SWIFT: How disconnecting Russia from it could backfire on the West
President Vladimir Putin’s decision to order attack on Ukraine has triggered calls for the West to sever Russia from the global financial system by disconnecting it from SWIFT, the global interbank payment system.
The Baltic states, once part of the Soviet empire, have urged their NATO and EU allies to stop Russia’s access to SWIFT. Other EU member states are reluctant to make such a move because, while it would hit Russian banks hard, it would make it tough for European creditors to get their money back and Russia has in any case been building up an alternative payment system. Data from the Bank of International Settlements (BIS) shows that European lenders hold the lion’s share of the nearly $30 billion in foreign banks’ exposure to Russia.
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What Is SWIFT?
The Society for Worldwide Interbank Financial Telecommunication is the main messaging system that banks use to make rapid and secure cross-border payments, facilitating smooth flow of international trade. In 2020, about 38 million transactions were sent each day over the SWIFT platform, facilitating trillions of dollars’ worth of deals.
Who Owns It?
SWIFT was founded in the 1970s as a Belgian cooperative society comprising thousands of member institutions. It serves as an intermediary and executor of financial transactions between banks worldwide. It also sells software and services to financial institutions. Swift Transfer is also called International Money Transfer. SWIFT remains neutral in trade disputes, being run principally as a service to its members.
Why Is the West Reluctant to Implement a Ban?
There are a number of reasons why the West is reluctant to exclude Russia from the SWIFT system. One is that the impact on Russian businesses might not be so serious. The head of a large Russian bank, VTB, said recently he could use other channels for payments, such as phones, messaging apps or email. Russian banks could also route payments via countries that have not imposed sanctions, such as China, which has set up its own payments system to rival SWIFT. A ban on Russia using SWIFT could accelerate the use of China’s rival system. A ban could also damage the US dollar’s status as the global reserve currency.
There are also concerns that a ban could harm European countries that export goods to Russia. Russia is a big buyer of foreign manufactured goods, especially from the Netherlands and Germany. Russia is the main EU supplier of crude oil, natural gas and solid fossil fuels, and European countries could find it harder to find replacement suppliers.