What happens if Russia is excluded from the SWIFT code. Nuclear option?

What is SWIFT and why is it important?

SWIFT is a secure communication platform used by banks, bank intermediaries and financial institutions that send and receive information, such as instructions for transferring money abroad or trading securities.

However, money is not transferred and stored through this platform.

For example, if a German company buys Russian natural gas, it has to pay for such a product. It can transfer money from a German bank account to a Russian firm’s account at a bank in Russia by entering the recipient’s account number and the SWIFT code.

The German company then sends a message from its German account through the SWIFT system to the Russian bank, saying that the money transfer is taking place. Then, when the funds arrive electronically, the Russian company can withdraw them.

The use of standardized SWIFT instruction codes enables banks to make faster payments.

About 11,000 financial institutions in over 200 countries and territories use SWIFT. Through this platform, over 10 billion messages have been sent this year, mediating payments worth trillions of dollars.

Prior to SWIFT, banks used the telex system to communicate financial information. This system was based on old telegraph circuits and was a slow system, not easy to use and unsafe.

Therefore, SWIFT was established in 1973.

Today, SWIFT is a giant in the financial communications industry thanks to its ease of use, speed and security. It can help banks make overseas payments in less than five minutes and also provides transfer tracking.

“It’s the most reliable type of overseas payment messaging system and so it’s extremely important,” said Brian O’Toole, a former senior adviser to the US Treasury Department.

Who owns SWIFT?

Headquartered in Belgium, the corporation is owned by member banks and has a board of directors of 25 members. Currently, a Russian citizen is also part of this board. The organization is overseen by a group of central banks known by the acronym G10 – Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Britain, the United States, Switzerland and Sweden – as well as the European Central Bank.

Has SWIFT removed any country from its platform?

In 2012, SWIFT had expelled Iranian banks after they were either included in a list of sanctions by the European Union, following pressure from the US.

However, Iran was largely isolated from the global financial network, so the impact of leaving SWIFT was not so great, said O’Toole, who is currently an associate at the Washington-based Atlantic Council.

“It has obviously made things difficult for Iranian banks that were connected to the international financial system,” he told Radio Free Europe.

Can the US force SWIFT to oust Russia?

SWIFT operates under Belgian and European law, not American law, so “it really should not listen to the United States,” O’Toole said.

However, the US has the power to influence SWIFT by threatening sanctions against the platform, as it did when it wanted Iranian banks to leave the platform, O’Toole said.

What will happen if Russia leaves SWIFT?

Russia is a larger economy than Iran and is deeply integrated into the global financial community, therefore, a possible departure from the SWIFT platform would have more impact than in the case of Iran.

Russia would face major economic difficulties over a period of time, especially payments abroad, until it adapts to the new platforms, said Elina Ribakova, an economist at the Washington-based Institute for International Finance.

These obstacles could cause the Russian economy to shrink and the ruble – Russia’s national currency – to depreciate in a short period of time, she said.

However, as Russia’s main exports – oil and gas – are critical to Europe’s livelihood, both sides are likely to seek a speedy solution, Ribakova told Radio Free Europe.

But it is likely that the possible departure from SWIFT will not have a major impact because Russia is already setting up its own financial messaging system, she added.

In 2014, when Russia annexed the Ukrainian Peninsula of Crimea, there were calls for Russia to leave SWIFT. Therefore, the Kremlin began building a platform for financial communications, in order to prepare if such a thing would happen.

Known as the Financial Messaging Transfer System, the Russian platform has over 400 member banks – including dozens of banks from the former Soviet Union – and by the end of 2020, it has completed one-fifth of all financial communications within Russia. .

Is Russia protected?

Not completely. The Russian system has its drawbacks.

While SWIFT operates 24 hours a day, the Financial Messaging Transfer System can send payment messages only during business hours on weekdays, said Maria Shagina, an associate at the Center for Eastern European Studies at the University of Zurich. published earlier this year.

The Russian system also has restrictions on the size of messages, she said.

“Technically, Russia can make the transition from the SWIFT platform to its system if it leaves SWIFT,” which was not the case in 2014, “Ribakova said.

However, “this would be a massive shock to the system” for a period of time, she said.

Russia may seek to internationally expand its Financial Message Transfer System as a possible solution to transactions abroad, O’Toole said.

China, whose economy is much larger than Russia’s, is also developing an alternative to SWIFT.

In 2015, Beijing launched the Interbank Payment System for payments abroad, in order to assist in the international use of the Chinese currency, the yuan.

Some Chinese officials have called for their system to be used instead of SWIFT in order to protect state-owned banks, following threats that they may leave the SWIFT platform.

Sanctions on banks: The most destructive?

While some officials and analysts call SWIFT a “nuclear” option, O’Toole said such a setting is an exaggeration.

Even if removed from SWIFT, Russia will be allowed to conduct international transactions through other communication platforms, although they may be less effective.

“If you remove SWIFT from all Russian banking systems without doing anything else, all you have to do is push them (Russian banks) to use SWIFT’s competing platforms,” ​​he said. “You are not stopping transactions. “You will only make it more difficult for people to carry out these transactions,” he said.

He said the White House should focus on sanctioning Russian banks.

“What financial institutions will the administration pursue if Russia crosses the border?” “I think that the most important question here has to do with the relevant policy,” he said.

The United States may target state-owned financial institutions affiliated with the Russian elite, such as the VEB and the Russian Direct Investment Fund, he said.

Sanctioning the two banks would have “more impact” than removing the entire Russian banking system from SWIFT, he said.

VEB acts as a development bank and as a payment agent for the Russian Government. Meanwhile, the Russian Direct Investment Fund is the country’s sovereign wealth fund and has been closely involved in foreign projects: such as promoting the coronavirus vaccine, Sputnik V.

But if the main retail banks such as Sberbank and VTB were to be targeted, it would be more complicated, he said. Sanctioning them would result in “major economic shifts” as they own a massive market share and ordinary citizens would be harmed.

Can the Russian economy withstand the unrest?

Since 2014, Russia has stepped up its defense against the threat of greater US sanctions.

In addition to developing an alternative to SWIFT as well as alternatives to the Visa and Mastercard payment platforms, the Russian government has also been quite careful with spending, and has even had budget surpluses, which is a rarity in Western democracies.

The Russian government has also created its own currency reserves and gold reserves, exceeding $ 620 billion.

This amount includes approximately $ 200 billion of the National Wealth Fund, which can be used in emergencies.

Excluding sanctions, Russia’s reserves could increase by as much as $ 20 billion over the next year, Ribakova said.

The Russian government “always has this kind of ‘Sword of Damocles’ hanging over it for more sanctions. “And I think that kind of describes all aspects of their macroeconomic policy.”

“It is part of Russia’s strategy and they stand behind this strategy because it has worked well for them,” Ribakova said.

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