What is SWIFT and why does it matter in the Russia-Ukraine war?

Russia has been partially cut off from the SWIFT system for transferring money

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In the wake of Russia’s invasion of Ukraine, global leaders have been imposing sanctions on the country’s banks, its president, Vladimir Putin, and some of its wealthy oligarchs.


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The leaders of the European Commission, France, Germany, Italy, the United Kingdom, Canada and the United States announced in a joint statement on February 26 that they condemned the “Putin Choice War” and banned selected Russian banks from the SWIFT messaging system. The ban notably excludes Russian oil and gas exports.

The ban on SWIFT has been called a “nuclear option” in the international community’s confrontation with Putin.

But what is SWIFT? For those who are just hearing this for the first time, here’s what you should know about this global financial network, as well as the impact the ban could have on Russia and the world.

What is SWIFT?

SWIFT, or Society for Worldwide Interbank Financial Telecommunications, is a high-security messaging network for banks and financial institutions. Based in Belgium, it is sometimes described as the “Gmail of the global bank”.


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It was created in 1973, replacing the previous telex system for cross-border payments. The idea was to create a “common language” for banks around the world to move money and carry out other transactions.

It has since grown to serve more than 11,000 financial institutions in 200 countries and territories. In 2021, the average was 42 million messages per day.

Why is it important?

While the network does not hold any assets or actually move money, access to SWIFT means funds can be exchanged between member institutions easily and securely. There are other payment systems, but SWIFT dominates the market.

In addition to payment instruction messages, it also transfers messages between institutions related to everything from precious metals trading to travelers checks. Their latest report shows that categories other than direct payments now account for well over half of their transactions.


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What does this mean for Russia?

The exclusion of Russian institutions from SWIFT will certainly affect its economy. How much is hard to say, but former finance minister Alexei Kudrin estimated in 2014 that the country’s GDP could shrink by 5% under the SWIFT ban.

This is probably a low estimate of the damage that would be done if Russia were completely cut off from the SWIFT system.

When Iran was blocked from SWIFT in 2012, it had a huge economic impact on the country. Oil exports have dropped sharply from more than 2.5 million barrels a day to just one million barrels in two years, and the country has lost about 30% of its foreign trade.

The impact of these sanctions is believed to be a key part of what brought Iran to the table in the 2015 Iranian nuclear deal.


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alternate paths

Analysts have also speculated that Russia may partner with China, which uses its own Cross-Border Interbank Payment System, or CIPS. Or that you can count on cryptocurrencies or a digital ruble.

In January, Nikolai Zhuravlev, vice president of the upper house of the Russian parliament, noted that Russia has alternatives to the SWIFT system. After the threat of sanctions in 2014, it switched to using its own financial messaging system, SPFS, or Financial Message Transfer System.

While SPFS will cushion the blow from being hacked, it doesn’t have nearly the number of members of SWIFT. According to Russian news agency TASS, SPFS had 400 members as of February 2021, including institutions from Armenia, Belarus, Germany, Kazakhstan, Kyrgyzstan and Switzerland.


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Russia’s alternatives are not ideal, says Maria Shagina, a postdoctoral fellow at the Center for Eastern European Studies (CEES) at the University of Zurich. Shagina wrote an article last year analyzing the impacts that removing Russia from SWIFT could have.

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“Russia relies heavily on SWIFT for its multi-billion US dollar-denominated hydrocarbon exports,” she wrote. “The cut would end all international transactions, trigger currency volatility and cause large capital outflows.”


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Shagina noted that only 20% of domestic transfers from Russia are made through SPFS. And since it’s still limited to weekday work hours and transfer sizes are limited, it’s still not a suitable alternative for most potential users.

However, the SWIFT ban currently only includes seven Russian banks and excludes its biggest lender, Sverbank and Gazprombank, which are the country’s main channels for payment for Russian oil and gas.

But that volatility that Shagina alludes to may still be in the cards, as the US and other countries appear to be considering sanctions that would target their energy exports.

What happens next?

If member countries ban Russian banks linked to oil and gas, it will leave several European countries scrambling to find new energy sources.


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Russia is the world’s third largest oil producer and countries like Finland, Bulgaria, Germany and Italy rely heavily on imported Russian oil and gas for heating and transport fuel.

Financially, the countries that lose the most, according to Shagina’s newspaper, are the US and Germany, as they carry out more transactions with Russia through SWIFT.

In light of this, it seems certain that Russia – and, inevitably, some of its trading partners – will face a tough journey following the SWIFT ban.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.



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