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Amid the rounds of sanctions on Russia, one possible action has received a lot of attention globally: a ban from the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
A critical part of the international payment system, SWIFT serves as the largest global provider of financial messaging services — and facilitates the connections needed to make payments across borders.
A block from SWIFT severs communication with the world. A nationwide ban would cripple that country’s ability to receive payments for exports (like oil, gas, and metals).
But not all countries are on board with leaning on a SWIFT ban. Countries that trade with Russia may not want the payments network to be unavailable entirely. And the effectiveness of a ban — with other options for payment available — may make targeted sanctions against specific Russian financial institutions more potent.
Still, a ban on SWIFT was notably used in 2012 against Iran over its nuclear program. The action dramatically slashed the country’s oil export revenue and strangled foreign trade.
What does SWIFT do?
SWIFT is not itself a payment processor; it provides and secures the messages between global firms to help facilitate payments. The need for SWIFT arose from the lack of standardization that made it difficult for a bank in Hong Kong, for example, to send money to a bank in the United States.
Founded in the 1970s, SWIFT created a messaging platform and computer system to validate and route information regarding payments around the world. The “cooperative” is based in Belgium and is owned and controlled by a cohort of financial institutions that make up its shareholders.
Today, about 11,000 firms in over 200 countries are connected to SWIFT, which has helped transact over 8.4 billion messages.
The cooperative company is governed by a board of 25 independent directors representing banks around the world. The G-10 central banks (including those from the United States, the United Kingdom, and the European Central Bank) oversee SWIFT.
How would a country get banned from SWIFT?
SWIFT itself does not have the power to make decisions on sanctions, but complies fully with applicable sanction laws that may be imposed by governments and legislators.
In March 2012, the European Union issued a regulation that prohibited SWIFT from providing financial messaging services to EU-sanctioned Iranian banks. As a Belgian organization, SWIFT had to comply and followed through by disconnecting the sanctioned banks from the network.
With Russia, a similar regulation may be needed to implement a new ban, thus requiring sign-off from EU nations like Germany.
Why would a country not want to support a SWIFT ban?
For countries with direct trade ties to Russia, a SWIFT ban may mean an inability to settle ongoing trade relationships critical to some European countries. Germany and Italy, for example, rely more on Russian natural gas than the EU at large.
There’s also the question of how effective a SWIFT ban would be. Since SWIFT is not a payment processor itself, firms could get around a ban by turning to alternative messaging systems to facilitate payments.
Some have raised the question of whether or not being left out of SWIFT would threaten the role of the U.S. dollar, given the fact that a substantial amount of SWIFT messages are tied to U.S. dollar-denominated assets. But Russia has already made an effort to de-dollarize itself, with the country’s central bank having dramatically shifted its reserves away from the greenback prior to the pandemic.
The United States has taken the stance that sanctioning individual banks in Russia is the better way to pinch Russia’s financial connections to the world. VTB and Sberbank, Russia’s two largest banks, now lack direct access to the U.S. dollar.
“The sanctions that we've proposed on all the banks are of equal consequence — maybe more consequence than SWIFT,” President Joe Biden said Feb. on 24.
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