financial system.”

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