With the rapid escalation of Russia’s invasion of Ukraine, a large coalition of states, including the EU, U.S., Canada, and the UK, among others, agreed on February 26th, 2022, to ban select Russian banks from the Society for Worldwide Interbank Financial Telecommunications (SWIFT) international payment messaging system. The move was the latest in a series of severe sanctions aimed at economically isolating Russia and crippling the Russian financial system in order to pressure the Putin regime to end its military operations in Ukraine.
Seven Russian banks were removed from SWIFT, effectively denying them access to international markets. However, the list of those targeted did not include Sberbank or Gazprombank, two of Russia’s largest banks by assets. The decision to impose a selective ban is primarily due to Europe’s continued reliance on Russia for energy, and concerns that removing all Russian banks would create further turmoil in global energy markets. Removing the selected Russian banks from SWIFT is already having a discernible negative impact on Russia’s economy, but determining the long-term impact is more complicated. Russia is intricately connected to the global economy, holds large quantities of critical resources, and has been strategically preparing to weather the long-term impacts of sanctions and a removal from SWIFT since 2014, when Putin annexed Crimea.
The global role of SWIFT, the implications of Russia’s removal, and the potential long-term impacts it will have on the global economy are broken down below.
Understanding how the SWIFT system facilitates global financial transactions
A consortium of U.S. and European banks created the SWIFT system in 1973 to facilitate the exchange of interbank messages containing the secure payment and transfer information for settling international transactions. Today, SWIFT is the most widely used interbank messaging system in the world, with over 11,000 member banks and financial institutions in over 200 countries and territories. Based in Belgium, SWIFT is jointly owned by more than 2,000 banks and financial institutions and is overseen by the National Bank of Belgium, in partnership other major central banks, including the U.S. Federal Reserve and the Bank of England. In 2021, the SWIFT platform processed more than 10 billion messages and facilitated trillions of dollars in cross-border payments. Roughly one percent of these payment messages were linked to Russia.
Critically, SWIFT does not actually move or hold money or securities, nor does it function as a clearinghouse for settling transactions between banks. SWIFT’s main function is to enable banks to communicate transaction information, thereby facilitating payments for imports and exports. Although several Russian banks are now cut off from SWIFT, they can still execute international transactions with other banks. However, in lieu of SWIFT, they must use slower and less-secure methods of interbank communication, such as the outdated telex telegram network or phone calls and email.