As the western powers begin to impose unprecedented sanctions on Russia, there's one measure in particular that appears to strike fear at the heart of the Kremlin; cutting the country off from the global banking system. This would mean removing Russia's access to the Belgium-based Society for Worldwide Interbank Financial Communications (SWIFT).
EJ Biz explains what is SWIFT and why it is the economic 'nuclear option' UK & US are lining up.
It is an electronic payment messaging system used by banks and financial institutions worldwide. Think of SWIFT as the central nervous system of international financial transactions. The messaging platform enables financial institutions to send, receive and track information about financial transactions in a secure and standardised way that facilitates the smooth flow of funds across borders. Considered the gold standard for reliability and security in financial transactions, SWIFT is used by over 11,000 institutions across 200 countries.
Calls to exclude Russia from SWIFT are not new. In August 2014, the UK appealed to European leaders to consider such an option. Alexei Kudrin, Russia’s former finance minister, then forecast that such a move could cause Russia’s GDP to shrink by 5 percent. Ultimately, the pressure campaign was dropped. Cutting Russia off from SWIFT was considered to be a major escalation, or, as then prime minister Dmitry Medvedev put it, tantamount to “a declaration of war.”
Russia is heavily reliant on SWIFT due to its multibillion exports of hydrocarbons denominated in U.S. dollars. Deja vu of Iran serving as a cautionary tale: after Iranian banks were disconnected from SWIFT, the country lost almost half of its oil export revenues and 30% of foreign trade.
The cutoff would terminate all international transactions, trigger currency volatility also international card systems like Visa and Mastercard stop operations.
Russia has taken steps in recent years to blunt the trauma should it be removed from SWIFT after the threat in 2014. The Kremlin established its own payment system, SPFS but it is limited to domestic transfers and only on weekdays.
But as the sanction is indeed imposed onlookers await to see the response, does Russia move to Chinese Cross-Border Interbank Payment System (CIPS) or does it do u-turn and take to the crypto world.
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