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All about SWIFT, one possible path to sanction Russia

All about SWIFT, one possible path to sanction Russia

Exclusion from the SWIFT banking network would make it difficult for Russia to trade with the rest of the world. (Photo: AFP/File/ALEXANDER NEMENOV)

As the US, the UK and the European Union impose new sanctions on Russia in response to its actions in Ukraine and consider increasing them, one idea under discussion involves cutting off access to a messaging system called SWIFT. It’s so central to the international financial system that any such talk rattles bankers and diplomats alike.

WHAT IS SWIFT?

Think of SWIFT, an acronym for Society for Worldwide Interbank Financial Telecommunication, as the Gmail of global banking. It delivers secure messages among more than 11,000 financial institutions and companies, in over 200 countries and territories. The message traffic - 42 million a day on average last year - includes orders and confirmations for payments, trades and currency exchanges. The member-owned cooperative, based just outside Brussels, was founded in 1973 to end reliance on the telex system. 

WHY IS LOSING SWIFT ACCESS SUCH A BIG DEAL

A country cut off from SWIFT can suffer 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. (Many of the banks were reconnected in 2016 after the EU took them off its sanctions list.)

When Western nations threatened Russia’s access to SWIFT in 2014, Alexei Kudrin, a one-time finance minister close to President Vladimir Putin, estimated that it could reduce Russia’s gross domestic product by 5 per cent in a year.

Cutting Russia off from SWIFT could have ramifications for other nations as well, since Russia is a key energy supplier to Europe and countries rely on the SWIFT system to pay for fuel.

WHY THE RELUCTANCE TO CUT RUSSIA OFF FROM SWIFT?

US President Joe Biden cited the lack of unity among European nations as a reason. Another is a fear among Western officials that banning countries from SWIFT would encourage other countries to develop alternative systems.

Another concern is over collateral damage. Europe uses SWIFT to send payments for Russian natural gas it needs to heat its homes and power factories, meaning a ban could threaten supplies in the midst of the winter heating period, adding to an already heightened cost of living crisis in the region.

Plus, any “legitimate company doing legitimate business with Russia” could find itself unable to collect payment if SWIFT is restricted, said Daniel Tannebaum, head of sanctions at Oliver Wyman in New York. 

IS THERE AN ALTERNATIVE TO SWIFT?

Not really, or at least not yet. Since 2014, the Bank of Russia has run its own financial messaging system for Russian and foreign banks. But that one has only about 400 users.

The People’s Bank of China in 2021 announced a joint venture with SWIFT that was seen in some quarters as an insurance policy against being cut off from the global financial system. Digital currencies and the underlying technology have also been touted as a threat to SWIFT for several years, but they’re nowhere close to replacing it.

HOW SECURE IS THE SWIFT SYSTEM?

There have been multiple attempts to rob financial institutions through fraudulent messaging on SWIFT, some of them successful. The best known is when Bangladesh’s central bank lost US$81 million to hackers who breached it in 2016 and tricked the Federal Reserve Bank of New York into sending funds.

SWIFT emphasized that its own network hadn’t been breached, but it beefed up security in the wider industry with mandatory and advisory controls at member firms. 

WHO REGULATES SWIFT?

Since it doesn’t hold deposits, SWIFT isn’t regulated the way a bank is. It’s overseen by the National Bank of Belgium and representatives from the US Federal Reserve System, the Bank of England, the European Central Bank, the Bank of Japan and other major central banks.

Generally speaking, SWIFT would cut off access only if the European Union passed sanctions against a particular entity or country. SWIFT suspended certain Iranian lenders in 2018 after the US imposed a new round of sanctions, although it says that was “an isolated event” that was “taken in the interest of the stability and integrity of the wider global financial system.”

Source: Bloomberg/fh

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