By now, everyone’s heard western countries have taken a harder stance against Russia for its invasion of Ukraine, imposing two rounds of economic sanctions. One of the most talked about sanctions is cutting off some of Russia’s banks from SWIFT. But what does that mean, and what are the consequences?
Here, we’ll walk you through it from the beginning—explain what SWIFT is, what’s happening with it, and what it can mean for the U.S. economy and ultimately, consumers.
What is SWIFT?
SWIFT is the acronym for the Belgium-based Society for Worldwide Interbank Financial Telecommunication. It’s a global member-owned cooperative that provides a secure messaging system that connects 11,000 financial institutions, organizations, and corporate customers in more than 200 countries and territories that need to make cross-border payments.
No payments, only messages, are sent over SWIFT. So what’s the big deal? These messages are important because they contain sensitive information telling institutions where, when, and how much money to send, so the system has to be secure and reliable. Last year, an average of 42 million payments and securities transactions were processed each day using SWIFT’s financial messaging system.
This is how it works: Say you’re a U.S. manufacturing company and you buy raw materials from a Russian company. The Russian supplier’s local bank will send a message to a larger international bank with account information and the amount of the transaction. That’s followed by a series of messages, often flowing through a few banks and agents, that ultimately ends up with a payment being sent to the supplier.
How did western nations use SWIFT as a sanction against Russia?
Last weekend, European countries, the U.S., and Canada toughened the initial sanctions imposed against Russia because of the escalation of its attacks on Ukraine. This second round included disconnecting select Russian banks from the SWIFT messaging system, cutting them off from the international financial system and making it difficult for them to operate globally. Russia and its businesses and citizens would no longer be able to receive payment for goods and services through those banks unless Russia establishes secondary measures.
“If one of these de-SWIFTed Russian banks wants to make or receive a payment with a bank outside of Russia, such as a bank in Asia, it will now need to use the telephone or a fax machine,” a senior White House official said in a briefing last weekend. “In all likelihood, most banks around the world will simply stop transacting altogether with Russian banks that are removed from SWIFT.”
The European Union on Wednesday recommended that seven Russian banks be “de-SWIFTed.”
Did the west just “go nuclear”?
Many people have called the move to de-SWIFT Russian banks “the nuclear option” because it’s seen as the last resort—the harshest sanction countries can take against another nation.
In 2012, Iranaian financial institutions were booted from SWIFT after Iran failed to comply with a pact on nuclear arms development. The disconnection inflicted serious damage to Iran’s economy because other countries that were willing to buy Iranian oil could no longer easily pay. Additional damage to Iran came from direct sanctions on its oil.
“If you eject a country from SWIFT, you essentially cripple its ability to trade [goods] and move currencies,” said Mai’a Cross, Edward W. Brooke professor of political science and international affairs at Northeastern University, in an interview with a university publication.
Well, not quite, says Eddie Fishman, an adjunct professor at Columbia University’s School of International and Public Affairs and a former official in the State Department’s Office of Economic Sanctions Policy and Implementation. “No—it’s not even close to being the nuclear option,” he said in a Goldman Sachs note. “SWIFT is just a messaging service. If the US and Europe decided to cut Russians banks off from SWIFT without imposing full-blocking sanctions on them, they could still transact with US and European financial institutions—they just couldn’t use SWIFT to do so. And in a perverse way, that may actually increase the demand for SWIFT alternatives, such as Russia’s own System for Transfer of Financial Messages (SPFS).”
SPFS has about 400 users, which is small compared to SWIFT’s 11,000 users.
The real “nuclear option” would be sanctions on Russia’s oil and natural gas exports, which have so far been untouched, analysts said. That move would be the most powerful sanction against Russia, which derives much of its revenue from those exports. But going after Russian energy would harm western countries that rely on it and could weaken the western alliance because some regions, like Europe, would be hurt more than others, like North America.
How does this affect our economy and consumers?
With western countries providing exceptions in their SWIFT sanctions for energy and other commodities, they’ve limited the effects of the sanctions on their own economies. Western countries that rely on Russian oil and natural gas will continue to be able to receive those commodities, White House officials said.
But the price of oil and other commodities like wheat and palladium has soared anyway because of the large impact of Russia as a supplier to those markets. The increase in those prices, which could go even higher if western countries eliminate the exemptions for energy and other commodities, can push U.S. inflation, already at a 40-year high, up even more, and that could hit consumers hard.
“Retail gasoline prices could hit $4 per gallon soon, up from $3.40 in January, meaning that households will be spending an additional $75 billion annualized on filling up at the pump,” said Capital Economics senior U.S. economist Andrew Hunter in a commentary. “That will leave less to spend on other goods and services, and could trim 0.5% off real disposable incomes.”
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