Russia-Ukraine crisis: What is SWIFT and how its ban will affect Russian banks?

Several western and European countries have announced a harsh set of sanctions to punish Russia for its invasion of Ukraine including blocking some banks from the SWIFT international payment system. The countries that have announced the sanctions are the United States, Germany, Britain, Europe, and Canada. This would be the most potentially crippling financial penalty yet on Russia over its unrelenting invasion of Ukraine. The SWIFT financial messaging system daily moves countless billions of dollars around more than 11,000 banks and other financial institutions around the world, according to Associated Press.

Getting the EU on board for sanctioning Russia through SWIFT had been a tough process since EU trade with Russia amounted to 80 billion euros, about 10 times as much as the United States, which had been an early proponent of such measures.

What is SWIFT

SWIFT stands for Society for Worldwide Interbank Financial Telecommunication, which is the world's international payment network used by banks and other financial systems to quickly, accurately, and securely send and receive information, such as money transfer instruction.

Where is SWIFT used?

SWIFT was founded in 1963 with 239 banks in 15 countries. By 1977, it expanded to 518 institutions in 222 countries. At present, more than 9,000 users from over 200 countries use SWIFT payment network.

Who uses SWIFT?

Initially, SWIFT founders designed the network to facilitate communication about treasury and correspondent transaction only. Now, it is expanded to--Banks, brokerage institutes and trading houses, depositories, corporate business houses, securities dealers, clearinghouses, asset management companies, foreign exchange and money brokers, and exchanges.

SWIFT transaction

For money transfers, SWIFT assigns each participating financial organization a unique code with either eight or eleven characters. The code has three interchangeable names: the bank identifier code (BIC), SWIFT code, SWIFT ID, or ISO 9362 code

How could SWIFT ban affect Russia?

Russia will not get any access to financial markets across the world. The ban would make it harder for Russian companies and individuals to pay for imports and receive cash for exports.

The US has succeeded before in persuading the Belgium-based SWIFT system to kick out a country — Iran, over its nuclear program. But kicking Russia out of SWIFT could also hurt other economies, including those of the U.S. and key ally Germany.

Allies on both sides of the Atlantic also considered the SWIFT option in 2014, when Russia invaded and annexed Ukraine’s Crimea and backed separatist forces in eastern Ukraine. Russia declared then that kicking it out of SWIFT would be equivalent to a declaration of war. The allies — criticized ever after for responding too weakly to Russia’s 2014 aggression — shelved the idea back then. Russia since then has tried to develop its own financial transfer system, with limited success.

The disconnection from SWIFT announced by the West on Saturday is partial, leaving Europe and the United States room to escalate penalties later.