Russian President Vladimir Putin started sending troops to Ukraine on Thursday for a “military operation”.
US President Joe Biden, however, said that he won’t put US boots on the ground to defend the eastern European nation. Biden has, so far, only threatened Russia with economic sanctions against launching an attack into Ukraine.
However, even that is not panning out the way Biden would have liked as the European Union (EU) is not on the same page concerning SWIFT — The Society for Worldwide Interbank Financial Telecommunication. An important facilitator of international banking, SWIFT is used by more than 11,000 financial institutions and companies in over 200 countries and territories.
What is SWIFT?
SWIFT is a Belgium-based co-operative and is overseen by multiple government banking systems — the European Central Bank, the National Bank of Belgium, and the US Federal Reserve System, among others.
Founded in 1973 to end reliance on the telex system, SWIFT is an international system used to send written messages, including orders and confirmations for payments, trades, and currency exchanges.
It’s like Gmail for banks and international financial institutions. On an average, SWIFT delivers 40 million messages per day and facilitates trillions of dollars worth of transactions.
How will Russia be impacted if removed from SWIFT?
Without being able to access SWIFT, Russian banks would have to rely on outdated tech like fax and email for cross-border transactions. This would not only impede the pace of the process but also make it more costly. As a consequence, Russia’s ability to participate in global trade would be hampered a great deal.Given the heavy reliance of global financial institutions on SWIFT, some experts have said that preventing Russia from using the network would be equivalent to a nuclear attack on the country’s economy. In a tweet, US lawmaker Senator Marsha Blackburn wrote, “We pray for the people of Ukraine as they defend against Putin’s attempt to rebuild the old Soviet Union. Biden must stand up to Putin and immediately levy severe sanctions against Russia — starting with removal from the SWIFT banking system. The USA stands with Ukraine.”
In 2014 too, when Russia annexed Crimea, the proposal of isolating Russia from the SWIFT network was floated. The then Russian finance minister had estimated that the country would suffer a potential GDP contraction of 5 percent if the US and its European allies exercise the option to cut off Russia from the SWIFT network. In 2020, Russia accounted for 1.5 percent of total transactions on SWIFT.
Will Russia be removed from SWIFT?
When asked if the proposal to remove Russia from SWIFT is being considered, Biden said, “It is always an option. But right now, that’s not the position that the rest of Europe wishes to take.”
The primary reason behind Europe’s reluctance to remove Russia from SWIFT is its reliance on Russia for oil and gas. Currently, the EU depends on Russia for around 40 percent of its gas needs. Meanwhile, Russia has also issued a warning saying the flow of gas and oil would be immediately stopped without payment.
Nonetheless, the foreign ministers of Estonia, Latvia, and Lithuania have all expressed interest in booting Russia from SWIFT. If more leaders join in, Russia’s removal from SWIFT may well become a possibility.
Russia’s counter
As is well-known, the economic sanctions put on Russia after 2014 made Putin fix the chinks in his armour. Over the last eight years, he has turned Russia into an economic fortress, and sanctions can only cause the country limited harm now.
At present, Russia has a massive amount of forex reserves and its debt-to-GDP ratio is only around 10 percent. In comparison, the US has a debt-to-GDP ratio of nearly 130 percent. Not to forget, Russia has become a big oil and gas supplier.
Among other things, Russia also came up with an alternative to SWIFT. The country developed SPFS — the financial messaging system of the Bank of Russia. Currently, SPFS has 400 users and the system handles about a fifth of domestic payments. In a statement on SPFS, Russia’s central bank said, “This is a reliable and secure channel for sending electronic messages on financial transactions.”
