Two days after Russia launched an attack on Ukraine, the United States, Canada and European allies agreed to disconnect a handful of Russian banks from SWIFT, the Society for Worldwide Interbank Financial Telecommunication. These “de-SWIFTed” Russian banks would no longer be able to use the financial interface to transfer money.
The long-standing, and controversial, threat to disconnect Russia from the SWIFT network has been touted as a centerpiece of the West’s retaliation. How big is it, really? And how will it affect the United States and its use of financial power in the future?
The limits of de-SWIFTing
SWIFT connects more than 10,000 financial institutions in a communications network where orders are sent and received. This messaging service enables participating banks to settle commercial, financial and foreign-exchange payments. Cutting banks off from SWIFT means they can no longer use the network to exchange information.
But keeping banks from accessing SWIFT is not, on its own, the financial nuclear weapon some suggest. Denying access to SWIFT, for example, does not stop banks from communicating or transacting with the 11,000 financial institutions outside the SWIFT network. Disconnected banks that do not face sanctions are free to use alternative messaging networks to settle payments.
In fact, without sanctions on actual money transfers, denying countries access to SWIFT could undermine the messaging service by encouraging users to rely on other financial communication networks.
Today, SWIFT continues to be dominated by major U.S. financial institutions, with 40 percent of recorded transactions occurring in U.S. dollars. Making the U.S.-centered financial order less attractive is precisely the type of collateral damage the United States seeks to avoid.
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SWIFT is safe, for now
While the United States might fear the growth of new messaging services in the future, this case isn’t likely to bring significant blowback. Russia is unlikely to use alternative financial channels, because the existing ones all have problems. For example, executing transactions over telephone or fax, or by using credit or debit cards that fuse communications technologies with transactions. That’s outdated and will not scale to the degree Russia would need.
Alternative financial communication networks are either in their infancy or depend on the SWIFT network. The Bank of Russia created a financial messaging system (FMS) after the 2014 Ukraine crisis — but it includes only 400 users and therefore isn’t that useful. China’s Cross-Border Interbank Payment System (CIPS) has about three times FMS’s users — but SWIFT includes nearly 10 times as many users as CIPS. What’s more, CIPS isn’t an alternative to SWIFT; it depends on SWIFT for international messaging.
Russian banks not facing sanctions may turn to CIPS. But China may be reluctant to welcome sanctioned banks, lest it jeopardize its use of SWIFT.
Russian users cannot easily bypass sanctions through cryptocurrency transactions. On Feb. 28, the crypto exchange Binance announced it would not process transactions by sanctioned Russian individuals or entities. Even “dirty money” channels are increasingly challenged by Western governments, and a new sanctions package promises to tighten the screws on illicit financing.
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Sanctions, not SWIFT, are hurting Russia’s economy
But financial sanctions, not banishment from SWIFT, are the key economic punishments being imposed on Russia. In fact, by the time the West banned five Russian banks — Sberbank, VTB, Otkritie, Novikom and Sovcom — from SWIFT, the mere threat of sanctions was seriously damaging the Russian economy.
Sell-offs of Russian bank stocks started because of rumors they would be placed on the sanctions list of Specially Designated Nationals (SDN) that would be banned from processing U.S.-dollar transactions using the U.S. financial system. Mid-February, while Russian military forces were massing near Ukraine, President Biden promised that the United States would respond “swiftly and decisively” to an invasion — and that threat alone sent the Russian stock market and the ruble into decline. Sovereign default risk, the possibility of the Russian government defaulting on its debt, spiked.
Even before the United States and allies appeared likely to remove Russia from SWIFT, financial instability spread through Russia. In the week before the invasion, the Russian stock market lost 40 percent of its value, Russia’s major bank stocks’ worth decreased by 40 to 60 percent, credit default risk on five-year government debt increased 250 percent, and the ruble fell another 12 percent from its previous lows. While sanctions failed to deter Russia, the promise of sanctions wreaked financial havoc as the certainty of Russian aggression approached.
To be clear, de-SWIFTing does have some effects, including signaling effects. Once a bank is sanctioned, kicking these sanctioned banks off SWIFT clearly tells institutions in other countries not to work with the sanctioned bank. Even institutions not legally mandated to participate in the sanctions regime might feel pressure to conform to its rules. While clearing transactions over alternative platforms may be technically difficult, what’s more important is that these banks fear that working with a sanctioned bank will make them targets of de-SWIFTing as well.
Disconnection from SWIFT is often portrayed as a “nuclear option” in geo-financial brinkmanship. Yes, banning information exchange over the world’s largest financial network has consequences. But the financial prohibitions and asset freezes are what give SWIFT banishment its real coercive power.
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Carla Norrlöf (@CarlaNorrlof) is a senior fellow at the Atlantic Council and associate professor at the University of Toronto.