SWIFT, the international payment messaging system for for global banking and finance, is once again in the limelight following a ban on Russian banks post its invasion of Ukraine.
The European Commission has already announced that it was banning seven Russian banks from SWIFT. These banks are already the target of sanctions either by the European Union or by members of the G7 (the seven largest developed economies).
A joint statement of the European Commission, with the United States, France, Germany, Italy, Canada and the United Kingdom on February 26 committed to this step. "We commit to ensuring that selected Russian banks are removed from the SWIFT messaging system. This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally", the statement said. Japan too joined these countries in blocking access of selection Russian banks from SWIFT the next day.
The banning of Russia from SWIFT is one component of larger and coordinated set of sanctions and restrictions placed on them by the developed world, which includes payment restrictions, market access prohibitions, freezing of properties and funds of the Russian government, central bank and oligarchs abroad and trade restrictions.
The acronym 'S.W.I.F.T.', also known as Society for Worldwide Interbank Financial Telecommunication gives access to banks and even central banks around the world to securely settle payments under a unified umbrella. Access to it has often been pulled by larger countries of the West against countries deemed to be villainous or detrimental to global peace so as to prohibit their banks from international payments and inflict financial pain on them, as is the case currently with Russia. North Korea has been kept off the system, and Iran is facing tremendous restrictions in trade.
Here's why it is important, and what you need to know.
1. What is SWIFT?
SWIFT is an international messaging system, that lets banks all around the world transfer funds to other participating banks. It is headquartered in Brussels, Belgium and it is a self-governing body by its participants.
The National Bank of Belgium is the lead overseer of the system, along with the central bank of the G-10 (Canada, Germany, the US, France, Japan, the Netherlands, Sweden, Italy, Switzerland and the UK). There is also a SWIFT oversight forum, where these central banks are joined by those in several other leading economies. The Reserve Bank of India is one of them.
The system itself does not hold or transfer funds; only facilitating the secure financial messaging of the network.
2. Just how widely is SWIFT used?
According to SWIFT's 2020 annual review, that is pertaining to the year 2020, the network had nearly 11,000 participating banks across 200 countries.
In 2020, it processed more than 9.5 billion messages, averaging nearly 37.7 million messages daily and facilitates the transfer of equivalent to billions of dollars daily.
The aim of the broader restriction is to ban countries like Russia from accessing a standard and known way to transfer funds.
This can be read here (triggers download).
3. How does SWIFT work?
Banks connected to the SWIFT network come with a SWIFT code that can be 8 to 11 characters long. The messaging platform enables banks to message and thus enable payments among themselves using a standardised messaging service.
Say a user uses an Indian bank to transfer money to the UK. The fund transferor would provide her bank with the receiving British bank's SWIFT code and the recipient's account number. This would allow the Indian bank to message the recipient's British bank, who in turn would perform due diligence and conclude the transaction.
Some transactions fail due to an incorrect account number, or if the the accounts are sanctioned.
4. How is Russia avoiding this?
Russia has responded by launching its own messaging service - the Financial Message Transfer System of the Bank of Russia (SPFS). It is open to Belarusian banks, and has 399 participants. Russia is currently in negotiations with China to join the network. Reportedly, the network is also used for payments within some ex-Soviet countries, namely Kazakhstan and Kyrgyztan other than Belarus.
Though Russian banks may be off SWIFT, they may not be off the international payments grids completely. Professor Scheherazade Rehman of George Washington University, teaching international finance, told NPR:
"If you remove all the Russian financial institutions from SWIFT, you're removing them from one key artery of finance, but you can't prevent them from using pre-SWIFT tools like the telephone, fax, telex or emails to engage and bank-to-bank transactions. Clearly that's not efficient, but it does work", Rehman said.
Further, the aim to exclude only a few Russian banks from SWIFT also undermines the effectiveness of the move, as the selection of banks will be strategic, as several European countries like Germany and Italy, who are diplomatically oppposed to Russia in the ongoing crisis, have significant business and energy ties.
"European businesses will continue to collect money owed and buy Russian energy. So Germany has the most to lose, with Italy coming in second, would they rely on Russian gas. Now, the French and the U.K., by the way, have less ties, and so they're all for kicking all the banks off SWIFT.s to the country.", Rehman said.
The interview can be heard and read here.
5. Which are the other countries banned from using SWIFT?
North Korea has been banned from SWIFT while Iran is facing isolation too.
These countries are reeling under their own set of sanctions from the West: Iran for its alleged motive to attain nuclear weapons and North Korea for obtaining them, and SWIFT is one of many tools to force international financial isolation.
North Korea was totally banned from SWIFT in 2017 - a year where it saw repeated missile tests - after the United Nations said that companies trading with blacklisted North Korean banks would be in violation of its sanctions. It was also found that North Korea was accessing international banking to flout sanctions.
With respect to Iran, despite the Iranian nuclear deal with major powers in 2015 and though Iran was readmitted to SWIFT, it still cannot conclude transactions to other major financial institutions due to other sanctions.
A legal note with SWIFT in 2016 says that it remained unable to enable transactions of Iranian banks sanctioned by the EU. It can be read here.