What is SWIFT & How Will It Affect Russia?

The call to bar Russia from the SWIFT payment system is increasing in intensity as the armed conflict between Russia and Ukraine escalates.  What is SWIFT and how can it impact Russia’s economy? Let’s find out together.

To know more about the escalation between Russia and Ukraine read our article.

What is SWIFT?

• SWIFT is a global financial system created by a collective of financial institutions for smooth cross border payments. 
• SWIFT stands for Society for Worldwide Interbank Financial Telecommunication. It was established in 1973 in Belgium.
• The SWIFT system connects more than 11,000 banks and financial institutions in more than 200 countries.
• SWIFT is not a payment system or a bank itself. It is an instantaneous messaging service that notifies banks and other financial entities the exact date and time a transaction takes place. 
• SWIFT handles more than 40 million financial messages per day in the amounts of trillions of dollars.
• According to reports Russian transactions represent 1% of total SWIFT activity.

Who owns SWIFT? 

SWIFT was created by a cooperative of American and European banks whose desire was to prevent any one institution from monopolizing the financial sector.

Currently it is owned by more than 2000 banks and financial institutions.

SWIFT is supervised by the National Bank of Belgium as well as the central banks of the G10 countries such as the US Federal Reserve and the British Bank of England.

Check out our article The Russian - Ukrainian War How Will it Affect Egypt 

How does SWIFT function?

As mentioned earlier SWIFT is an instantaneous messaging service provider. It aids in making international trade safer for SWIFT members. SWIFT complies with all applicable sanction laws. For example, in 2012 as the international sanctions imposed on Iran increased they were banned from the SWIFT system. As a result, Iran lost almost half of its oil export earnings and 30% of foreign trade.

How will a SWIFT ban affect Russia?

Russian companies and banks will lose the smooth transactions notification services provided by SWIFT which will in turn affect payments for key sectors such as energy and agriculture negatively.

Banks will be forced to contact each other by phone/fax/email for each and every transaction which will cost them both time and money.

Companies and countries trading with Russia will lose money. This will affect the import/export sectors all around.

Russia is one of the major suppliers of both oil and natural gas in Europe. Finding an alternative will not be easy or cheap.

Not all western countries approve of the SWIFT ban since as mentioned earlier it will affect their own import and export sectors. 

Companies and countries in debt to Russia, and those Russia owes money to will have to find an alternative method to pay/receive their money.

A banking crisis is most likely to happen.

Russian economy could shrink by as much as 5%.

Economic reports state that the impact may be lessened if Russia cooperates with China on a larger scale.

Russia’s answer to SWIFT

In 2014 when Russia was threatened by a SWIFT ban due to their interference in the Crimean Peninsula it developed its own version of SWIFT called SPFS “System for Transfer of Financial Messages”. SPFS has struggled to establish itself internationally however and may not be able to assist Russia in recovering from the SWIFT ban. Russia was able to create and establish its own credit card system called “Mir”.

There is still some hope for Russia as American legislators do not approve of imposing a SWIFT ban on the country. President Joe Biden stated that other sanctions would be preferable as a SWIFT ban will have global repercussions. 

Many European countries are also hesitant as it will impact their own economy.