Some call it the “nuclear option.” It doesn’t involve weapons though.
As U.S. President Joe Biden’s administration considers economic threats to thwart what it fears is a new Kremlin plan to invade Ukraine, there is one option that is reportedly on the short list: cutting Russia off from the global electronic-payment-messaging system known as SWIFT.
It would be an unprecedented move against one of the world’s major economies.
The White House has not confirmed it is threatening to disconnect Russian banks from SWIFT, which stands for Society for Worldwide Interbank Financial Telecommunication.
However, Biden himself added grist to the rumor mill on December 8 by warning that should Russian President Vladimir Putin decide to attack Ukraine, the United States and allies would slap his country with sanctions “like none he’d ever seen.”
While analysts agree such a move would cause economic pain for Russia, some say the impact of cutting the country off from SWIFT is overhyped, for various reasons.
What Is SWIFT And Why Is It Important?
SWIFT is a secure communications platform used by banks, brokerages, and other financial institutions to send and receive information, such as instructions for transferring money overseas or settling securities trades.
However, it does not actually move or hold money and securities.
Say a German company is buying Russian natural gas, so it needs to pay for it. It can transfer money from its German bank account to the Russian firm’s Russian bank by entering the recipient’s account number and the SWIFT code.
The German firm then sends a message from its German account, via SWIFT, to the Russian bank saying a money transfer is incoming. Then, when the funds electronically arrive, they will be available for the Russian company to withdraw.
SWIFT’s use of standardized codes for instructions enables banks to process payments quickly.
Some 11,000 financial institutions located in more than 200 countries and territories use SWIFT. The platform is on pace to process more than 10 billion messages this year, facilitating trillions of dollars in cross-border payments.
Before SWIFT, when banks wanted to communicate financial information from one place to another, they used a “telex” system, based on old telegraph circuits. But that was slow and cumbersome, and not secure.
So SWIFT was set up in 1973.
Today, SWIFT is a behemoth in the financial-communications industry thanks to its ease of use, speed, and security. It can help banks complete cross-border payments in under five minutes and offers end-to-end tracking.
“It is the most trusted kind of cross-border payment-messaging system out there and so its hugely important,” said Brian O’Toole, a former senior adviser at the U.S. Treasury Department.
Who Owns SWIFT?
Based in Belgium, the cooperative is owned by member banks and governed by a 25-member board of directors that currently includes one Russian national. The organization is overseen by the G10 central banks — Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Great Britain, the United States, Switzerland, and Sweden — as well as the European Central Bank.
Has SWIFT Ever Cut Off A Country From Its Platform?
In 2012 SWIFT disconnected Iranian banks after they were blacklisted by the European Union and amid pressure from the United States.
However, Iran was largely isolated from the global financial network, so the overall impact was muted, says O’Toole, now an associate with the Atlantic Council, a Washington, D.C., think tank. “It certainly made life a heck of a lot harder for the Iranian banks that were still connected to the international financial system but [the cut-off] was essentially just plugging the leaks,” he told RFE/RL.
Can The United States Force SWIFT To Disconnect Russia?
SWIFT adheres to Belgian and European law, not U.S. law, so it “doesn’t actually have to listen to the United States,” O’Toole said.
However, the United States has the power to twist SWIFT’s arm by threatening sanctions against the platform itself as it had done when it was seeking to disconnect Iran, O’Toole said.
What Would Happen If Russia Were Cut Off From SWIFT?
Russia is a much larger economy than Iran and deeply integrated into the global financial community, so the impact of a SWIFT cutoff would be much greater than in the case with Iran.
Russia would face significant economic disruption for a period of time, especially with respect to cross-border payments, as it adjusts to new platforms, says Elina Ribakova, an economist at the Washington-based Institute for International Finance.
The disruption could cause the Russian economy to contract and send the ruble tumbling in the short term, she says. However, since Russia’s leading exports — oil and natural gas — are critical to Europe’s livelihood, both sides would seek to find a quick solution, Ribakova told RFE/RL.
The impact would also be muted because Russia has been building its own financial-messaging system, she adds.
Back in 2014, after Russia annexed Ukraine’s Crimea Peninsula, there were calls to cut Russia off from SWIFT. So the Kremlin backed development of a domestic financial-communications platform to protect itself.
Known as the System for Transfer of Financial Messages (SPFS), the Russian platform had more than 400 member banks — including two dozen from former Soviet states — and handled one-fifth of all domestic financial communications, as of the end of 2020.
So Russia Is Protected Then?
Not entirely: the Russian system has its drawbacks.
Whereas SWIFT operates 24 hours a day, SPFS can send payment messages only during weekday working hours, Maria Shagina, a fellow at the Center for Eastern European Studies at the University of Zurich, wrote earlier this year. SPFS also has shorter limits on the size of messages, she said.
Russia “technically” can make the transition should it get cut off from SWIFT, “which was not the case in 2014,” Ribakova said. Nonetheless, “it will still be a massive shock to the system” for a period of time, she said.
Russia could try to expand SPFS internationally as a possible solution for cross-border transactions, O’Toole says.
China, whose economy is far larger than Russia’s, is also developing an alternative to SWIFT. In 2015, Beijing launched the Cross-Border Interbank Payment System (CIPS) to help internationalize use of the Chinese currency, the yuan.
Some Chinese officials have called for using CIPS instead of SWIFT to protect the country’s banks from threats of a cutoff.
Bank Sanctions: More Devastating?
While some officials and analysts have called SWIFT the “nuclear” option, O’Toole says that was an exaggeration. Russia would still be allowed to conduct international transactions through other communications platforms, albeit less effective ones.
“If you cut SWIFT off from the Russian banking system without doing anything else, all you’re doing essentially is forcing it to use [SWIFT competitors],” he said. “You’re not prohibiting transactions. You’re just making it more annoying to transact and more difficult for people to get those transactions.”
He says the White House should focus on placing sanctions on Russian banks. “What financial institutions will the administration go after if Russia crosses the border? I think that’s the relevant policy question,” he said.
The United States could target state-owned financial institutions tied to Russia’s elite, like VEB and Russian Direct Investment Fund. Sanctioning those two banks could be “more impactful” than cutting Russia’s entire banking system off from SWIFT, he said.
VEB acts as a development bank and payment agent for the Russian government. The Russian Direct Investment Fund, meanwhile, is the country’s sovereign-wealth fund, and has been closely involved in Kremlin foreign prestige projects: such as promoting the Sputnik V coronavirus vaccine.
Targeting leading retail banks Sberbank and VTB would be trickier, he said. While placing sanctions on them would result in “major economic dislocation” because of the massive market share they hold, ordinary Russian citizens would be caught in the crosshairs.
Can Russia’s Economy Withstand The Turmoil?
Since 2014, Russia has been building up its defenses against the threat of greater U.S. sanctions. Aside from developing a SWIFT alternative as well as a payment-processing alternative to Visa and Mastercard, the Russian government has kept a tight lid on spending, even posting budget surpluses, a rarity in Western democracies.
The government has also built up its foreign-currency and gold reserves, which exceed $620 billion, putting it neck-and-neck with India for fourth-highest in the world.
That amount includes the roughly $200 billion in the “rainy day” National Wealth Fund.
Barring any sanctions, Russia’s reserves could grow another $20 billion next year, Ribakova says. The Russian government “always has this sort of Sword of Damocles hanging over them of more sanctions. And I think that sort of permeates all aspects of their macroeconomic policy,” she said.
“It’s part of this ‘Fortress Russia’ strategy, and they’re sticking to it because it has worked well for them,” she said.