During Russian Ukraine conflict a move to counter Russia’s war over Ukraine, the US and the European Commission issued a joint statement to exclude some Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging system.
The intention behind excluding Russian bank is to further isolate Russia from the international financial system.
The move against Russia is only partly implemented for now, with only some Russian banks being covered.
The option of expanding it further to a pan-country ban is something that the US and its allies are holding back as a further escalatory move.
What is the SWIFT Messaging System?
SWIFT provides the trusted messaging platform that enables financial institutions to exchange information about global monetary transactions such as money transfers.
While SWIFT does not actually move money, it operates as a middleman to verify information of transactions by providing secure financial messaging services to more than 11,000 banks in over 200 countries.
Most of the world trade takes place with financial messaging passing through SWIFT.
SWIFT was established in 1973 and is based in Belgium.
It is overseen by the central banks from eleven industrial countries: Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States, besides Belgium.
India’s financial system has access to the SWIFT.
Prior to SWIFT, the only reliable means of message confirmation for international funds transfer was Telex.
It was discontinued due to a range of issues such as low speed, security concerns, and a free message format.
What will be Impact on Russia?
Russia is heavily reliant on the SWIFT platform for its key natural resources trade, especially the payments for its oil and gas exports.
It will freeze the assets of Russia’s central bank, which would stop Russia from “using its war chest”, referring to its forex reserves.
Further, the curbs on Russia’s central bank will prevent it from dipping into its forex deposits to limit the effect of sanctions.
Targeting only some Russian banks seems to be aimed at both keeping the option of further escalation open.
it also envisages that the sanctions have the maximum possible impact on Russia, but prevent a major impact on European companies dealing with Russian banks for payments for their gas imports
There is going to be a catastrophe on the Russian currency market.
Prior to this, only one country had been cut off from SWIFT — Iran. It resulted in it losing a third of its foreign trade.