What is Swift and how is it run?

The Society for Worldwide Interbank Financial Telecommunication (Swift) is a service that facilitates secure messaging between banks and other financial institutions. Swift states that this enables financial institutions to perform transactions such as payments and settling trades between themselves. However, it is not, in itself, a payments or settlement system.

Swift is used by more than 11,000 institutions in more than 200 countries and territories around the world. Swift said that in 2021, it recorded an average of 42 million messages per day.

The organisation is a cooperative society under Belgian law and its headquarters are in La Hulpe, outside Brussels. As a cooperative, it is owned by its members. Nations are entitled to nominate directors to its board according to a formula based on their usage of the system. The board delegates day-to-day management of the company to an executive team.

What will be the effect of banning Russia?

Most sources agree that the immediate effect of banning Russian institutions from Swift will be to make cross-border payments involving Russia much more difficult. For example, the Financial Times (FT) argued that such payments would become “fiddly, slow and insecure”. However, commentators differ on the precise implications for Russia and other nations, while some have argued that the effects are highly uncertain.

Impact on Russia

Making international payments more difficult would affect Russia’s economy, for example by impacting receipts from its exports of gas and oil to Europe.

Investor and commentator Johannes Borgen has estimated that Russian members represent 1.5% of all Swift flows, and that they sent or received payment messages relating to financial transactions amounting to around $800bn per year. Writing for Bloomberg, Javier Blas estimated that $700m of oil, gas and other commodities were purchased in the 24 hours after the Russian decrees on Lugansk and Donetsk on 21 February 2022.

Academic Maria Shagina has argued that disruption to international transactions would trigger volatility in the value of the rouble and cause “massive capital outflows” from Russia. She referenced estimates made in 2014 that banning Russia from Swift could cause Russia’s GDP to fall by 5%. The UK had called for this measure in 2014 following Russia’s occupation of Crimea. The former Russian Prime Minister, Dmitry Medvedev, was reported as saying that the move would have been “a declaration of war”.

Impact elsewhere

The measures would also have implications for western countries. For example, Reuters reported that European banks were concerned that “billions of dollars” of outstanding loans in Russia would not be repaid. A separate Reuters article suggested that Italian, French and Austrian banks were most exposed to Russia. It reported that one German lender described the move as a “catastrophe” and a “sort of atomic bomb”.

The FT said that if payments to Russia for oil and gas were affected this could affect supplies to the west. This could lead to higher energy prices. Indeed, prices for oil and gas have already risen since the start of the Russian conflict with Ukraine. In particular, the FT attributed a “spike” in the gas price to fears that Russia could respond to sanctions by withholding exports, which the FT said are a third of Europe’s gas needs.

Equally, payments for exports from European countries to Russia would be affected. This could have adverse impacts on western firms exporting to Russia.

In a 2014 article commenting on the Crimea debate, the FT said that one disadvantage to banning Russia from Swift would be to make it harder for western governments to monitor how Russian people and institutions moved their money around.

Uncertainty over the impact

Other sources have stressed the uncertainty around the possible impact of the measure. For example, the research director for the European Council on Foreign Relations, Jeremy Shapiro, argued that we understand “little” about what effect the decision would have. He said whether it would have the “desired” political and economic effect on Russia, or would rebound to impact the west, was a “fraught and technically difficult question to answer”.

What steps have been taken so far?

Ukraine called for Russia to be banned from Swift on 24 February 2022, shortly after the Russian President, Vladimir Putin, announced a military operation in Ukraine. On the same day, the UK Prime Minister, Boris Johnson, said that the UK was “raising the issue and trying to make progress with our friends but, for obvious reasons, it has to be done in unison”. On 25 February 2022, the Minister for the Armed Forces, James Heappey, said that the Government was “keen” that Russia should be removed from the system, as it “feels like a sanction that Russia would properly sit up and take notice of”. In the House of Commons debate on 24 February 2022, both the leader of the opposition, Keir Starmer, and the leader of the Scottish National Party at Westminster, Ian Blackford, supported a ban.

Initially, reports suggested that other countries were divided on the question. For example, the Guardian reported that at a meeting of the leaders of the G7 group of nations on 24 February 2022, only Canada supported the UK’s call for a ban. The article stated that other EU countries, such as the Netherlands, Germany, Cyprus and Italy were more cautious, believing either more work was needed to assess the consequences, or that the move should be retained as further “leverage”. The New York Times suggested that some countries were looking for exceptions for particular industries; for example, Italian luxury goods and the Belgian diamond trade.

However, on 26 February 2022, a joint statement by the UK, European Commission, France, Germany, Italy, Canada and the United States announced a package of sanctions including that “selected” Russian banks would be removed from Swift. At the time of writing, no further details have been released.

Alternatives to Swift

Commentators have considered whether alternatives to Swift, particularly those developed in recent years in Russia and China, could lessen the impact of a ban for Russia.

Maria Shigna reported on the Russian System for Transfer or Financial Messages (SPFS), set up following the UK calls in 2014 for Russia to be banned from Swift. She said that SPFS was mostly limited to Russian banks and that it “pales in comparison” with Swift. Academic Harley Balzer has also argued that the Russian system “remains mostly aspirational”.

Shigna also discussed the Chinese Cross-Board Interbank Payment System (CIPS). She said CIPS might be seen as more credible than SPFS because of the size of China’s economy and the greater use of its currency compared to the rouble. However, Shigna reported that CIPS remains approximately 0.3% of the size of Swift, meaning that it was unlikely to be a solution outside Eurasia. She added that less than 2% of international payments take place in Chinese renminbi, compared to 40% in US dollars.

Although alternative systems may not yet be substitutes, the FT has argued that the US might be reluctant to impose a complete ban on Russian use of Swift because it could give further impetus to the CIPS system. This, the FT said, could undermine the predominant position of the dollar in global payments in the longer term. However, it stated that “for the foreseeable future, the status quo stands and [Washington] DC has the option to use its currency to hurt Russia”.

Finally, Shigna also cast doubt on the ability to use digital currencies to sidestep sanctions. For example, she argued that a “digital rouble will be as toxic as the analogue version”, and that sanctions apply equally to digital currency transactions as to traditional ones.

How could a ban happen in practice?

Swift is obliged to comply with sanctions regimes in the jurisdictions in which it operates. Hence, in 2012, following a decision of the European Council, it disconnected certain Iranian financial institutions that had become the subject of EU sanctions.

In the absence of formal sanctions, Swift might also be persuaded to change its operational practices, including through its “oversight” regime. Oversight is provided by the central banks of the G10 countries (Belgium; Canada; France; Germany; Italy; Japan; the Netherlands; Sweden; Switzerland; the United Kingdom; and the United States). As host nation to Swift, the National Bank of Belgium (NBB) is the lead overseer.

However, this oversight is primarily concerned with the security and operational reliability of the system. Moreover, it is not formal regulation and the central banks have no direct powers to enforce decisions upon Swift. Instead, NBB stated that the main instrument of oversight is “moral suasion”. Other avenues of influence include informing Swift users and their national supervisors about oversight concerns. NBB has said this arrangement has “never proven to be a drawback”.

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Cover image by Ludvig14 on Wikipedia.