What It Means to Cut Russia Off from SWIFT as an Economic Sanction and Why It Is Not So Simple

SWIFT is a commercial organization and as early as 2014 said it did not want to be an "instrument of economic sanctions."

Amid global concern over a possible invasion of Ukraine by Russian troops, proposals are increasingly surfacing to cut Russia off from the international electronic payment messaging system SWIFT as an irreparable economic sanction.

Such a step threatens losses for the Russian economy, and officials even compare it to a declaration of war. However, in reality it is very difficult to implement, and it would have almost no effect on Russian citizens.

Together with BBC Ukraine, we look into how the system is structured, the company's own position, what disconnecting Russia from it would threaten, and how this is possible at all.

What SWIFT is and how it resembles messaging apps

SWIFT is essentially a messenger in which financiers around the world exchange payment orders, confirmations of agreements and other financial documentation.

It is not a payment system, but it is the main and only universal channel for transmitting instructions to transfer money and other assets between 11,000 financial and non-financial organizations in almost every country in the world. Over 5 billion such messages are sent through SWIFT each year.

In some countries, from the United States to Russia, there are their own internal communication systems between banks, but even there many choose SWIFT because it is more convenient, and all payment instructions in foreign currency are still sent through this system anyway.

But being cut off from it does not eliminate other communication channels. After all, SWIFT replaced the telephone, pneumatic post and telex in 1973, and since then the world has gone through several revolutions in telecommunications and encryption, from fax and email to blockchain.

Why disconnecting Russia from SWIFT at the request of the US is difficult and unlikely to be possible

First, SWIFT is an independent private cooperative owned by 3.5 thousand of its members, banks and financial organizations. It is based in Brussels, and its oversight is carried out by the central banks of the 10 largest Western economies. It is not subject to the US and strongly resists being used as an instrument of sanctions.

The US has succeeded in doing this only a few times. Against Iran and North Korea, but in both cases these countries were subject to sanctions from the international community and, most importantly, the European Union.

As a Belgian organization, SWIFT was forced to comply and disconnect banks against which the EU imposed sanctions.

However, when it came to Russia after the annexation of Crimea in 2014, SWIFT made an uncharacteristic move and issued a statement demanding that pressure on it stop, and promised to ignore any individual calls to disconnect banks.

SWIFT consistently emphasizes that it only provides communication channels and does not intend to be an instrument of sanctions. The only way to force it to disconnect a bank is a decision of the European Parliament approved by the Belgian authorities, not demands from the US or other countries.

What can the US do in this situation, bypassing the EU? Threaten sanctions against SWIFT itself. But this would already be a rift between allies.

Second, disconnecting Russia is difficult also because politically it is a double-edged sword. Such a step carries serious risks for the West as well. 

The point is that American intelligence services have access to SWIFT payments, and a complete shift of Russia's international banking settlements from the Western electronic system to an alternative one would complicate life for US intelligence.

But that is not all. There are also global consequences.

The West has long created institutions of globalization such as the IMF and the World Bank, and using one of the tools that unites the world for political purposes would lead to fragmentation and a slowdown on the path the world has chosen under Western leadership since World War II.

The first signs are already evident: Russia and China are reducing the share of the dollar in settlements and reserves and have more than once discussed creating their own interbank payment system.

What disconnecting from SWIFT would threaten Russia with

Disconnecting Russia from SWIFT threatens rising costs, financial and, most importantly, reputational.

Former Russian Finance Minister Alexei Kudrin said in 2014 that losing access to SWIFT would inflict damage on the country equal to 5% of its annual economic output. True, since then Russia has prepared for such a development, so the blow will be softened, but it would still send business and banks into a knockdown. For two main reasons.

Since all three SWIFT data centers are located outside Russia (in the United States, the Netherlands and Switzerland), all messages from Russian banks go abroad, even if the SWIFT message is addressed to a Russian bank.

Therefore, being cut off from SWIFT resembles a situation in which a bank is disconnected from the international telephone line or its internet cable is cut, through which it transfers money, precious metals and securities from accounts to other banks. Of course, one could send letters or use fax, but this is slow and expensive.

This is the first problem. Returning banking services to the stone age, price increases and a sharp slowdown of financial flows in an era of global trade and international technological and commercial chains would deal a serious blow to business.

The second problem is reputational. Sanctions that forced SWIFT to disconnect banks have so far been imposed only against Iran and North Korea. If Russia ends up in the company of the "fierce outcasts" of the international community, many Western banks and companies would themselves refuse to work in the country and cooperate with Russian business and the state.

Will this affect citizens

After the occupation of Crimea in 2014, when Russia came under sanctions and faced the threat of being disconnected from SWIFT, the Russian Central Bank created its own analogue for exchanging payment orders between Russian banks. Some use it, but while SWIFT works, most choose to stay on the unified and familiar system. However, if necessary, they will switch to their own.

Since Russians settle with each other in rubles, sending instructions about their operations to correspondent banks abroad is not required, so disconnecting from SWIFT will not cause delays in domestic ruble payments.

A similar situation has developed with payment cards. The international leaders Visa and MasterCard agreed back in 2015 to move processing and clearing of domestic Russian payments to Russia. But even in an emergency, the country has its own national payment system, Mir.

As for foreign currency accounts, disconnecting a bank from SWIFT will not force depositors to convert all their savings into rubles. Since SWIFT only forwards instructions to correspondent banks, where Russian banks hold the relevant accounts in dollars, euros, pounds or yuan. That is, technically, disconnection from SWIFT only complicates sending instructions to transfer this money to other accounts, but does not force anyone to give them up.

If the US and the European Union want to restrict Russians' access to dollars and euros, they have a more serious tool for this: direct sanctions against Russian banks and companies, which would deprive them of the ability to open correspondent accounts in Western banks and conduct currency transactions.

So far they apply this very selectively, against those the US considers close to the Kremlin, such as Bank Rossiya. Accounts, deposits and settlements in rubles do not depend on international systems at all, whether SWIFT, TARGET2 or Facebook.

Countries are not connected to the SWIFT system as a whole; each bank is connected individually. Therefore a partial scenario is also possible, in which some Russian banks would keep access to the system even if state banks and state companies were disconnected from it.