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Explained: What is SWIFT and what does shutting Russia out entail?

Explained: What is SWIFT and what does shutting Russia out entail?

Explained: What is SWIFT and what does shutting Russia out entail?
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By Ritu Singh  Feb 28, 2022 2:14:16 PM IST (Updated)

The United States, Canada, the United Kingdom and European Union have decided to exclude some Russian banks from the SWIFT payment system. What does this mean and what options does Russia have?

World leaders have announced various sanctions on Russia in an attempt to dissuade it from waging a war on Ukraine. The idea is to deter Russia and increase the cost of war to an extent where it makes it unviable for Russia to continue its military operations in Ukraine any longer.

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Last week, the United States, Canada, the United Kingdom and European Union decided to exclude some Russian banks from the SWIFT payment system.
In a series of tweets on February 27, European Commission President Ursula von der Leyen said “In coordination with US, France, Germany, Italy, Canada and United Kingdown, I will now propose new measures to EU leaders to strengthen our response to Russia’s invasion of Ukraine and cripple Putin’s ability to finance his war machine… First, we commit to ensuring that a certain number of Russian banks are removed from SWIFT. It will stop them from operating worldwide and effectively block Russian exports and imports…Second, we will paralyse the assets of Russia’s central bank.   This will freeze its transactions. And it will make it impossible for the Central Bank to liquidate its assets.”

But what does SWIFT mean?
SWIFT stands for Society for Worldwide Inter-bank Financial Telecommunication. It is a platform for banks to exchange information about money transfers and acts as a carrier of the messages containing payment instructions between financial institutions.
It is a Belgium-based system, overseen by G-10 central banks as well the European Central Bank, and used by over 11,000 financial institutions and companies around the world. SWIFT handles millions of payments across more than 200 countries on a daily basis. Iran and North Korea are excluded. The message traffic -- 42 million a day on average last year -- includes orders and confirmations for payments, trades and currency exchanges.
In simple terms, it is like a messaging service that financial institutions use to transact or speak to each other. For example, if France needs to pay for a shipment of oil it got from Russia, Bank A in France will send a code via SWIFT to Bank B in Russia, and the deal is done!
What losing SWIFT access means for Russia
With world leaders deciding to remove Russia from the SWIFT system, what does that entail? It means that selected Russian banks will be disconnected from other global banks and won’t be able to transact. This means Russia will not get paid for its goods, which will disrupt government activities, regular business transactions in Russia, exports and importers. This could mean significant economic pain.
That’s what happened to Iran in 2012 when its banks lost access as part of European Union sanctions targeting the country’s nuclear program and its sources of finance.
World leaders believe this will impact Russia’s ability to finance a war.
"This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally," European Commission President Ursula von der Leyen said after a videoconference with the leaders of the US, Germany, France, Italy and Canada.
"All of these measures will significantly harm
The White House believes this will make Russia rely on the less-smooth telephone or a fax machine to make payments.
Experts believe exclusion from SWIFT will also deal a major blow to the country's crucial oil and gas sector, which relies heavily on SWIFT for the movement of funds. Russia is heavily reliant on SWIFT due to its multibillion exports of hydrocarbons denominated in U.S. dollars. . It will also restrict Russians' ability to invest or borrow overseas.
Russia’s alternative
Russia was threatened with a SWIFT expulsion before as well, in 2014 when it annexed Crimea. While the Western allies did not go ahead with the expulsion at the time, the threat did prompt Russia to develop its own, very fledgling, cross-border transfer system.
Since 2014, therefore, several countermeasures have been introduced to minimize the risks and potential economic damage to Russia.
The Russian equivalent System for Transfer of Financial Messages (SPFS) was set up by the central bank in 2014 and aims to replicate the functions of the Brussels-based interbank transfer system. According to Carnegie Moscow Center, in 2020, SPFS traffic doubled to almost 13 million messages, but the system still pales in comparison with SWIFT.
Additionally, when Russian banks were blacklisted by the United States in 2014, both Visa and MasterCard suspended the targeted banks’ services and blocked them from using their payment systems. Following this, the Russian government passed a new law introducing the National Payment Card System, later known as Mir. Fully owned by Russia’s central bank, the card system operates as a clearing centre for processing card transactions within Russia.
Since 2014, Mir’s share of operations has grown to 24 percent of all domestic card transactions, with more than 73 million cards using the Mir system issued. However, few foreign countries currently use it.
So while there may be a more immediate, short-term hit to the Russian economy, the medium-term impact of these sanctions may be limited.
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