In a bit to limit and put a check on Russia and its moves on Ukraine, the President of the United State, Joe Biden and the European Union have unveiled sanctions against Russia. The sanctions rolled out by the US and its allies are targeted at certain financial institutions and industries as well as individuals. The US believes that collectively the sanctions will be “more consequential” as compared to one of the strongest single options making rounds that he could seek – kicking out Russia from the SWIFT banking system.
While announcing the sanctions at a press briefing in the White House, Biden stopped short of announcing that the U.S. and its allies would impose one major financial penalty against Russia. President Biden disclosed that some of its European allies have opposed kicking Russia off SWIFT but said such action may still be reconsidered as the crisis unfolds. According to the US President “It is always an option, but right now it’s not the position that the rest of Europe wishes to take.” Financial experts and analysts have warned if that were to happen, can be characterized as a “nuclear option,” and an unprecedented move that could have large negative impacts on the global economy.
SWIFT as it’s globally known is the Society for Worldwide Interbank Financial Telecommunication is a cooperative of financial institutions, headquartered in Belgium. It was founded in 1973 under Belgian laws with 239 banks in 15 countries. By 1977, it expanded to 518 institutions in 22 countries. In 2022, there are more than 11,000 financial institutions in over 200 countries and territories. SWIFT is the financial-messaging infrastructure that links world banks and is overseen by the National Bank of Belgium in partnership with other major players such as the U.S. Federal Reserve System, the Bank of England and the European Central Bank. Etc.
According to NBC News, SWIFT isn’t a traditional bank and doesn’t get involved in the transfer of funds. Rather, it provides a secure messaging system that informs banks when transactions occur, this platform links financial institutions in various countries and territories of the world. (For instance, U.S. banks have unique SWIFT codes that customers use for incoming wire transfers in U.S. dollars.) SWIFT records an average of 42 million messages daily and over five billion financial messages a year. There was an 11 per cent increase from 2020 when Russia accounted for 1.5 per cent of transactions. SWIFT provides fast, reliable and secure support for businesses worldwide.
SWIFT assigns each financial organization a unique code that has either 8 – 11 characters. The code is interchangeably called the bank identifier code (BIC), SWIFT code, SWIFT ID, or ISO 9362 code. Other recognised global message services exist, e.g Fedwire, Ripple, and Clearing House Interbank Payments System (CHIPS), but SWIFT continues to stand out. Its success has been linked to the fact that it continually adds new message codes to makes transmitting different financial transactions seamlessly. The SWIFT system offers many services that assist businesses and individuals to complete seamless and accurate business transactions. Some of the phenomenal services offered by the global platform are business Intelligence, applications, messaging, connectivity, compliance services and software solutions. However, the core of SWIFT business resides in providing a secure, reliable, and scalable network for the smooth movement of messages. Through its various messaging hubs, software, and network connections. Banks, Securities Dealers, Asset Management Companies, Brokerage Institutes and Trading Houses, Depositories, Exchanges, Clearing Houses, Treasury Market Participants and Service Providers, Corporate Business Houses, Foreign Exchange and Money Brokers globally have all turned to SWIFT for one service or the other due to its commendable dominant position in the global processing of transactional messages.
As much as deserving the move to cut Russian access SWIFT financial system feel logically, it’s by far one of the toughest financial steps the U.S. and its European allies could take. This move would have a tangible effect on Russia’s economy immediately and also in the long term. Reports say this move could jeopardize Russia’s participation in most international financial transactions, this includes profits generated from oil and gas production, which contributes about 40% of the country’s revenue. Financial experts have warned that kicking Russia off SWIFT can be characterized as a nuclear option, which could have negative impacts on the global economy.
In 2014, the idea of kicking Russia off SWIFT was shelved by allies on both sides of the Atlantic. This was a period when Russia annexed Crimea and backed separatist forces in eastern Ukraine. At that time Russia made it clear that being kicked out of the SWIFT financial system would be tantamount to a declaration of war. As a result of this huge declaration, the idea was immediately shelved. Ever since Russia had invested effort into creating its own financial system with capabilities such as SWIFT but little or no results have been yielded. Although the U.S. once recorded tremendous success in its persuasion to kick out Iran from the SWIFT financial system due to its nuclear ambitions. However, the decision with Russia feels different as it is bound to hurt other economies, including those of the U.S. and a key ally, Germany.
In order for Russia to be booted out of the SWIFT system, Biden has noted that he would need the buy-in and support from his European counterparts, who currently appear to be less supportive of such drastic measures. The perception of the European allies is that Russia is a key energy supplier to Europe and support for the SWIFT kick-off ambition would hurt the rest of Europe adversely. In a statement issued in 2014 when it last discussed booting Russia, SWIFT said it is a “neutral global cooperative” and that “any decision to impose sanctions on countries or individual entities rests solely with the competent government bodies and applicable legislators.”
For now, the US can choose to act unilaterally by enforcing a move by the Federal Reserve, which clears transactions, to block Russian companies’ access to U.S. dollars. Experts have resolved that if European countries won’t agree with supporting harsher financial penalties for Russia, the U.S. can choose to act unilaterally. But whether the sanctions earlier rolled out will be tougher on Russia than the SWIFT option would be hard to measure because of the backlash that may come along.