• Fri. Mar 29th, 2024

How expelling Russia from SWIFT could impact the country. And why there’s reluctance to do so

UPDATE: After this story was published, news broke that the U.S., U.K., Europe and Canada plan to block Russia’s access to the SWIFT international banking communications platform as part of another round of sanctions against Moscow.


Countries around the world have placed sanctions on Russia for its invasion of Ukraine, with some also calling for Moscow to be banned from SWIFT, a banking communications platform used by financial institutions in over 200 countries.

CBC News takes a look at SWIFT, how Russia might be impacted if removed from the important system, and why some countries are reluctant to take that step.

What is SWIFT?

SWIFT is the acronym for the Society of Worldwide Interbank Financial Telecommunication. The Belgian-based co-operative is used by thousands of financial institutions in over 200 countries, including Russia, and provides a secure messaging system to facilitate cross-border money transfers.

The system averaged 42 million messages daily last year to enable payments. About half of all high-value payments that cross national borders go through its platform.

SWIFT is much like a “social network for banks” that doesn’t move money around, but provides information about where the money is going, said Alexandra Vacroux, executive director of the Davis Center for Russian and Eurasian Studies at Harvard University in Massachusetts.

“It’s really like a social messaging system, and it’s like Twitter for banks,” Vacroux said.

WATCH | Trudeau says removal from SWIFT would prevent Putin from profiting from war:

Trudeau calls for Russia’s removal from the SWIFT international banking system

Prime minister says Putin cannot make war and expect to benefit financially 1:15

Banks that connect to the SWIFT system and establish relationships with other banks can use messages within the system to make payments, Reuters reports. The messages are secure so that payment instructions are typically honoured without question. This allows banks to process high volumes of transactions at high speed. It has become the principal mechanism for financing international trade.

You can think of SWIFT as the backbone of the financial services sector.– Markos Zachariadis, University of Manchester

“You can think of SWIFT as the backbone of the financial services sector,” said Markos Zachariadis, a professor and chair in financial technology and information systems at the University of Manchester.

“It is the most influential infrastructure we have in financial services in terms of the volume and value of money that it’s being moved around the world.” 

How reliant is Russia on SWIFT?

According to the Russian National Swift Association, about 300 leading banks and organizations in the country are users of SWIFT, more than half of the Russian credit organizations are represented in SWIFT, and Russia is ranked second by number of users of the platform, after the United States.

How would Russia be impacted if banned from SWIFT?

Excluding Russian banks from SWIFT would restrict the country’s access to financial markets around the world. 

A man clears debris at a damaged residential building at Koshytsa Street, a suburb of the Ukrainian capital Kyiv, where a military shell allegedly hit. Moscow’s invasion of Ukraine has prompted sanctions against Russia from Canada and other countries. (Daniel Leal/AFP/Getty Images)

It would be almost like cutting a country from the internet, Zachariadis said.

“Imagine all these organizations that operate online. They have their customers where they send information and transact with suddenly having zero access to this infrastructure.”

Maria Shagina, an international sanctions expert based in Helsinki, wrote last year in an article for the Carnegie Moscow Center that the impact of banning Russia from SWIFT could be as devastating as it was for Iran, which was denied access to the system in 2012 over its nuclear program.

“Russia is heavily reliant on SWIFT due to its … exports of hydrocarbons denominated in U.S. dollars. The cutoff would terminate all international transactions, trigger currency volatility, and cause massive capital outflows,” she wrote. 

Vacroux said that because Russia’s federal budget is so highly dependent on taxes generated from the export of raw materials like oil and gas, it would make it difficult to conduct sales and then get the money needed for the country’s budget.

WATCH | U.S. President Biden unveils sanctions against Russia: 

Biden defends effectiveness of sanctions against Russia

Challenged by reporters over the effectiveness of sanctions against Russia for its actions in Ukraine, U.S. President Joe Biden said the measures were ‘profound’ and ‘exceed anything that’s ever been done.’ 2:45

But some experts have questioned whether expelling Russia from SWIFT is as devastating as other potential sanctions.

I think there’s excessive attention on SWIFT relative to its impact and insufficient attention on U.S. banking sanctions relative to their impact,” said Chris Miller, an assistant professor of international history at the Fletcher School at Tufts University, and co-director of the Massachusetts school’s Russia and Eurasia Program.

Miller said threatening to cut off major Russian banks from the U.S. financial system would certainly have more bite.

“It’s a communications platform, not a financial payments system,” Adam Smith, an international lawyer who focuses on international trade and worked in the Obama administration, told CBS News. “If you remove Russia from SWIFT, you’re removing them from a key artery of finance, but they can use pre-SWIFT tools like telephone, telex or email to engage in bank-to-bank transactions.”

Are there alternative systems Russia could use?

Following the Russian invasion of Crimea in 2014 that led to calls to boot Russia off SWIFT, the Central Bank of Russia began plans to develop a SWIFT alternative — the System for Transfer of Financial Messages (SPFS).

PHOTOS | WARNING: This photo gallery contains graphic images:

As of February 2020, more than 400 Russian banks had joined SPFS, exceeding the number of Russian banks enrolled in SWIFT, according to Harley Balzer, an expert on Russia and Russian-Chinese relations, and professor emeritus at Georgetown University in Washington, D.C.

The Russian government has subsidized banks to try to encourage use, which has made banks in the country want to be part of SPFS because it lowers their fees, Balzer said 

But so far, only about a dozen foreign banks are using it, including one Chinese bank, meaning “it really is not going to help [Russia] very much for international payment transfers,” he said.

Why are some countries reluctant to ban Russia from SWIFT?

Countries seem divided over whether Russia should be ejected from SWIFT. Britain as well as Canadian Prime Minister Justin Trudeau have called for Russia to be cut off from the platform.

German Foreign Minister Annalena Baerbock expressed skepticism over cutting Russia from SWIFT. (Markus Schreiber/The Associated Press)

On Friday, France’s finance minister said the European Union will soon analyze the consequences of Russia’s expulsion from SWIFT, while Italy said it would not veto such a proposal. Meanwhile, German Foreign Minister Annalena Baerbock expressed skepticism over such a move, while U.S. President Joe Biden has ruled it out for now.

The United States and Germany would stand to lose the most if Russia were disconnected from SWIFT, because banks in those two countries most frequently use SWIFT to communicate with Russian banks, Shagina, the international sanctions expert, wrote in the Carnegie Moscow Center article.

For Germany and Italy, it’s what SWIFT is used to pay for that would pose problems if Russia is cut out.

“Both Germany and Italy are very heavily dependent on imported gas from Russia. So comprehensive sanctions against Russian banks or a blanket exclusion of the entire Russian financial system from SWIFT would mean that they couldn’t pay their gas bills, ” said Adam Tooze, a history professor at Columbia University in New York and director of the European Institute.

Zachariadis said it’s not just Russia that would suffer by being cut out of SWIFT. 

“But also all the other countries that transact with Russia, including a lot of the EU countries and other countries around the world who get a lot of their energy resources from Russia as well, and other businesses that transact with Russian organizations.”

 

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