Exclusion from SWIFT, a small but vital gear in the international financial mechanism, is one of the most damaging penalties imposed by the West on Russia for its invasion of Ukraine.
The United States, the European Union, and other Western allies had threatened the action in recent weeks as a method of intensifying retribution for Russia’s aggression against its ex-Soviet neighbour.
On Saturday, as the Russian military stepped up its assault on Ukrainian cities, Western allies attempted to cripple the country’s banking sector and currency by disconnecting selected banks from the international money-transfer system, severely limiting Russia’s ability to trade with the rest of the world.
What exactly is SWIFT?
The Society for Worldwide Interbank Financial Telecommunication, or SWIFT, was founded in 1973 but does not handle any money transactions.
However, its messaging system, which was designed in the 1970s to replace the use of Telex machines, allows banks to communicate quickly, securely, and affordably.
The non-listed Belgian corporation is basically a bank cooperative that professes to be impartial.
What exactly does SWIFT do?
Banks utilise the SWIFT system to exchange standardised communications concerning sum transfers between themselves, sum transfers for clients, and asset buy and sell orders.
SWIFT is used by nearly 11,000 financial institutions in more than 200 countries, making it the backbone of the worldwide money transfer system.
However, the firm’s dominant role in finance has required it to collaborate with authorities in order to prevent the funding of terrorists.
Is it a legitimate threat?
Tactically, “the benefits and drawbacks are disputed,” according to Guntram Wolff, head of the Brussels-based Bruegel think tank.
In practice, being excluded from SWIFT means that Russian banks will no longer be able to utilise it to send or receive payments from international financial institutions for trade operations.
“It would be a major pain operationally,” Wolff said, especially for European nations that do a lot of business with Russia, which is their single largest supplier of natural gas.
Following Russia’s annexation of Crimea in 2014, Western nations threatened to exclude it from SWIFT.
However, the exclusion of such a significant country (Russia is also a significant oil exporter) may prompt Moscow to speed the establishment of an alternative transfer mechanism, maybe with China.