SWIFT AND SANCTIONS

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A look into the SWIFT (Society for Worldwide Interbank Financial Telecommunications) mechanism and the implications of its ban in Russia.

 

The ongoing Russia-Ukraine conflict has placed the SWIFT payment system into the spotlight, with the United States and some European countries threatening to cut Russia off from the global banking system. This might be a death blow to Russian banks, particularly smaller ones.
But what exactly is SWIFT? It is an acronym for the Society for Worldwide Interbank Financial Telecommunication. In other words, SWIFT is a worldwide payments system that is used by over 11,000 financial institutions and businesses in over 200 countries around the world. In a nutshell, SWIFT is a messaging system for money transfers.

 

HOW DOES THE SWIFT SYSTEM WORK?
The SWIFT network does not actually transmit money. Instead, it uses SWIFT codes to communicate transaction orders between institutions. For actual financial transactions, standardised IBAN (International Bank Account Number) and BIC (Bank Identifier Code) forms are used. SWIFT assigns a unique code to each financial institution, which can be 8 or 11 characters long. The SWIFT code, ISO-9362, or BIC is the name given to this code. The institution code, nation code, location code (or city code), and an optional branch code to distinguish distinct branches are also included. While the SWIFT number simply identifies a bank, the IBAN code identifies both the bank and a specific account. Instead of using IBAN, the United States employs ABA (American Bankers Association) routing numbers for domestic payments and SWIFT codes for international payments. Because SWIFT does not actually send money, it necessitates multiple interventions, which slows down the entire process. It also raises the cost of transfers.

 

 

 

WHAT IS THE SIGNIFICANCE OF SWIFT?
SWIFT’s global reach makes it a nearly universally accepted system. Its list of overseers includes the central banks of the United States, the United Kingdom, Germany, France, Japan, India, China and Singapore to name a few. Given that the majority of the world uses SWIFT for international money transfers, excluding Russia from the payment system would prevent Russian banks from accepting funds or making payments outside of the country. But there are even deeper implications.
According to the European Commission, the measure is aimed at guaranteeing that the war in Ukraine is a ‘strategic failure’ as a whole. “Blocking the banks will essentially prohibit Russian exports and imports by preventing them from executing most of their financial activities globally,” said EU Commission President, Ursula von der Leyen. She explained that the measure was part of a broader set of penalties aimed at “preventing Putin from deploying his war chest.” However, the restriction is not broad enough to effectively cut Russia out of the global banking system.
Seven banks have been cut off from the SWIFT system – Bank Otkritie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank, Vnesheconombank, and VTB Bank. However, SberBank and Gazprombank, two significant Russian banks that play a key role in facilitating energy transactions with Europe, are not being removed from SWIFT. A US lawyer told Reuters that in practice “being kicked out of SWIFT doesn’t make transactions impossible, it just makes them considerably more complex,” and significantly increases transaction costs. “To have a healthy economy, you need a functioning banking system,” an analyst noted. “This has the potential to damage the Russian economy.” According to The New York Times, Russia can continue to export some gas to Europe because of the targeted approach.

 

According to the European Commission, the measure is aimed at guaranteeing that the war in Ukraine is a ‘strategic failure’ as a whole. “Blocking the banks will essentially prohibit Russian exports and imports by preventing them from executing most of their financial activities globally,” said EU Commission President, Ursula von der Leyen.

 

 

WILL RUSSIA SUFFER AS A RESULT OF THE SWIFT BAN?
UK Prime Minister Boris Johnson said that banning Russia from SWIFT would make Putin’s life more difficult by stopping Russia from transferring and receiving funds. Further commenting on the situation, UK Defence Secretary Ben Wallace said, “When you pay Russia for their gas, for example, it probably flows through the SWIFT system. We want it turned off.”
According to the Russian National SWIFT Association, the SWIFT network has roughly 300 banks and financial institutions in Russia, making it the second-largest group of customers outside of the United States. In Russia, SWIFT is used by more than half of all credit institutions. If an institution is removed from the cooperative network, it will no longer be able to send or receive international payments via SWIFT. According to a 2021 research by the Carnegie Moscow Center, removing all Russian banks from SWIFT would result in a 5% drop in Russia’s gross domestic product. According to the BBC, Iran lost 30% of its overseas trade when it was kicked out of SWIFT in 2012. However, the coalition has not specified which or how many banks will be targeted. Furthermore, SWIFT is not Russia’s sole alternative. For instance, China’s Cross-Border Interbank Payment System, a global payment messaging system with around 80 financial institutions as members (as of the end of 2021) is expanding. As per the report by Asia Markets, at least 23 Russian banks employ CIPS, and more may simply convert.
The departure of Russian banks from SWIFT, according to Nikolay Zhuravlev, deputy speaker of Russia’s Federation Council, would be disastrous to Europeans.
“We will not get [foreign] currency if Russia is unplugged from SWIFT,” Zhuravlev stated in an interview with state-owned news outlet TASS. “However, our goods – oil, gas, metals, and other major components of their imports – will not be delivered to purchasers, mostly European countries. Do they require it? I’m not certain.”

 

WHAT OTHER SANCTIONS HAVE BEEN APPLIED AGAINST RUSSIA?
The United States has implemented a series of economic measures against Russia. Before the invasion, the US retaliated against Russia’s acknowledgement of the independence of Ukraine’s Donetsk and Luhansk regions by stifling investment and prohibiting technology imports. The Treasury Department retaliated by imposing harsh restrictions on a number of Russian state-owned banks and developers. After Russia’s invasion of Ukraine formally began on February 24, the US imposed new sanctions and restrictions on the top 10 Russian financial institutions, which account for around 80% of the country’s banking assets. Similar restrictions were imposed by Australia, Canada, the EU, Japan, and the United Kingdom. Personal penalties against Russian President Vladimir Putin, Foreign Minister Sergey Lavrov, and other members of the security team were issued by the EU and the US on Friday, including a travel ban. In addition to removing Russian banks from SWIFT, the EU and US agreed to limit the Russian National Bank’s ability to deploy international reserves and make it more difficult for wealthy Russians to purchase ‘golden passports’ and become residents of other nations.

 

HOW WOULD RUSSIA’S EXPULSION FROM SWIFT AFFECT THE UNITED STATES AND OTHER COUNTRIES?
The United States’ main worry in barring Russian banks is a devaluation of the dollar. According to S&P Global, Russia has been pursuing a ‘de-dollarization’ plan – an endeavour to move away from the US dollar for international commerce, since 2014, despite the fact that the great majority of its oil sales are still in dollars.
Russia’s expulsion might weaken the currency globally, putting a damper on US energy exports. Due to their reliance on Russian energy and gas, Germany and Italy were among the European countries who first opposed removing Russian banks from SWIFT. The prohibition will also affect other countries that trade substantially with Russia, such as the Netherlands. According to the BBC, the coalition’s goal in banning some Russian banks is to maximize the bad impact on Russia while minimizing the damage to Europe.

 

 

When Russia received a waiver from SWIFT sanctions in 2014, the country quickly developed its own communications network to serve the local payment system. Russia has shifted its foreign reserve composition away from the dollar and increased links with the Chinese Cross-Border Interbank Payment System (CIPS)

 

 

HAS THIS FORM OF PUNISHMENT BEEN USED BEFORE, AND IF SO, HOW EFFECTIVE WAS IT?
North Korea and Iran have been cut off from SWIFT for a long time. Although this embargo has contributed to the withering of these economies, it has not resulted in regime change or conflict resolution, as has any other economic sanction. In 2019, a similar effort was launched against Venezuela, but no significant changes were made to the situation on the ground. The severe consequences of a SWIFT prohibition are only likely to be short. When Russia received a waiver from SWIFT sanctions in 2014, the country quickly developed its own communications network to serve the local payment system. Russia has shifted its foreign reserve composition away from the dollar and increased links with the Chinese Cross-Border Interbank Payment System (CIPS), which may pay international claims in yuan. As a preventive move against the growing potential of US-imposed financial sanctions, China has created its own parallel international communications system in recent years. Even the European Union had begun to establish its own financial communications system prior to the collapse of the Iran nuclear deal in order to avoid becoming entangled in the web of US-imposed sanctions on Iran.
As a result, countries adapt and develop ways to circumvent sanctions. Sanctions are more likely to be effective in diplomatic discussions as a threat. Nonetheless, the invasion’s short-term economic impact on the targeted country, as well as the readiness to incur economic sacrifices in order to show sympathy for the aggressor, raise the cost of the invasion and provide badly needed assistance to the aggressor’s victims.

 

IS IT POSSIBLE TO GET AROUND A SWIFT BAN?
VTB, a prominent Russian bank, recently stated that it may make payments using alternative methods such as phones, messaging applications, or email. China has its own CIPS system, which it hopes will become a popular alternative to SWIFT. There are also alternatives, such as cryptocurrency, and Russian banks will be able to channel funds through countries where sanctions have not yet been applied.

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