Why Swift ban is such a potent sanction on Russia
Excluding Russia from global banking’s Swift messaging system was always seen as an extreme option to punish President Vladimir Putin for his actions in Ukraine. Some were reluctant to impose it; France’s finance minister called it “the financial nuclear weapon.” Yet on Feb 26, the US and its allies put aside fears over the potential hit to their own economies and moved to shut a group of Russian lenders out of the network. That left bankers and diplomats racing to grasp the repercussions for everything from energy exports to debt and currency markets.
1. What is Swift?
Swift — the Society for Worldwide Interbank Financial Telecommunication — is the Gmail of global banking. It delivers secure messages among more than 11,000 financial institutions and companies in over 200 countries and territories, handling trillions of dollars in transactions. The message traffic — 42 million a day on average last year — includes orders and confirmations for payments, trades and currency exchanges. A member-owned cooperative, based just outside Brussels, Swift was founded in 1973 to end reliance on the telex system.
2. Why is losing Swift access such a big deal?
A country cut off from Swift can suffer significant economic pain. That was what happened to Iran in 2012 when its banks lost access as part of European Union sanctions targeting the country’s nuclear program and its sources of finance. (Many of the banks were reconnected in 2016 after the EU took them off its sanctions list) When Western nations threatened Russia’s access to Swift in 2014, Alexei Kudrin, a onetime finance minister close to Putin, estimated that it could reduce Russia’s gross domestic product by 5% in a year.
3. Who’s been banned?
The US was working with European Union partners to finalise the list of Russian banks to be cut off from Swift. It was set to include seven lenders including state-controlled VTB, Bank Rossiya and Bank Otkritie, according to an EU draft. Some of those targeted already faced other sanctions. Sberbank and Gazprombank were excluded from the proposal, underscoring concern over the potential economic fallout for Europe. Sberbank has twice as many assets as any other bank in Russia and Gazprombank is a key bank for Russia’s energy conglomerates.
4. Why the initial reluctance to impose a Swift ban?
US President Joe Biden cited the lack of unity among European nations as a reason. Another was a fear among Western officials that banning countries from Swift would encourage the development of alternative systems. Plus, there is the likelihood of collateral damage. The Swift move could result in missed payments and giant overdrafts within the international banking system, said Credit Suisse strategist Zoltan Pozsar, who compared the situation to the 2008 failure of Lehman Brothers and the pandemic-related market slump of March 2020. Europe uses Swift to send payments for Russian natural gas it needs to heat its homes and power factories, meaning a ban could threaten supplies during the winter heating period, adding to an already heightened cost of living crisis in the region. A German government spokeswoman said purchases of Russian gas were still possible using Swift, even after the ban.
5. Is there an alternative to Swift?
Not really or at least not yet. Since 2014, the Bank of Russia has run its own financial messaging system for Russian and foreign banks. But that one has only about 400 users. The People’s Bank of China in 2021 announced a joint venture with Swift that was seen in some quarters as an insurance policy against being cut off from the global financial system. Digital currencies and the underlying technology have also been touted as a threat to Swift for several years, but they are nowhere close to replacing it.
6. How secure is the Swift system?
There have been multiple attempts to rob financial institutions through fraudulent messaging on Swift, some of them successful. Bangladesh’s central bank lost US$81 million to hackers who breached it in 2016 and tricked the Federal Reserve Bank of New York into sending funds. Swift emphasised that its own network had not been breached but it beefed up security in the wider industry with mandatory and advisory controls at member firms.
7. Who regulates Swift?
Since it does not hold deposits, Swift is not regulated the way a bank is. It is overseen by the National Bank of Belgium and representatives from the US Federal Reserve System, the Bank of England, the European Central Bank, the Bank of Japan and other major central banks. Generally speaking, Swift would cut off access only if the European Union passed sanctions against a particular entity or country. Swift suspended certain Iranian lenders in 2018 after the US imposed a new round of sanctions, although it says that was “an isolated event” that was “taken in the interest of the stability and integrity of the wider global financial system”.