Russia’s invasion of Ukraine has pushed the importance of the SWIFT payment system into the limelight, with the United States and European nations threatening to cut off Russia from the financial world.
Since the sanctions against Russia to limit the country’s access to SWIFT, a platform for facilitating money transfers that is integrated into banking systems worldwide, experts say a fatal blow is imminent to Russian banks, especially the smaller ones.
What is SWIFT?
SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. Set up in 1973. It is a messaging system that allows banks around the world to securely and quickly communicate about cross-border payments.
There are about 11,000 member banks in 200 countries and territories that use SWIFT. Under the SWIFT system, each organisation is assigned an 8 or 11 character unique code. In February 2022, the system sent 82 million messages.
SWIFT is a neutral organisation that cannot issue its own sanctions. A decision to sanction any country from using the system needs to be agreed upon by governments. The system is controlled by the central banks of the G10 countries, the European Central Bank, and the National Bank of Belgium.
Why is SWIFT important?
The wide coverage of SWIFT makes it an almost-universally accepted system. It counts central banks of countries like the US, UK, Germany, France, Japan, India, China, Singapore and others among its list of overseers.
An important part of the SWIFT messaging system is the SWIFT code. Each bank that participates in the system is assigned this code, which identifies the bank, the country it’s in, where it’s located in the country, and, optionally, the branch.
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Since most of the world uses SWIFT for international money transfers, a ban on Russia from the payment system would mean that the banks in the country will not be able to accept funds or make payments outside of Russia, as well as business transactions being halted, and it will have to look for alternative means to transfer money.
Analysts say this would lead to ‘autarky’. This is an economic system of self-sufficiency and limited trade, which translates to the fact that Russia would be isolated from most of the world, forcing the economy to look inwards to sustain itself and the country.
Although there are other payment systems used globally, for example, China has its own system known as Cips which it hopes will become a widely used alternative to SWIFT.
Others include cryptocurrencies, and Russian banks will still be able to make payments via countries that have not imposed sanctions.
The European Union has listed seven Russian financial institutions to be excluded from the SWIFT system. They include VTB Bank, Bank Rossiya, Otkritie, Novikombank, Promsvyazbank, Sovcombank, and VEB.RF.
In a bid to limit Russia’s access to SWIFT, the country is being disconnected from the international financial system. However, SWIFT is not a payment or settlement system in itself. It is only the messaging system that enables those transfers.
