What shutting Russia out of SWIFT means

Russian President Vladimir Putin chairs a meeting with members of the Security Council in Moscow, Russia February 21, 2022. [Reuters]

The European Union (EU), US, UK, and several of its allies are moving to block Russia from using Swift as part of economic sanctions over its invasion of Ukraine.

But what is Swift and why does it matter in the Russia-Ukraine war?

Why are some countries allied to the EU split over cutting some Russian banks off the Swift system?

Swift is the acronym for Society for Worldwide Interbank Financial Telecommunication. It has been in existence since 1973.

It is a messaging system that connects banks around the world, allowing smooth and rapid transfer of money across borders.

Kenya for instance, as part of the global financial system, relies on Swift to offer international money transfer services. Customers are among other things required to state the Swift code, amount, and currency they are sending.

Swift is based in Belgium and links more than 11,000 financial institutions in more than 200 countries. The system averages more than 40 million transactions a day.

Therefore, cutting major Russian banks from Swift is seen as a move to disconnect them from the international financial system. In short, they will struggle to process cross-border transactions.

Russian companies will therefore feel the heat in receiving money from their supplies for commodities such as wheat and oil. Russia, an eastern European country, is strong on oil and several agricultural products.

In 2014, when Russia faced a similar threat, its ex-finance minister estimated that such a move could knock off five per cent of the country’s gross domestic product.

Iran in 2012 was cut off from Swift over its nuclear programme, suffering a nearly 30 per cent reduction of its foreign trade. The cut-off lasted up to 2015.

But cutting Russia from the Swift network is putting western countries in a catch-22 situation. Russia is both an importer and an exporter. It needs the world and the world needs it too.
Russia is the key supplier of oil and gas to the EU. Cutting Russia from the network could see the country stop exporting these energy resources. EU may struggle to find alternatives.

Several countries including Britain, France, and Germany had expressed concerns that blocking Russia from the Swift could also impact their own economies and companies.

France’s finance minister Bruno Le Maire had on Friday likened Swift ban to a financial nuclear weapon.
“When you have a nuclear weapon in your hands, you think before using it,” he said.

This partly explains why the US and UK are only moving to cut off some as opposed to all Russian banks from this system.

The curbs are deemed to be enough to restrain Russia from using its forex reserves to soften the impact of the sanctions. Russia is reportedly working with China on alternatives to the Swift.

US, UK, and their allies insist that they could roll out more economic sanctions should Russia not pull out its army from Ukraine.