SWIFT: How Will It Affect the Russian Economy?

Web Desk — According to the White House, the United States and its allies have agreed to block select Russian banks from using SWIFT, a global financial messaging system.

In a joint statement with leaders of the European Commission, France, Germany, Italy, the United Kingdom, and Canada, the officials said excluding Russia from SWIFT means that “these banks are disconnected from the international financial system and this harms their ability to operate globally.” The joint statement further said that the Ukraine war would be Russia’s strategic failure.

The joint statement also reiterates that Russia’s central bank will be barred from using its international reserves in a way that could harm the effects of sanctions.

On Thursday, President Joe Biden told reporters that the penalties for the latest round of sanctions against Russia are “maybe more serious than SWIFT.”

What does Russia’s exclusion from SWIFT mean? This is what you need to know:

What is the SWIFT financial system?
SWIFT stands for International Financial Telecommunication Society. A global messaging system, it connects thousands of financial institutions around the world.
SWIFT was founded in 1973, and it is headquartered in Belgium. The National Bank of Belgium oversees it along with the Federal Reserve System, European Central Bank, and others. The system connects 11,000 financial institutions in more than 200 countries and territories so that banks can be informed about transactions.

According to Alexander Vacroux, executive director of the Davis Center for Russian and Eurasian Studies at Harvard University, “It doesn’t move the money, but it moves the information about money.”

The Swift banking system serves primarily as a large group chat for financial institutions around the world and its role is crucial for global financial communications. According to Swift, its services connect more than 11,000 financial institutions in more than 200 countries and territories and host an average of 42 million messages daily.

How would a removal from SWIFT affect Russia?
Russia’s exclusion from SWIFT would damage the country’s economy right away and, in the long run, cut the country off from a large portion of international financial transactions. International profits from oil and gas production account for more than 40% of Russia’s revenue.

European Commission President Solo Van Derlein says secession from the international payment system will prevent Russia from operating worldwide and effectively cut off Russian exports and imports. Experts say secession from the Swift banking system could be disastrous for the Russian economy.

As a result of sanctions over its nuclear program, Iran lost SWIFT access in 2012. However, many of its banks were reconnected to the system in 2016. Vacroux told NPR that Iran lost half of its oil export revenues and 30% of its foreign trade when it was kicked off.