What is SWIFT? Why this banking service could be a great weapon against Russia
As Russia invades Ukraine, talk of banning SWIFT from Russia is once again becoming a hot topic of discussion, amid Western-induced sanctions. The European Union has been reluctant to launch this Minuteman missile-like sanction against Russia. In this article, Livemint explains why SWIFT is so important for international banks. And why cutting off Russia’s access to Swift may prove a drag on Western economic interests.
For starters, this is not the first time that Russia has been threatened with exclusion from SWIFT. The United States had demanded that Russia be cut off from Swift after Moscow annexed Crimea in 2014.
What is SWIFT?
SWIFT – Society for Worldwide Interbank Financial Telecommunication – acts as the Gmail of global banking services. It was founded in 1973 to end dependence on the telex system, an international system used mainly in the past to send written messages.
SWIFT transmits secure messages to more than 11,000 financial institutions and corporations in more than 200 countries and territories.
Swift sends an average of 40 million messages per day, including orders and confirmations of payments, transactions and currency exchange.
It is a member-owned cooperative, based in Brussels, the capital of Belgium.
What’s so crucial about SWIFT?
The crucial role of SWIFT can be determined by the fact that when some Iranian banks were cut off from SWIFT in 2012, Iran’s oil exports fell sharply from over 3 million barrels per day in 2011 to around 1 million barrels per day a few years later. .
When Russia was threatened with being cut off from SWIFT in 2014, Alexei Kudrin, Russia’s former finance minister, warned of a potential GDP contraction of 5% due to such a move. Although the sanction never materialized. Russia accounted for 1.5% of total transactions on Swift in 2020.
When SWIFT comes into action?
SWIFT does not hold deposits. It is overseen by the National Bank of Belgium and representatives from the US Federal Reserve, Bank of England, European Central Bank, Bank of Japan and other major central banks.
Swift would ban countries or entities only if the EU passes a sanction. SWIFT has 40% of its payment flows in US dollars.
Is there an alternative to SWIFT?
Since 2014, Russia operates its own financial messaging system for Russian and foreign banks. It has developed an alternative messaging system called SPFS (Bank of Russia Financial Messaging System) which handles about a fifth of domestic payments. It only has 400 users. “This is a reliable and secure channel for sending electronic messages about financial transactions,” Russia’s central bank said in a note.
Why is the EU reluctant?
To put it plainly, the EU is cautious because of its dependence on Russia for oil and gas. The EU depends on Russia for around 40% of its gas needs.
Russian politicians have warned that without payment, the flow of gas and oil will quickly stop. But some European lenders are nonetheless reducing their exposure to Ukraine and Russia is threatening trade-critical credit lines.
Brent crude rose about 3% after topping $105 a barrel at one point in Thursday’s dramatic trading.
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