The West has announced a barrage of tough new sanctions aimed at cutting off Russia’s banks from the global financial system and depriving the country of vital technology. Yet a punishing financial weapon is being kept in reserve.
The United States and the European Union held back from cutting Russia off from SWIFT, a high security messaging network that connects thousands of financial institutions around the world, after failing to agree on a step that some have called the “nuclear option.” It would damage Russia but also big economies in Europe.
Ukraine appealed for Russia to be removed from SWIFT after President Vladimir Putin ordered an invasion on Thursday. The call from Kyiv was backed by Lithuania, Estonia, Latvia and the United Kingdom but other European countries resisted.
US President Joe Biden told reporters on Thursday that depriving Russia of access to SWIFT is “always an option.” But, he added, “right now, that’s not the position that the rest of Europe wishes to take.”
French Finance Minister Bruno Le Maire said the measure could still be adopted as the “very last resort.” It is “one of the options that remains on the table,” he told journalists ahead of a meeting of EU finance ministers.
Germany, which relies on Russian gas to power the largest economy in Europe, is the most notable holdout. Chancellor Olaf Scholz, who earlier this week won praise for halting certification of a new Russian natural gas pipeline, has come under withering criticism at home.
“SWIFT is our sharpest sword,” Christian Democratic Union lawmaker Norbert Röttgen said Thursday on Twitter. “The SWIFT exclusion of Russia must not fail now because of Germany!”
The German government said such a move would require careful preparation.
”A suspension of SWIFT would … have a massive impact on payments in Germany and for German companies doing business with Russia but also to settle energy supply payments — that all would have to be well prepared,” Steffen Hebestreit told reporters.
What is 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 much harder 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 for Carnegie Moscow Center.
Excluding Russia from SWIFT would cause its economy to shrink by 5%, former finance minister Alexei Kudrin estimated in 2014, the last time the sanction was considered in response to the Russian annexation of Crimea.
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.
UK Defense Secretary Ben Wallace said Friday that removing Russia requires consensus.
“These are international organizations, and if not every country wants them to be thrown out of the SWIFT system, it becomes difficult,” he told the BBC.
What happens if Russia is removed?
There is precedent for removing a country from SWIFT.
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.
“SWIFT is a neutral global cooperative set up and operated for the collective benefit of its community,” the organization said in a statement on Thursday. “Any decision to impose sanctions on countries or individual entities rests solely with the competent government bodies and applicable legislators,” it added.
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.
But the pain could be widespread. Senior Russian lawmakers have said that shipments of oil, gas and metals to Europe would stop.
“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 last week, according to state media outlet TASS.
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. 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 fledgling Cross-Border Interbank Payment System, or CIPS, may provide another alternative to SWIFT. Moscow could also be forced to resort to using cryptocurrencies.
But these are not appealing alternatives.
“I’m not sure that other countries, especially those whose share of trade with Russia is large in balance, will support the shutdown,” Zhuravlev added.
— With contributions from Nadine Schmidt in Berlin, Joseph Ataman and Camille Knight in Paris.