A profound measure, as a part of the package of economic sanctions targeted at deterring Russia from invading Ukraine, and which appears to strike fear at the heart of the Kremlin, is cutting the country off from the global banking system.
US lawmakers have recently suggested that Russia could be removed from SWIFT, a high security network that connect thousands of financial institutions around the world.
Senior Russian lawmakers have responded by saying that shipments of oil, gas and metals to Europe would stop if Russia is shut out from SWIFT.
“If Russia is disconnected from SWIFT, then we will not receive [foreign] currency, but buyers, European countries in the first place, will not receive our goods — oil, gas, metals and other important components,” Nikolai Zhuravlev, vice speaker of Russia’s upper house of parliament, said Tuesday, according to state media outlet TASS.
SWIFT – the Society for Worldwide Interbank Financial Telecommunication – was founded in 1973 to replace the telex and is now used by over 11,000 financial institutions to send secure messages and payment orders. With no globally accepted alternative, it is essential plumbing for global finance.
Removing Russia from SWIFT would make it nearly impossible for financial institutions to send money in or out of the country, delivering a sudden shock to Russian companies and their foreign customers -— especially buyers of oil and gas exports denominated in US dollars.
“The cutoff would terminate all international transactions, trigger currency volatility, and cause massive capital outflows,” Maria Shagina, a visiting fellow at the Finnish Institute of International Affairs, wrote in a paper last year at the Finnish Carnegie Mosco Center.
SWIFT is based in Belgium and governed by a board consisting of 25 people, including Eddie Astanin, chairman of the management board at Russia’s Central Counterparty Clearing Centre. SWIFT, which describes itself as a “neutral utility,” is incorporated under Belgian law and must comply with EU regulations.
SWIFT unplugged Iranian banks in 2012 after they were sanctioned by the European Union over the country’s nuclear program. Iran lost almost half of its oil export revenue and 30% of foreign trade following the disconnection, according to Shagina.
The United States and Germany have the most to lose if Russia is disconnected, because their banks are the most frequent SWIFT users to communicate with Russian banks, according to Shagina.
British Prime Minister Boris Johnson told lawmakers on Tuesday that his government was discussing the possibility of banning Russia from SWIFT with the United States.
“There is no doubt that that would be a very potent weapon [against Russia]. I’m afraid it can only really be deployed with the assistance of the United States though. We are in discussions about that,” Johnson said.
Russia has taken steps in recent years to blunt the trauma should it be removed from SWIFT.
Moscow established its own payment system, SPFS, after it was hit by Western sanctions in 2014 following its annexation of Crimea early that year. SPFS now has around 400 users, according to Russia’s central bank. Twenty percent of domestic transfers are currently done through SPFS, according to Shagina, but the size of messages are limited and operations are limited to weekday hours.
China’s Cross-Border Interbank Payment System, or CIPS, may provide another alternative to SWIFT. Moscow could also be forced to resort to using cryptocurrencies.
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