Here’s Why Russia’s Exclusion From the SWIFT Interbank Network Is a Double-Edged Sword
This is why America will only use this weapon as a last resort.
After Russia recognized two separatist regions in eastern Ukraine on February 21, 2022, America threatened Russia with sanctions like it “has never seen before”. It was Joe Biden who used these words. However, for the time being, America has limited itself to prohibiting American companies from investing in the two new autonomous regions where Russia has sent military troops in support.
This will not frighten Vladimir Putin, who feels stronger than ever in the face of an America that he considers being in decline both internally and externally.
On the American side as well as on the European side, many voices are being raised to say that it is necessary to move up a gear before it is too late. After all, it will no longer be possible to act if Putin takes control of the whole of Ukraine. The measure most often mentioned by these people is to cut off Russia's access to the global SWIFT interbank network.
Such a measure, which would greatly slow down transactions between Russian banks and the rest of the world, would have a devastating effect on the country's economy.
The U.S. Under Secretary of State for Economic Growth, Energy and the Environment, Jose Fernandez, said on February 18:
“We are prepared to adopt sanctions that would have a high cost to the Russian economy, including its financial system, and export controls on products that are critical to the ambitions of the Kremlin and Vladimir Putin. No option is off the table.”
While cutting off SWIFT is a sanction with enormous consequences for Russia, it must be seen as a double-edged sword. This is why I believe it will only be done as a last resort.
The SWIFT interbank system secures and accelerates payment orders worldwide
To fully understand the issues with SWIFT, it is necessary to quickly review the functioning of this network. SWIFT (an acronym for Society for Worldwide Interbank Financial Telecommunication) is a cooperative company under Belgian law, based in La Hulpe (Belgium), which manages the bulk of payment orders for international transactions.
The SWIFT network includes more than 11,600 financial and banking organizations in over 200 countries. Created in 1973, it automates the writing and sending of payment orders between banks around the world. It is therefore a secure electronic messaging system that allows banking transactions between countries.
Let's take the example of an American company that buys $10,000 worth of integrated circuits from a Chinese company. The buying company's U.S. bank debits its account, then sends a SWIFT message to the selling company's Chinese bank to credit its account with $10,000. The Chinese company can choose to receive the payment in U.S. dollars or convert it to yuan, the Chinese currency.
The SWIFT message allows transactions to be carried out securely and quickly, but does not execute them directly: ultimately, SWIFT's client banks operate the exchanges themselves when they receive or send payment orders.
In 2021, the SWIFT network transmitted approximately 10.6 billion payment orders worldwide, with a peak of more than 50 million per day in late November 2021.
Disconnecting Russia would require the agreement of more than half of the SWIFT system administrators
Disconnecting Russia from the SWIFT network is something technically possible. It is an option that the American administration has already studied in case of a possible Russian military aggression on the Ukrainian territory. However, for this to be possible, America will first have to reach an agreement with the other administrators of SWIFT.
The peculiarity of the SWIFT governance is that the small countries are represented as well as large ones. Thus, a country cannot have more than two directors out of the 25, even if it represents a significant share of messaging flows. A possible disconnection of Russian banks would therefore be conditional on the approval of at least 13 of the 25 directors of the company.
However, one can imagine that America and its European partners would manage to reach this minimum of 13 approvals.
The consequences would be devastating and immediate for Russia, but also important for Europe
As a note from the think tank Carnegie Moscow Center points out, Russia's exclusion from the Swift network would be “devastating, especially in the short term”. An immediate economic impact that can be considered a nuclear weapon in the economic and financial field. To use such a powerful weapon requires exceptionally serious motives. This will only happen if Russia completely invades Ukraine, kills people, and sets out to occupy the entire country.
Cutting off Russian access to SWIFT would also have serious effects on Europe. Banking institutions wishing to carry out transactions would be forced to resort to manual methods of processing transactions, find their communication channels (electronic messaging or encrypted software), which would slow down the time of exchanges. The Carnegie Moscow Center recalls that during the previous similar threat in 2014, forecasts envisaged a drop in Russian GDP by five points.
In 2020, Russia's trade balance was in surplus by $92 billion and accounted for 6.2% of its GDP. Of Russia's $331.7 billion in exports, almost half (49.6%) is hydrocarbons and refined oil products.
Russian gas is a major geopolitical issue behind this threat, which would have serious consequences for the Kremlin, since Russian hydrocarbon exports account for nearly half of its trade with the European Union, but would also penalize the EU, which would probably see energy prices rise at a time when they are already at their highest.
Finally, this sanction would place the interests of a leading European country like France in a delicate position. France is the second-largest foreign investor and the largest foreign employer in Russia, with 160,000 employees. The four major French banks are present there, and Société Générale even owns Rosbank, one of the main Russian private banks.
A decision that could weaken SWIFT in the long term by strengthening the development of competing systems
All these consequences are devastating, even if they could be assumed. Where the double-edged sword appears is that it may encourage the development of systems competing with SWIFT. Excluding Russia even temporarily from the SWIFT network is not necessarily the most strategic measure, because of the risk of the Kremlin increasing its independence from Western tools like SWIFT.
Following European threats after the annexation of Crimea in 2014, the Bank of Russia developed its competing system, SPFS (System for Transfer of Financial Messages). By the end of 2020, it connected 23 foreign banks to Russia in Armenia, Belarus, Germany, Kazakhstan, Kyrgyzstan, and Switzerland. Agreements are being discussed to integrate the Russian network with China's Cross-Border Inter-Bank Payments System (CIPS) and to connect the Russian SPFS system to India, Iran, and the countries of the Eurasian Economic Union.
America probably does not want to lose the economic and financial leverage it has over Russia through SWIFT.
For a cut-off of SWIFT to be effective and avoid the development of competing systems, America would have to go so far as to prohibit banks from working with their Russian counterparts. Otherwise, the banks will always find a messaging solution to agree on the transactions to be carried out.
This will be costly and slower at first, but the risk is too great for this weapon to be used immediately. So you can see why the first sanctions that have been announced are still more than gradual in the face of the scale of what Vladimir Putin has done. As powerful as it may be, the financial nuclear weapon represented by the cutting off of access to the SWIFT network will only be used as a last resort.
Some reading
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