Why Does Banning Russia from SWIFT matter?

Ukraine's invasion by Russia has resulted in sanctions and efforts to cut Russia off from the world's most important financial system, SWIFT.

What is SWIFT?

Society for Worldwide Interbank Financial Telecommunication (or SWIFT) is a banking network that allows financial institutions to communicate secure communications concerning money transfers and other operations. SWIFT is the backbone of the worldwide financial transfer system, with over 11,000 financial institutions using it worldwide.

Under Belgian legislation, SWIFT is a cooperative enterprise. It says on its website that "it is owned and administered by its investors [financial institutions] representing around 3,500 enterprises from around the world." The G10 central banks and the European Central Bank govern the system, with the National Bank of Belgium serving as its chief supervisor.

SWIFT ban prevents Russia from money transactions

As Moscow carried on with its military attack, Western allies attempted to cut key Russian banks' access to the SWIFT primary global payment system on Saturday. With this, Russian banks will find it much more challenging to interact with counterparts abroad, even in friendly nations like China, slowing commerce and increasing transaction costs.

Behind the United States, Russia has the second-largest number of SWIFT users, with more than half of Russia's financial institutions using the system. As to Alicia Garcia Herrero, head economist for the Asia Pacific at Natixis in Hong Kong, Russia's exclusion from SWIFT would significantly blow the country.

"It's more critical than suspending EU gas exports from Russia," Garcia Herrero told Al Jazeera, "since no settlements on debt or trade finance can be paid."

Also read - Understanding International Bank Codes: BIC (SWIFT) & IBAN

"SWIFT is a service, not just a settlement system," he says. "If Russia is shut off from SWIFT, we would not receive [foreign] dollars, but we will receive our goods - oil, gas, and other commodities, metals, and other essential components of their imports - would not be received by buyers, mostly European countries."

How does this impact Russia's economy?

Russia is relying on the payment system to export its oil and gas. According to the White House, the country will have to rely on "the telephone or a fax machine" to make payments due to the action taken. The new sanctions are the toughest yet imposed on Russia, intending to prevent the Russian Central Bank from deploying its international reserves through "restrictive measures." Banning some Russian banks from using SWIFT is a significant setback for the country, according to Conservative MP Jonathan Djanogly, who believes it will effectively restore Russia to "the dark ages of economics."

In principle, this would make it considerably more difficult for Russia's financial institutions to move and trade money with other countries because they would no longer have access to Swift's standardized format.

What happens to Russia's central banks?

The impact of the sanctions was seen when the ruble plunged over 30% against the dollar, and the Russian central bank raised interest rates to 20% to avoid depreciation and inflation.

In geo-financial brinkmanship, disconnecting from SWIFT is frequently portrayed as a "nuclear option." Yes, prohibiting sharing information through the world's greatest financial network has ramifications. The economic bans and asset freezes, on the other hand, are what give the SWIFT ban its coercive power.

Why does the SWIFT ban matter?

You can't stop Russian financial institutions from engaging in bank-to-bank transactions by removing them from SWIFT. Still, you can't prevent them from utilizing pre-SWIFT means like the telephone, fax, telex, or emails. This is inefficient, but it works. However, they will lose some international trade as a result of this. So the new sanctions, by isolating only a few handpicked Russian banks from SWIFT, which have yet to be named, are, of course, very strategic in ensuring that the sanctions have the maximum impact on Russia.

While avoiding too much - negative impact - on European countries like Germany, which has historically had robust ties with Russia concerning business, capital, and, of course, dependency on Russian gas, the situation is complicated.

When prospective sanctions in the event of an invasion that had not yet occurred were being examined in 2022, the US and European officials stated that removing Russia from the financial system was not on the table. In a statement, Russia's central bank said that "external conditions for the Russian economy have radically changed."

SWIFT prohibition would be a "severe" concern, according to the first deputy chairman of the Russian State Duma's committee on international affairs. If you've ever tried to make transactions with a friend or relative in another country, you can appreciate the frustration this banning has caused.

European companies will continue to recover debts and purchase Russian energy. So Germany stands to lose the most, with Italy in second place, if they rely on Russian gas. In addition, the French and the United Kingdom have fewer ties; thus, they're all in favour of removing all banks from SWIFT.