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What is the SWIFT and why is it called the Financial Nuclear option against the Russian leadership?

• Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a member controlled and managed cooperative that provides secure financial transactions via messaging for the participants • This financial payment system allows companies and people to receive and make digital payments even if the transactions participants use different banks • Following Russia Invasion of Ukraine in late February 2022, the U.S. and EU removed several Russian banks from SWIFT. What comes next is going to be crippling for the Russian economy.

By Andrea ZanonPublished 2 years ago 3 min read
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Source: FirstData

What is the swift and how does it work?

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a messaging system that banks use to securely send messages and instructions to each other through a standardized system of several codes. SWIFT facilitates the sharing of efficient communication between members founded in 1973 that allows financial institutions to send money to each other. It is a Belgian headquartered cooperative which is currently used by more than 11,000 banks and financial institutions from around the world. It was originally created as a neutral consortium for banks to communicate about money transfers, trade, and general business transactions. Think of the SWIFT as the “plumbing for global finance” (CNN Business). SWIFT manages approximately 42 million messages daily for an average transaction of $ 5 trillion per day, and about $ 1.25 quadrillion dollars a year according to Money Transfer Comparison. Russia accounted for 1.5% of SWIFT transactions in 2020, according to the Financial Times. Prior to SWIFT, Telex was the only available instrument of communication to enable funds transfer between financial institutions. Telex was much less sophisticated, less secure, slower and was more depended on human interaction causing significant risk and mistakes. This system is still being used but it is neither considered safe nor efficient.

Are there any alternatives to SWIFT?

Although there are other message services like Fedwire, and Clearing House Interbank Payments System (CHIPS which is Chines owned), SWIFT is the “go to place” in terms of international financial communications. Its dominance is attributable to its security which is guaranteed via the issuance of complex codes that avoid fraudulent activity. Russia has also established its own payment system which is known as System for Transfer of Financial Messages (SPFS) which has approximately 400 members which according to CNN handles about 20% of domestic transactions. It is reasonable to expect that Russia has activated alternative to ensure its business and financial continuity, but it is not going to be enough.

Potential consequences of being cut off from the SWIFT

Removing Russia from the Swift would literally mean “nuking Russia out of the financial system”. Banning Russia from Swift would limit Russia's capability to do business, received funds from abroad and conduct its day-to-day business operations. According to Business Insider, removing Russia from SWIFT would reduce Russia output of 5% in 2022. If we add the other heavy sanctions, it is easy to estimate a complete crash of the Russia economy that could lose up to 20% of its GDP. It is important to clarify that, while these sanctions are not operational at scale, there is great momentum around them as the US, EU and UK want to hold Russia accountable and severely punish its leadership. So far there are 7 Russian banks suspended by Swift: VTB (the second largest Russian bank), Bank Otkritie, Novikombank, Promsvyazbank, Rossiya Bank, Sovcombank, Vneseheconombank (VEB). Others have been shortlisted and if an immediate cease-fire talk does not occur, expect more Russia financial institutions to be removed from SWIFT by next week, including those responsible for energy transactions to Europe such as Gazprombank. Global ramifications from these harsh sanctions, should not be undervalued. These would be significant and could include a major energy price surge if Europe as the region will not be able to receive and pay for energy from Russia. Additionally, we could have a deprecation of the dollar which is the global reserve currency of reference couple with extreme capital market volatility.

Conclusion

While SWIFT sanctions will have dramatic consequences for the Kremlin, for the Russian people and for the Europeans that depend on Russia energy supplies, time has come to collectively manage forcefully these state-sponsored terrorist actions against Ukraine and freedom. While the short-term price will be high, there is huge opportunity and incentive for all to be less dependent on oil and gas from rogue suppliers and transform our economies towards greater renewable energy independence.

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About the Creator

Andrea Zanon

Andrea Zanon is an international sustainable development and empowerment specialist who has dedicated his life to reducing poverty, promoting sustainability and empowering ambitious people

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