I don’t usually publish articles like this, but the purpose of this article can be clearly seen and understood at the end of this article. So please don’t just close it, read till the end.
On the 24th of February, president Biden of the United States announced a long set of sanctions or economic penalties as are known to be imposed on Russia. In an attempt to deter them from furthering their attack on Ukraine. These sanctions include;
- Limiting their ability to transact in dollars, pounds, euros, and yen.
- Cutting off the largest Russian bank from the US financial system
- Freezing assets in the United States
One thing was left out of this list which left many people wondering which was, why wasn’t Russia removed from SWIFT? Although, the EU, UK, Canada, and the US, have pledged to remove Russia from the interbank messaging system SWIFT.
However, the information presented in this article is still very relevant and basically outlines what’s going to happen or what might happen when Russia gets removed from SWIFT. Let’s get started.
Russia’s Ban From SWIFT
In this article we’re going to;
- Define what SWIFT is
- Discuss the reasons why Russia has not been cut off from SWIFT
- Discuss what Russia’s ban means for them and the rest of the world economically
- Additionally, we’re also going to discuss what might happen if Russia does get removed from SWIFT. So if for some reason in the future and Russia has been since removed from SWIFT, this article will still be relevant and we’ll talk about what it all means.
What Is SWIFT
SWIFT stands for Society for worldwide interbank financial telecommunication. That last word telecommunication is key. SWIFT actually isn’t a system where money gets transferred, it’s basically just a messaging system. Established in 1973, it connects more than 11,000 financial institutions in over more than 200 countries.
When one bank wants to send money to another bank internationally, they’re going to use SWIFT to communicate the payment information from one bank account to another.
What SWIFT Does
SWIFT doesn’t actually move your funds from one bank to another, but it is an essential “plumbing” or a backbone of the international financial system to get your funds transferred across borders. A lot of countries use SWIFT to trade things internationally such as importing and exporting commodities, which will be a key piece of information here later in this article.
SWIFT has become the international industry standard for banks, and it was founded in Belgium. Since it is headquartered in Belgium, it needs to follow Belgium’s law which requires it to follow EU regulations. The EU is partially the reason why SWIFT was not cut off from Russia already.
No Concrete Agreement Yet
When Biden was asked by the press why SWIFT was in the sanctions he said “…the sanctions that we’ve proposed on all their banks of equal consequences may be more consequences than SWIFT number one. Number two, there’s always an option but right now that’s not the position that the rest of Europe wishes to take…” source, the whitehouse.gov. You’ll notice that he said “that’s not the position that the rest of Europe wishes to take”
According to readers, “German chancellor Olaf Schulz said Germany which is a key trading partner of Russia opposed cutting off Russia’s access to the payment system at this point”. That’s while “the foreign ministers of the Baltic states once ruled from Moscow but now members of NATO and EU called on Thursday to stop Russia’s access to SWIFT” source, Reuter.com
You can see that there’s a disagreement within the EU itself about cutting Russia from SWIFT. In fact, this situation is ongoing with the latest reports that Germany was more accepting and open to the idea of the disconnection of Russia from the SWIFT system.
Why Germany Is Hesitating
The initial hesitation from Germany is stemmed from their reliance on Russian gas. Removing Russia from SWIFT means that it’s going to be impossible for funds to flow between the countries. If payments can’t go through for the export of gas, and you’re a country heavily reliant on Russian gas, well you can see where the problem lies.
By removing Russia from SWIFT the collateral damage to EU countries that are heavily reliant on Russian gas and oil is going to be devastating. The chart below shows that a great percentage of the Eu’s gas comes from Russia and many countries are dependent on those pipelines.
What Happens If Gas Supply In Europe Is Reduced
By reducing the gas supply in Europe, prices are going to climb internationally across the global market as well. If Russia was cut off from SWIFT, Russia could theoretically sell its gas to other countries that are willing to deal with conversant payment methods in order to get it. This might not be a solution though.
Another issue is wheat. Ukraine and Russia combined for 25% of global wheat exports, and other commodities will be affected as well. Corn, palladium, platinum, and aluminum will also be affected. The removal of Russia from SWIFT is going to that more than just oil is affected.
Globally this could also mean higher prices for your food as well.
What Others Are Saying
“Other EU members are reluctant to make such move because while it would hit Russian banks hard, it’ll make it tough for European creditors to get their money back and Russia has in any case been building up an alternative payment system” source, Reuters
Let’s discuss both of these.
It was hard to find a number on exactly how much Russia owed to European countries, but what I found was that the total external debt is around $478 billion according to trading economics. According to fortune.com, they owe $121 billion to international banks and this is a problem.
European banks also have money owed to them by Russian civilians and EU citizens have money in Russian banks as well, so the problem is going in many different directions.
Alternative Payment System
The other item mentioned in that quote is the use of an alternative payment system. About eight years ago, Russia developed what’s called SPFS which is a SWIFT alternative system for Russian banks only. The system was started as a result of a threat to disconnect Russia from the SWIFT system back in 2014 by the United States.
Compared to SWIFT, the Russian SPFS faces a number of challenges, especially higher transaction costs, and it mostly works only within Russia. Since the majority of banks that use it are Russian, this alternative payment system will not really be able to communicate with the outside world, and therefore it’s a legitimate argument against cutting off SWIFT. According to an expert on Russian and Russian-Chinese relations, so far only a dozen foreign banks are using SPFS including one Chinese bank, so there’s not that much of there either.
So far in this article, we’ve outlined the arguments for removing Russia from SWIFT the main points being:
- Global Economic Downside due to gas and oil export, and commodities.
2. Russia Creditors May Not Be Paid. Russia owes money to EU creditors.
3. Russia Have An Alternative Payment System
What Will Happen If Russia Is Banned From SWIFT
If Russia is banned from SWIFT, it’s one of the most severe sanctions that you can impose on a country, and some sources have even called that a financial nuclear option. But, this still wouldn’t prevent Russia from doing international or cross-border transactions.
According to Adam Smith, yes his name is actually Adam Smith, he’s an international lawyer who focuses on international trade and worked with Obama “SWIFT is a communications platform, not a financial payment system….. 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 the bank to bank transactions” source, cbs news.
While cutting off Russia from SWIFT is bad news for Russia and possibly the rest of the world, it’ll just make transactions a lot slower and cumbersome for them but not impossible. If Russia is banned from SWIFT, we have one president from 10 years ago that we can examine in order to view the potential effects that it might have. That was a disconnection of SWIFT which happened to Iran back in 2012. It was back then that the west hopes that disconnecting Iran from SWIFT will pressure Iran into curbing its nuclear activities at the time.
You can see from the above chart how in 2012 Iran’s oil export fell dramatically when they were disconnected from SWIFT. From 2.5 million barrels per day to just over 1 million dollars per day in 2014, only recovering when sanctions were lifted in 2016.
Iran’s other exports and imports were affected as well, and the 2012 SWIFT ban was seen as a key piece to bringing Iran to the negotiating table, which led to the 2015 Iran nuclear deal.
If Russia is cut off from SWIFT, it’s not a guarantee that any behavior will be curbed. Some will argue that the current sanctions including limiting Russia’s ability to transact in dollars is far more effective because it essentially does the same thing if not exceed SWIFT in its impact. We actually don’t know what’s going to happen and it’s an ongoing situation, and am going to continue to monitor the situation and probably write articles about it.
Like I Said Earlier
I don’t normally write articles like this to publish but, AM DOING THIS FOR THE PURPOSE OF SUPPORTING THE UKRAINIANS.
My thoughts and heart are with the Ukrainian people, I know it’s a really tough situation right now, and am hoping for a resolution soon.
It’ll mean a lot if you guys share this article with friends or anyone you know to basically what SWIFT is and render a helping hand also. Bontinel