What Is SWIFT? Why Can This Banking System Punish Russia For Invading Ukraine?
Ukraine’s foreign minister, Demetro Kuliba, has warned Western leaders to “have blood on their hands” if they fail to ban Russia from the global “Swift” payments system, a pivotal one for flexible money dealings worldwide.
“I will not be a diplomat on this; everyone who doubts Russia should be banned from the SWIFT regime should understand that the blood of innocent Ukrainian men, women, and children will stain their hands too,” Kuliba said in a tweet.
The foreign ministers of Britain, Estonia, Lithuania, and Latvia joined Kuliba’s call to cease Russia’s operations through the global financial system “SWIFT.” Still, other European countries are reluctant to take the same step.
So how will these sanctions affect Russia, and why is there a disagreement over their imposition among Western countries?
What is the SWIFT system?
The SWIFT system is a global financial artery that allows for a smooth and rapid cross-border money movement. SWIFT is an acronym for the Association of Global Interbank Financial Communications, established in 1973 and based in Belgium. SWIFT connects 11 thousand banks and institutions in more than 200 countries.
But Swift isn’t the typical bank you’d meet on any street, and it’s an instant messaging system that tells users when to send and receive payments.
This system sends more than 40 million messages daily, as trillions of dollars are traded between companies and governments.
It is believed that Russian payments account for one percent of transactions through the SWIFT system.
Why are there calls to get Russia out of this system?
Banning Russia from dealing through the SWIFT system, which thousands of banks use, will affect the network of Russian banks and Russia’s access to money.
But many governments fear that this penalty will affect their economies and companies. For example, the purchase of gas and oil from Russia will be affected.
Britain led the call to stop the work of the Swift system in Russia, but Ben Wallace, the British Defense Minister, said: “Unfortunately, we do not have control over the Swift system on our own. Such a decision is not taken individually.”
Germany is said to oppose Russia’s ban from the SWIFT system.
In the same way, French Finance Minister Bruno Le Maire and Dutch Prime Minister Mark Rutte said today, Friday, that the option to ban Russia would be used in the event of an absolute necessity.
On Thursday, US President Joe Biden said the ban was not on the table because “right now that’s not the position the rest of Europe would like to take,” although he added that it would remain on the table.
Who owns and controls the Swift system?
The SWIFT system was created by American and European banks, who wished that no single institution controlled the financial system and applied monopoly.
More than 2,000 banks and financial institutions now jointly own the network.
It is overseen by the National Bank of Belgium, in partnership with major central banks worldwide, including the US Federal Reserve and the Bank of England.
The SWIFT system helps make safe international trade possible for its members, and it is not supposed to take sides in disputes.
However, Iran was banned from Swift in 2012 as part of sanctions against its nuclear program.
As a result, Tehran lost nearly half of its oil export earnings and 30 percent of its foreign trade.
Swift says she has no influence over the sanctions and that any decision to impose them rests with governments.
How does that ban affect Russia?
Russian companies will lose access to the smooth and instant transactions provided by the SWIFT system. Payments for Russia’s essential products in the energy and agricultural sector will be negatively affected.
Banks will likely have to deal directly with each other, adding delays and additional costs and ultimately cutting off revenue for the Russian government.
Russia was threatened with a rapid exit before, in 2014, when it annexed Crimea. Russia said the move would amount to a declaration of war.
The Western allies did not move forward, but the threat prompted Russia to develop its own — very modern — cross-border transportation system.
However, it is currently only used by a few foreign countries.
The Russian government created a national payment card system known as “MIR” to handle card payments to prepare for such punishment.
Why is the West divided over Swift?
Removing Russia from this system would harm companies that supply and buy goods from Russia, particularly Germany.
Russia is the leading oil and natural gas supplier in the European Union, and finding alternative supplies will not be easy.
With energy prices already soaring, more disruption is something many governments want to avoid.
Companies crediting Russia will have to find alternative ways to collect the money.
Some people say the risks of international banking chaos are too significant.
And Alexei Kudrin, the former Russian finance minister, had said that a break from the Swift system could shrink the Russian economy by five percent.
But there are doubts about the lasting impact on the Russian economy. Russian banks direct payments through countries that have not imposed sanctions, such as China, which has its own payments system.
There is some pressure from US lawmakers for a ban, but President Biden says he favors other sanctions, in large part because other economies and countries have been hurt.
The decision to block Russia’s access to the SWIFT system will still need support from European governments, many of which are hesitant due to the potential for harm to their economy.
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