Current Affairs 2022 : Russia Exclusion from SWIFT and Its Impact

By Abhishek Desai

SWIFT is the globally recognized prominent banking method for overseas monetary transactions. Read here in detail about the Russia exclusion from SWIFT and its impact on Russia.

The SWIFT system, abbreviated as Society for Worldwide Interbank Financial Telecommunications, is a globally recognized prominent banking method for overseas monetary transactions. Based out of Belgium since 1973, SWIFT is jointly owned by more than 2,000 banks and numerous other stakeholders which belong to over 200 countries such as Canada, France, Italy, the USA, etc. It is, basically, an extensive messaging network that is used by banks and other similar financial institutions for sending as well as receiving information like money transfers in a quick, reliable, and accurate manner. To state its worldwide prominence, more than 11,000 global SWIFT members sent an average of 42 million messages daily through the system in the year 2021. Business intelligence, messaging, connectivity, and software solutions are some of the various services provided by SWIFT. 

The efficient functionality of the SWIFT network permits both people and businesses to conduct card and electronic payments even if the customer uses a different bank than the payee. Even though SWIFT is today an integral cog of the financial infrastructure globally, it is not a financial institution in itself. Neither does it hold nor transfer assets but plays a key role in facilitating ever-reliable and effective communication between its members. It functions by designating each of its members a special ID that not only has the bank name but also the branch, city, and the nation at large. This unique code provided has either eight or eleven characters and is known as the BIC (bank identifier code), SWIFT code, SWIFT ID, or the ISO 9362 code. And this system is mainly used by banks, asset management firms, exchanges, money brokers, corporate business houses to name a few. 

In the wake of the recent Russian invasion of Ukraine on February 24, 2022, the USA and many of its allies have replied to this invasion with a chain of financial sanctions. The EU has prohibited seven Russian banks from SWIFT, except those banks dealing with payments related to the energy sector. These banks, being targeted due to their suspected close Kremlin connections, have been given a 10-days deadline to shut down their SWIFT-based operations. The ban is also applicable to the organizations for which these seven banks control at least 50% of the ownership. These sanctions include asset freezing and forbidding some Russian banks from SWIFT. To simply put this SWIFT ban, cutting off a bank from SWIFT can be compared to cutting an individual from the internet. 

While it is assumed that the ban will adversely affect Russia, it does not seem to be the case at least for now. Since SWIFT is just a messaging network, the ban doesn’t look as threatening as initially anticipated. While the banks and other stakeholders of SWIFT can explore and implement other ways, via secured emails, for example, they might prove to be quite tedious and ineffective as compared to SWIFT. However, the union of SWIFT and the ban on the Russian central bank and its banking infrastructure handicaps Russia and its citizens. Since they cannot directly send and receive overseas payments, they cannot access their dollar assets too; thus, barred from participating in the global payments network. 
Even if the Russian government supports its banking system shortly, the need of having and maintain an independent and robust financial domain will prove to be pretty dire for an average Russian. The falling price value of the Russian currency i.e., the ruble will eventually make the imports very costly, leading to a rise in the cost of several items that a typical Russian use in his everyday life. Some of the immediate consequences also include a spike in mortgage costs, expensive consumer loans, incompetency of the Russian firms to access funding worldwide, eventually leading to an economic recession and massive job losses. This ban also directly implies that the world, at large, opposes the Russian invasion of Ukraine; prompting a de-escalation sooner than later. 

However, it is widely anticipated that Russia will try to devise an alternative network that largely reduces the reliability of SWIFT as well as ushers Russia into a new era of global monetary transactions. An era that could lead to the creation of a new technology blockchain. This SWIFT ban may also bring Russia and China closer economically and forever change the financial infrastructure worldwide. Steve Hanke, a professor of applied economics from Johns Hopkins University has reportedly stated that banning Russia from the SWIFT network won’t decide the result of the current invasion but may actually end up further boosting Russia’s commercial ties with China. Having said that, these seven banks banned from SWIFT may just be the starting point as the nations announcing the ban are keen to swell it to the other financial institutions too in the case of the Russian invasion not ceasing anytime soon. But being Russia, it will ensure there’s a way out to curtail the adverse effects of this ban and ensure its new solution works independently of the SWIFT network.

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