With the escalation of the war between Russia and Ukraine, calls are increasing to remove Russia from the global payments system “SWIFT”, a pivotal global system that facilitates financial transactions and makes them easier and more flexible.
The threat to remove Russia from this regime is not new. The West threatened Russia with it in 2014 when it annexed Crimea, but in the end, it did not, and with the increasing calls at the present time, there is no consensus on the need to remove Russia from this regime.
Away from all the controversy surrounding Russia’s expulsion and the possibilities of reaching an agreement on it, it remains important to answer some questions related to Swift as a regime and its impact on Russia if it is banned from it:
What is the Swift system?
SWIFT is a global financial system that allows for the smooth and rapid movement of money across borders.
The word SWIFT is an acronym for “The Society for Worldwide Interbank Financial Telecommunication”. This system was established in 1973 and the center of this association is Belgium. The SWIFT system links 11,000 banks and institutions in more than 200 countries.
But Swift isn’t the average bank you’d meet on any street, 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 the volume of transactions through the SWIFT system.
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.
The network is now jointly owned by more than 2,000 banks and financial institutions.
It is overseen by the National Bank of Belgium, in partnership with major central banks around the world, 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 the embargo affect Russia?
According to the BBC, Russian companies will lose access to the smooth and instant transactions provided by the Swift system. Payments for Russia’s important products in the energy and agricultural sector will be affected very negatively.
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.
To prepare for such punishment, the Russian government created a national payment card system known as “MIR”, to handle card payments.
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 main supplier of oil and natural gas 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 great.
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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