Updated Mar 11, 2022

What are Swift Sanctions?

What is Swift Sanctions?

The Society for Worldwide Interbank Financial Telecommunications (SWIFT) system is used for the majority of international money and security transactions. SWIFT is a massive communications network that banks and other financial organizations use to send and receive information such as money transfer orders swiftly, accurately, and securely.

SWIFT is a global, member-owned cooperative that offers secure financial communications services for the implementation of cross-border financial transactions and payments. The 11,000 member banks of the SWIFT network communicate with one another using a uniform language called the SWIFT message. These SWIFT messages are used to initiate and complete transactions using unique bank identifiers known as SWIFT codes. SWIFT processes around 10 billion communications per year. The SWIFT messaging system is used to settle the vast majority of individual and business international transactions between banks.

Obstructing Russia's access to the SWIFT system might have an immediate and catastrophic financial impact. Every Russian person who pays for an Uber trip or buys a cinema ticket with a credit card is most likely using SWIFT. Similarly, any bank transaction involving payments for energy exports to Russian enterprises, technology purchases, or meeting financial commitments owing abroad goes through the SWIFT system. It is a crucial component of the worldwide financial plumbing system, and any country that loses access to it will have its international financial and trade relationships frozen and transactions disrupted.

How horrible would it be for Russia if its banks were barred from using SWIFT? Can Russia continue to do business?

When a bank is barred from using SWIFT, it loses its capacity to transact with the rest of the world, at least temporarily. It hinders the excluded bank from executing and resolving agreements with foreigners, obtaining payment for exports, or providing short-term credit for imports. This has the potential to cripple the sectors of the economy involved in international trade and finance. Russian nationals would likewise find it far more difficult to travel overseas.

Russia's local payment system may also be interrupted to the extent that all transactions made by the main credit card firms (VISA, Mastercard, Amex, and so on) must all go through SWIFT. Russia, on the other hand, has already built its transaction system known as the System for Transfer of Financial Messages (SPFS), which is presently only utilized for domestic transactions. Following Russia's annexation of Crimea in 2014, the United States attempted to put a similar ban on SWIFT. Even a limited prohibition on Russian banks would have a significant direct economic impact on the Russian economy and enterprises.

However, the reactions to the SWIFT statement, as well as the actual freezing of the Russian Central Bank's foreign assets on February 28, were immediate, demonstrating the severity of the sanctions imposed. The ruble fell by around 30%, the central bank raised interest rates to 20%, and payments overseas were restricted. The public reacted with a widespread run on bank accounts, fearing that they would be unable to use credit cards for everyday purchases, and attempted to acquire dollars on the parallel market to preserve their funds from losing value in home currency. Russia last experienced such financial upheaval in 1998, when it defaulted on its international debt, plunging its domestic financial system into a catastrophic crisis.

Are there any challenges to the giant world economy?

Yes. The exclusion of Russian banks from SWIFT poses a huge risk to the global economy. For starters, it risks interrupting Europe's energy supply and commodities exports to global markets, resulting in significant spikes in energy and food costs. Oil, gas, and many other commodities are already at record highs due to supply constraints, poor weather, and supply chain disruptions. This significantly affects the Federal Reserve's and European Central Bank's efforts to reduce inflation, which is already at historically high levels. A Russian default on foreign commitments might have ramifications for foreign creditors and cause a liquidity shock in the US or European interbank market. Great American and European firms that hurry to liquidate their investments in Russian activities, as oil giants BP and Shell have already declared, would incur additional losses on their assets, which may eventually have to be written off. Indeed, dollar shortages began to emerge in the global interbank market on February 28, as American and other international counterparts of targeted Russian financial institutions hurried to cover their exposures.

Given that the viability and effectiveness of a payment network are dependent on universal adoption and usage of its services, the bigger risk of employing the figurative "nuclear weapon" in the arsenal of financial sanctions is long-term harm to international financial integration.

Was this kind of sanction been applied initially, and if so, how effective was it?

North Korea and Iran have been cut off from SWIFT for a long time. Although this particular sanction has contributed to the weakening of these economies, it has not resulted in regime change or conflict resolution, as any other economic sanction has. In 2019, Venezuela was also targeted by a similar action, which did not result in a meaningful change in the situation on the ground.

A SWIFT prohibition will almost certainly have a transitory impact. When Russia was subjected to fewer SWIFT sanctions in 2014, the country moved quickly to build its own communications network to serve the local payment system. Russia has shifted its foreign reserve composition away from the US currency and increased links with the Chinese Cross-Border Interbank Payment System (CIPS), which may pay international claims in yuan.

As a preventive move against the growing potential of US-imposed financial sanctions, China has created its own parallel international communications system in recent years. Even before the collapse of the Iran nuclear deal, the European Union had begun to establish its own financial communications system to avoid becoming entangled in the web of US-imposed sanctions on Iran.

As a result, countries adapt and discover ways to avoid sanctions. Sanctions are most likely effective as a threat during diplomatic negotiations. Nonetheless, the short-term economic impact on the targeted country, as well as the readiness to incur economic sacrifices to show support for the aggressed nation, raise the cost of the invasion and provide vitally needed assistance to the victims of the aggression.

Conclusion

SWIFT completely complies with all applicable sanctions legislation. Individual financial transactions, on the other hand, are the responsibility of the financial institutions processing them, as well as their respective responsible authorities. SWIFT is just a messaging service provider and has no involvement or control over the underlying financial transactions described in messages from its financial institution's customers.