New Delhi: The European Union, along with the United States and other Western partners, announced on Saturday their decision to disconnect Russian banks from the international financial system SWIFT, following the Russian invasion of Ukraine.
According to a joint statement issued by the leaders of the European Commission, France, Germany, Italy, the United Kingdom, Canada and the United States, the decision to withdraw certain Russian banks from the system of SWIFT messaging will hurt banks’ ability to operate globally. SWIFT is a global, member-owned cooperative and the world’s leading provider of secure financial messaging services.
The leaders also pledged to impose restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in a way that undermines the impact of sanctions proposed by the countries.
The decision has been made to launch a transatlantic task force next week, which will ensure the effective implementation of the financial sanctions by identifying and freezing the assets of sanctioned individuals and companies that exist in the jurisdictions of the United States and their allies, according to the statement.
The leaders said in the statement that they condemned Russian President Vladimir Putin’s war of choice and attacks on the sovereign nation and people of Ukraine.
According to an Associated Press report, Ukrainian President Volodymyr Zelenskyy has urged the United States and the West to go further and cut the Russians off from the SWIFT system.
What is SWIFT?
SWIFT, which stands for Society for Worldwide Interbank Financial Telecommunications, is a global provider of secure financial messaging services. It is a member-owned cooperative that provides safe and secure financial transactions to its members.
SWIFT was established in 1973 to find a better way for the global financial community to transfer value – a reliable, safe and secure approach that the community can fully trust, according to SWIFT’s official website.
SWIFT is a large messaging network used by banks and other financial institutions to quickly, accurately and securely send and receive information, such as money transfer instructions. The global cooperative had become the main mechanism for financing international trade.
It facilitates rapid cross-border systems, facilitating the flow of international trade. It uses a standardized, proprietary communication platform to facilitate the transmission of financial transaction information, according to an article published on Investopedia, a New York-headquartered financial website. Financial information, including payment instructions, can be exchanged securely by financial institutions using SWIFT.
Secure Messaging does not hold funds itself or manage external customer accounts. It started operating in 15 countries in 1973 and now operates in over 200 countries and territories, according to SWIFT’s official website. It operates internationally with 26 offices located around the world and is overseen by the G-10 central banks.
SWIFT, which has over 11,000 financial institutions, delivered over 5.6 billion messages in 2014.
In 2021, SWIFT member institutions sent an average of 42 million messages per day through the network. This marked an 11.4% increase from 2020, according to the Investopedia article.
By 1979, the global cooperative had delivered 10 million messages.
SWIFT is headquartered in Belgium and has offices in several countries, including Australia, Austria, Brazil, France, Germany, India and the United Kingdom, among others. SWIFT is overseen by the National Bank of Belgium, in addition to the US Federal Reserve System, the European Central Bank and others.
Telex was the only reliable means of message confirmation for international funds transfers before SWIFT. However, there were some disadvantages associated with the telex, including low speed, security issues, and a free message format. SWIFT proved to be more efficient thanks to its unified system of codes for naming banks and describing transactions. In 1977, its messaging services went live to replace Telex technology.
SWIFT’s vision is of a world in which payments are not only reliable, but rather, according to the cooperative’s official website. SWIFT, which is the backbone of global financial communication, provides reliable, secure and efficient messaging services to its user community. The global cooperative is at the forefront of the innovative application of technology in the financial sector. It allows individuals and businesses to accept electronic or card payments even if the customer or seller uses a different bank than the recipient, according to an article on Investopedia.
How does SWIFT work?
Financial institutions use the messaging network to securely transmit information and instructions through a standardized code system. SWIFT assigns each financial organization a unique code consisting of eight or 11 characters, and which is indifferently called bank identification code (BIC), SWIFT code, SWIFT ID or ISO 9362 code. For example, an Italian bank named UniCredit Banca , headquartered in Milan, has an eight-character SWIFT code called UNCRITMM.
The first four characters represent the institute code. In this case, UNCR was used for UniCredit Banca. The next two characters represent the country code. Here, IT is used for Italy. The next two characters represent the city code. In the Italian bank’s SWIFT code, MM was used for Milan.
The last three characters are optional, but can be used by organizations to assign codes to individual branches, according to the article.
If a customer at a Bank of America branch in New York intends to send money to his friend who does business with the UniCredit Banca branch in Venice, the New York customer can enter the branch of Bank of America with his friend’s account number. and UniCredit Banca’s unique SWIFT code for its Venice branch, according to the article.
Bank of America will send a payment transfer SWIFT message to the UniCredit Banca branch via the secure SWIFT network, according to the article. After that, UniCredit Banca will receive a SWIFT message regarding the incoming payment.
Once she receives the SWIFT message, UniCredit Banca clears and credits the money to the Italian friend’s account.
However, SWIFT does not hold any funds or securities, nor does it manage customer accounts.
According to an article published by the Reuters news agency, billions of dollars are transferred through SWIFT every year.
It made a profit of 36 million euros in 2020, according to its 2020 annual report.
How will removing Russian banks from SWIFT affect Russia?
The withdrawal of Russian banks from SWIFT restricts Russia’s access to financial markets around the world, according to the Reuters article.
In addition, it will become more difficult for Russian companies and individuals to pay for imports and receive money for exports, to borrow or invest abroad, according to the article.
Other channels such as phones, messaging apps or emails could be used by Russian banks to make payments. In this way, Russian banks could make payments through banks in countries that have not imposed sanctions. However, the alternatives are likely to be less efficient and less secure, and as a result, trading volumes could drop and costs could increase.
The country’s economy could be immediately damaged due to its disconnection from SWIFT. In addition, the move would cut off Russia from a range of international financial transactions, including international profits from oil and gas production, according to an article published by the US news broadcaster USA Today. International profits from oil and gas production account for more than 40% of Russia’s income.
How will Russia’s withdrawal from SWIFT affect other countries?
Due to the disconnection of Russian banks from SWIFT, exporters would find selling goods in Russia riskier and more expensive, according to the Reuters article. According to World Bank data, the Netherlands and Germany are Russia’s second and third largest trading partners.
Russia, which is a big buyer of manufactured goods, is not one of the top 10 export markets for the Netherlands or Germany, the article says.
Also, foreign buyers of Russian products will look for other suppliers.
The article said foreign buyers may have a harder time finding replacements when it comes to Russian oil and gas.
According to the European Commission, Russia is the main supplier of crude oil, natural gas and solid fossil fuels to the European Union.
Role of SWIFT in relation to financial sanctions imposed by regulators
According to SWIFT’s official website, all decisions on the legitimacy of financial transactions under applicable regulations, such as sanctions regulations, rest with the financial institutions processing them and their competent international and national authorities. SWIFT’s objective with regard to financial sanctions is to help its users meet their responsibilities for compliance with national and international regulations.
Additionally, SWIFT fully complies with all applicable sanctions laws, according to the official website. Any decision to impose or lift sanctions against individual countries or entities rests solely with the relevant government bodies and legislators.
SWIFT’s website states: “While sanctions are independently imposed in different jurisdictions around the world, SWIFT cannot arbitrarily choose which jurisdiction regime to follow.”
SWIFT is a company incorporated under Belgian law. The global cooperative must comply with related European Union regulations, as confirmed by the Belgian government.