What Is SWIFT and Why Does It Matter?
President Joe Biden delivered his first State of the Union address Tuesday night. He spent roughly one quarter of the speech talking about the Russian invasion of Ukraine and reciting the robust list of economic sanctions that the United States and its allies have placed on Russia.
The big new announcement — there always are a few novel initiatives revealed in each State of the Union — was that the United States would join European countries in closing airspace to Russian aircraft. That move is significant, but it is not the most impactful move that the West has announced in the last week to isolate Russia.
In fact, over the weekend, the United States, the European Commission and other allies signaled they are working on a plan to cut off Russian banks from the Society for Worldwide Interbank Financial Telecommunication, or SWIFT.
What is SWIFT, why is cutting off Russia from the system considered the financial “nuclear option,” and what are the potential outcomes of this action?
Let’s take a look.
Twitter, or a Texting Service for Banks?
In 1973, 239 banks from 15 countries, including the United States, agreed to work together to try to tackle a problem: how to make it easier to communicate about cross-border payments. The group envisioned “creating a global financial messaging service and a common language for international financial messaging” that would allow banks to process transactions more … well, more swiftly.
SWIFT came online in 1977. Originally, it included a messaging platform, a computer system to validate and route messages, and a set of messaging standards. As Business Insider has explained, SWIFT is like an SMS text service for financial institutions. Others have likened the platform to Twitter, albeit about 40 years before Twitter became part of our daily lives.
“Banks and financial institutions use the SWIFT payment system to securely and reliably send and receive money transfer instructions,” Business Insider reported. Importantly, however, as CNN Business has noted, SWIFT does not move money around the world. It just allows financial institutions to communicate about where money is to go. CNN concluded, “With no globally accepted alternative, [SWIFT] is essential plumbing for global finance.”
There were 239 SWIFT members from 15 countries at the end of the 1970s. These institutions sent about 10 million messages over the platform that year.
SWIFT grew rapidly in the 1980s. Several central banks joined the system in 1983 and by 1989 there were banks from 79 countries within its membership. Nearly 300 million messages were sent across the platform that year. A decade later, 189 countries were represented in SWIFT and the annual number of messages sent exceeded one billion.
Forty years after its founding, SWIFT calls itself “a global financial infrastructure that spans every continent” and more than 200 countries and territories. It provides services to more than 11,000 institutions around the world. Financial institutions exchange upwards of 42 million messages a day — or 15.3 billion a year — on the platform.
SWIFT’s headquarters are in Belgium. The organization is jointly-owned by more than 2,000 banks and financial institutions. It is overseen by the central banks of Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, United Kingdom, United States, Switzerland, and Sweden, as well as the European Central Bank, and the National Bank of Belgium. (The Belgian bank is the chief overseer.)
“You can think of SWIFT as the backbone of the financial services sector,” Markos Zachariadis, a professor and chair in financial technology and information systems at the University of Manchester, told CBC. “It is the most influential infrastructure we have in financial services in terms of the volume and value of money that is being moved around the world.”
When it comes to sanctions laws, SWIFT has made it clear that it abides by them, but the organization also has said “it does not monitor or control the messages that users send through its system.” SWIFT has advised that “all decisions on the legitimacy of financial transactions under applicable regulations, such as sanctions regulations, rest with the financial institutions handling them, and their competent international and national authorities.”
SWIFT also has said it is “neutral” when it comes to expelling or excluding banks.
What Does It Mean to Cut Off Russia from SWIFT?
Business Insider answered this question succinctly: “Given how most of the world uses SWIFT for international money transfers, a ban on Russia from the payment system would mean that the banks in the country will not be able to accept funds or make payments outside of Russia.” Exporting and importing goods from Russia would be nearly impossible. In other words: this measure would force Russia to rely entirely on itself for goods, services, and income.
That broad impact is just one reason cutting off Russia from SWIFT has been called the financial “nuclear option.”
“Once Russia is unplugged from the network, its government and businesses would no longer be able to receive payment for goods and services unless Russia establishes secondary measures,” ComputerWorld has reported. That apparently could include credit card payments from consumers. ComputerWorld noted that, as soon after news broke that the United States was considering a SWIFT cut off, an MSNBC reporter tweeted that he had been asked to pay his hotel bill in Moscow immediately because the hotel was not sure credit cards would work once SWIFT sanctions kick in. Commuters faced long delays in the Moscow Metro, as Apple Pay, Google Pay, and other digital payment tools stopped working earlier this week.
According to ComputerWorld, 40 percent of Russia’s revenue from oil and gas sales go through the SWIFT network, so a cut off also would impact the government’s ability to finance its war against the Ukraine.
About 300 Russian banks and financial institutions use SWIFT, as do more than half of Russia’s other credit issuers. Only the United States has more SWIFT users. To operate without SWIFT connectivity, as the BBC has explained, “Banks would be likely to have to deal directly with one another, adding delays and extra costs.”
Experts told CNN Business that cutting off Russia from SWIFT likely would immediately cause the Russian economy to contract by about five percent.
While using this nuclear option is rare, it isn’t unprecedented. According to CNN Business, in 2012 SWIFT cut off banks in Iran after the European Union imposed sanctions on that country. Iran lost almost half of its oil export revenue and 30 percent of foreign trade as a result.
There are alternatives Russia can use to conduct cross border transactions, however. SWIFT is “a communications platform, not a financial payments system,” international lawyer Adam Smith reminded the CBC. “If you remove Russia from SWIFT, you’re removing them from a key artery of finance, but they can use pre-SWIFT tools like telephone, telex, or email to engage in bank-to-bank transactions.”
Russia’s central bank also has developed an alternative, the System for Transfer of Financial Messages (SPFS). While more than 400 institutions have enrolled in SPFS, the CBC has reported that only about a dozen actually use it. According to the Carnegie Moscow Center, only 20 percent of all domestic transfers are done through SPFS, and the system still needs to resolve technical limitations like the fact that operations are limited to weekday working hours. (SWIFT is operational all day, every day of the year.)
Will It Hurt the United States to Cut Off Russia from SWIFT?
The honest answer is yes. As with any sanction, there is collateral damage. According to the BBC, any company that is owed money by an entity or person in Russia “would have to find alternative ways to get paid.”
The Carnegie Moscow Center has said the United States and Germany have the most to lose, other than Russia, from a cut-off. Indeed, according to ABC News, “A total ban of Russia from SWIFT, which uses the dollar as the reserve currency, could weaken the dollar as a reserve currency and thus impact the global economic dominance of the United States.” ComputerWorld also has said a SWIFT cut-off “might accelerate the creation of alternatives such as trading in local currencies, using cryptocurrency, and forming new bilateral free trade agreements … China, Iran, and India, for example, already trade in local currency.” JPMorgan Chase CEO Jamie Dimon has echoed this concern, saying, "I think people are more worried about the unintended consequences — what countries you hurt, what people are going to do work-arounds, how you fix that."
A SWIFT cut-off also could impact global energy and commodity prices. Indeed, senior Russian lawmakers have promised to end shipments of oil, gas, and metals to Europe if Russia is barred from using SWIFT.
In this State of the Union address last night, President Biden said he would try to limit the impact sanctions would have on Americans. That promise will be tougher to keep with Russia cut off from SWIFT, but the Biden administration and its allies across the globe appear ready to take this step anyway in order to convince Vladimir Putin to abandon his designs on Ukraine.