The SWIFT logo
(Picture: REUTERS)Boris Johnson is lobbying for Russia to be expelled from SWIFT in response to Vladimir Putin’s decision to invade Ukraine.
The Prime Minister spokesperson said he would “continue to work with allies to try and cut Russia off from Swift” to “ensure that we send a clear message to Vladimir Putin that his efforts will not succeed and to ensure that we can deal a severe blow to the Russian economy.”
Banning Russia from SWIFT could do huge damage to the Russian economy but also inflict pain on other countries like Germany and Italy. Observers say the move could also push Russia closer to China, helping to further re-draw the international political order. As a result, the proposal has proved controversial.
Johnson’s push for a ban has placed the spotlight on an obscure — but vital — part of the international financial system. SWIFT is used to send trillions around the world each year, despite attracting little attention.
What is SWIFT?
SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. It is a member-owned organisation that was set up in the 1970s to develop a common standard for international payments and settling share and bond trades across borders.
The network is “core to the backbone of how trade finances and international securities works,” said Virginie O’Shea, founder of industry analyst Firebrand Research. “It’s the plumbing in the background to make sure that you can pay.”
Headquartered in Belgium, SWIFT has over 11,000 financial institutions on its network, spanning more than 200 countries.
How does it work?
SWIFT does not actually move money. Instead, it is a secure, encrypted messaging system that tells financial institutions how much money to move where.
The organisation also helps set international standards when it comes to money transfer and securities trading. It makes sure every institution is talking the same language, as it were.
An average of 42 million messages were sent over the SWIFT network each day last year and the system is used to move trillions around the world. Transactions involving Russian institutions are thought to account for more than 1% of all network activity.
Why do world leaders want to eject Russia from SWIFT?
Kicking Russia out of the SWIFT network would be the “nuclear option” when it comes to sanctions, according to Charles Delingpole, the CEO and founder of ComplyAdvantage, a company that helps businesses with sanction screening.
It would send a powerful message to Russia and deal a severe blow to its economy, showing the Kremlin there are tough consequences for invading Ukraine.
Ejecting Russia would effectively expel the country and its businesses from the international economy. There is no well established rival to the SWIFT network, so Russia would have to either set up a rival communications network or develop ad hoc arrangements with countries and between companies if it wanted to trade internationally. That would be costly and time consuming.
Simon Taylor at financial technology consultancy 11:FS said: “Any business in Russia would find it very difficult to move money in and out.”
O’Shea said: “It would have a dramatic impact on Russia because it would cut them off from international finance and there are no real alternatives for them.”
Who supports ejection?
UK Prime Minister Boris Johnson is leading the calls internationally for Russia’s ejection. He raised the proposal at a meeting of G7 leaders on Thursday and his spokesperson said he would raise it again at a NATO meeting this afternoon.
Poland and Lithuania are said to favour the move. US President Joe Biden has supported the proposal, though has said he will only back it fully if European leaders are on side.
Dmytro Kuleba, Ukraine’s foreign minister, said on Twitter this week: “Russia is waging a horrific war of aggression in Europe. Here is your ‘never again’ test: BAN RUSSIA FROM SWIFT and kick it out of everywhere.”
Who opposes Russia’s expulsion?
Many EU countries are wary of ejecting Russia from SWIFT because of the blowback it would have on their own economies.
Germany and Italy are said to be the most vocal opponents. This stems from their dependency on Russian oil and gas. These countries use SWIFT to pay Russia for the energy supplies and ejection could disrupt that flow.
What would ejection mean for Russia?
Russia would suffer huge economic damage if it was kicked out of SWIFT. Capital Economics estimates that current sanctions will knock about 1% off Russia’s GDP but expulsion from SWIFT could take that number to 5%.
O’Shea said: “It would be very, very painful for everyone involved. It would have a dramatic impact on Russia because it would cut them off from international finance and there are no real alternatives for them. It would be quite dramatic.”
While firms would still be able to deal with Russian companies not under specific sanctions, exit from SWIFT would make it far costlier and more time consuming to do.
Sebastian Galy, a strategist at Nordea Bank, illustrated the problem: “How do you know the one on the other side of the phone is the right contact? I used to get calls from likely cons once every month or so.”
Trade would likely fall in response, leaving Russians poorer.
Over the longer term, ejection from SWIFT could also push Russia closer to China. Delingpole predicted an alliance between “China, Venezuela, Iran and other allied countries, adding to the financial balkanisation of the global economy.”
Taylor said: “Russia has been diversifying its reserves for a long time away from SWIFT, and China is eyeing its new central bank digital currency as potential alternative to the global US dollar order.
“A modern, China-based digital platform, adopted by a major oil trading nation like Russia, could create a corner of the world in which there’s a new financial infrastructure and reserve currency default.”
What would it mean for the rest of the world?
Ejection from SWIFT would do immediate damage to the likes of Germany and Italy, which would be forced to find energy supplies elsewhere.
“Payments for gas and other exports would be extremely challenging as banks try to bilaterally coordinate the mass movement of money,” Delingpole sale.
Cutting Russian oil and gas supplies off from the world would send the price of these fuels spiking, hobbling economies around the world. Stock markets would crash as higher fuel costs eat into profit margins.
O’Shea said: “It would have a massive economic impact on Russia but it also would have a massive international impact. It’s not something you could do a snap decision on.”
How likely is it to happen?
For now, it looks like Russia won’t be ejected. SWIFT falls under EU jurisdiction, meaning opposition from the likes of Berlin and Rome effectively blocks the prospect of a ban.
“The thing with Swift is it’s a globally neutral body,” O’Shea said. “There’s often conflicts between countries, they tend not to get into those.”
However, the situation may change. The longer war goes on, the longer EU countries will have to find alternative energy supplies. That would allow them to wean themselves off Russian oil and gas.
There is precedent for countries being booted from SWIFT: the EU ordered the network to stop serving Iran in 2012.
“It had a huge impact on Iran and they really struggled,” O’Shea said. “It’s not beyond the realms of possibility. It’s not a step they take very often but if the war escalates they could be pressured into it.”
