EXPLAINED | What Is SWIFT Financial System From Which US, EU Have Removed Russia? How It Will Affect Moscow, Others
The European Union, along with the United States and other Western partners, on Saturday announced its decision to disconnect Russian banks from the SWIFT international financial system.
New Delhi: The European Union, along with the United States and other Western partners, on Saturday announced its decision to disconnect Russian banks from the SWIFT international financial system, in the wake of Russia's invasion of Ukraine.
According to a joint statement issued by the leaders of the European Commission, France, Germany, Italy, the United Kingdom, Canada, and the United States, the decision to remove selected Russian banks from the SWIFT messaging system will harm the banks' ability to operate globally. SWIFT is a global member-owned cooperative and the world's leading provider of secure financial messaging services.
The leaders have also committed to imposing restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of the sanctions put forward by the countries.
A decision was made to launch a transatlantic task force the coming week, that will ensure the effective implementation of the financial sanctions by identifying and freezing assets of sanctioned individuals and companies that exist within the jurisdictions of the United States and its allies, according to the statement.
The leaders said in the statement that they condemn Russian President Vladimir Putin's war of choice and attacks on the sovereign nation and the people of Ukraine.
According to a report by the Associated Press, Ukraine's President Volodymyr Zelenskyy urged the United States and the West to go further and cut the Russians from the SWIFT system.
What Is SWIFT?
SWIFT, which stands for Society for Worldwide Interbank Financial Telecommunications, is a global provider of secure financial messaging services. It is a member-owned cooperative that provides safe and secure financial transactions for its members.
SWIFT was established in 1973 to find a better way for the global financial community to move value — a reliable, safe and secure approach that the community can trust, completely, according to the official website of SWIFT.
SWIFT is a vast messaging network used by banks and other financial institutions to quickly, accurately, and securely send and receive information, such as money transfer instructions. The global cooperative had become the principal mechanism for financing international trade.
It facilitates rapid cross-border systems, making international trade flow smoothly. It uses a standardised proprietary communications platform to facilitate the transmission of information about financial transactions, according to an article published on Investopedia, a financial website headquartered in New York City. Financial information, including payment instructions, can be securely exchanged by financial institutions, using SWIFT.
The secure messaging system neither holds funds on its own nor manages external client accounts. It began operating in 15 countries in 1973, and now operates in over 200 countries and territories, according to SWIFT's official website. It operates internationally with 26 offices located across the world, and is overseen by the G-10 Central Banks.
SWIFT, which has more than 11,000 financial institutions, delivered more than 5.6 billion messages in 2014.
In 2021, SWIFT member institutions sent an average 42 million messages per day through the network. This marked an increase of 11.4 per cent from 2020, according to the Investopedia article.
In 1979, the global cooperative had delivered 10 million messages.
SWIFT is headquartered in Belgium, and has offices in several countries including Australia, Austria, Brazil, France, Germany, India, the United Kingdom, among others. SWIFT is overseen by the National Bank of Belgium, in addition to the US Federal Reserve System, the European Central Bank, and others.
Telex was the only reliable means of message confirmation for international funds transfer prior to SWIFT. However, certain drawbacks were associated with Telex, including low speed, security concerns, and a free message format. SWIFT proved to be more efficient because of its unified system of codes to name banks and describe transactions. In 1977, its messaging services went live to replace the Telex technology.
SWIFT's vision is for a world in which payments are not only trusted, but instant, according to the official website of the cooperative. SWIFT, which is the backbone of global financial communication, provides reliable, secure and efficient messaging services to its community of users. The global cooperative is at the forefront of innovative application of technology within the financial sector. It allows individuals and businesses to take electronic or card payments even if the customer or vendor uses a different bank than the payee, according to an article published on Investopedia.
How Does SWIFT Work?
Financial institutions use the messaging network to securely transmit information and instructions through a standardised system of codes. SWIFT assigns each financial organisation a unique code that has either eight or 11 characters, and which is interchangeably called the bank identifier code (BIC), SWIFT code, SWIFT ID, or ISO 9362 code. For instance, an Italian bank named UniCredit Banca, headquartered in Milan, has an eight-character SWIFT code called UNCRITMM.
The first four characters represent the institute code. In this case, UNCR has been used for UniCredit Banca. The next two characters represent the country code. Here, IT is used for Italy. The following two characters represent the city code. In the SWIFT code for the Italian bank, MM has been used for Milan.
The last three characters are optional, but can be used by organisations to assign codes for individual branches, according to the article.
If a customer of a Bank of America branch in New York intends to send money to his or her friend who banks at the UniCredit Banca branch in Venice, the New York customer can walk into the Bank of America branch with his or her friend's account number and UniCredit Banca's unique SWIFT code for its Venice branch, the article said.
Bank of America will send a payment transfer SWIFT message to the UniCredit Banca branch over the secure SWIFT network, according to the article. After this, UniCredit Banca will receive a SWIFT message about the incoming payment.
Once It receives the SWIFT message, UniCredit Banca will clear and credit the money to the Italian friend's account.
However, SWIFT does not hold any funds or securities, nor does it manage client accounts.
According to an article published by news agency Reuters, trillions of dollars are transferred each year using SWIFT.
It made a profit of €36 million in 2020, according to its 2020 Annual Review.
How Will The Removal Of Russian Banks From SWIFT Affect Russia?
The removal of Russian banks from SWIFT restricts Russia's access to financial markets across the world, according to the Reuters article.
Also, it will become more difficult for Russian companies and individuals to pay for imports and receive cash for exports, borrow, or invest overseas, the article said.
Other channels such as phones, messaging apps, or email could be used by Russian banks to make payments. In this way, Russian banks could make payments through banks in countries which have not imposed sanctions. However, the alternatives are likely to be less efficient and secure, and hence, transaction volumes could fall and costs could rise.
The country's economy could be damaged right away, as a result of being disconnected from SWIFT. Also, this move would cut Russia off from an array of international financial transactions, including international profits from oil and gas production, according to an article published by American news broadcasting company USA Today. International profits from oil and gas production make up more than 40 per cent of Russia's revenue.
How Will The Removal Of Russia From SWIFT Affect Other Countries?
As a result of Russian banks being disconnected from SWIFT, exporters would find selling goods to Russia riskier and more expensive, according to the Reuters article. Based on World Bank data, the Netherlands and Germany are Russia's second and third biggest trading partners.
Russia, which is a big buyer of manufactured goods, is not a top 10 export market for either the Netherlands or Germany, the article stated.
Also, foreign buyers of Russian goods will seek alternative suppliers.
The article said that foreign buyers could find it harder to find replacements when it comes to Russian oil and gas.
According to the European Commission, Russia is the main European Union supplier of crude oil, natural gas and solid fossil fuels.
Role Of SWIFT In Relation To Financial Sanctions Imposed By Regulators
According to SWIFT's official website, all decisions on the legitimacy of financial transactions under applicable regulations, such as sanctions regulations, rest with the financial institutions handling them, and their competent international and national authorities. The focus of SWIFT, as far as financial sanctions are concerned, is to help its users in meeting their responsibilities to comply with national and international regulations.
Also, SWIFT fully complies with all applicable sanctions laws, according to the official website. Any decision to impose or to lift sanctions on countries or individual entities rests solely with the competent government bodies and legislators.
SWIFT's website says: "Whilst sanctions are imposed independently in different jurisdictions around the world, SWIFT cannot arbitrarily choose which jurisdiction's regime to follow."
SWIFT is incorporated under Belgian law. The global cooperative must comply with related European Union regulation, as confirmed by the Belgian government.
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