The possible effects of using SWIFT against Russia on the global economy

There has been outcry on why the world powers had not used SWIFT as a tool of sanction against Russia. Now that they have used it. Let's look at the implications it might have and why they have delayed its deployment. We will also attempt to look at the implications it might have on the global economy.

LET'S START WITH SWIFT

According to google, SWIFT is a vast messaging network used by banks and other financial institutions to quickly, accurately, and securely send and receive information, such as money transfer instructions. It connects more than 11,000 financial institutions all over the world.

World Street Journal (WSJ) in its article says, “The Society for Worldwide Interbank Financial Telecommunication, or SWIFT, is the financial-messaging infrastructure that links the world’s banks. Swift doesn’t handle actual money transfers itself. It is a messaging system, a secure way banks transmit transfer requests to each other. Money moving from one account to another often passes by multiple banks before landing in the final destination, particularly if it involves a foreign currency. Swift routes messages with instructions from one bank to another, allowing them to know where the money should ultimately land. The Belgium-based system is run by its member banks and handles millions of daily payment instructions across more than 200 countries and territories and 11,000 financial institutions.”

About 1% of the trillions of dollars that exchange hands between companies and governments on daily basis originate from Russian banks.

WHO OWNS AND CONTROLS SWIFT?

Swift was created by American and European banks, which did not want a single institution developing their own system and having a monopoly.

The network is now jointly-owned by more than 2,000 banks and financial institutions.

It is overseen by the National Bank of Belgium, in partnership with major central banks around the world - including the US Federal Reserve and the Bank of England.

 

HOW WILL BANNING RUSSIA FROM SWIFT AFFECT IT?

At this stage, it is not known which Russian banks will be removed from Swift. This is expected to become clear in the coming days.

The statement from EU, the US, the UK and others said the move would "ensure that these banks are disconnected from the international financial system and harm their ability to operate globally".

The aim is for Russian companies to lose access to the normal smooth and instant transactions provided by Swift. Payments for its valuable energy and agricultural products will be severely disrupted.

Banks would likely have to deal directly with one another, adding delays and extra costs, and ultimately cutting off revenues for the Russian government.

Russia was threatened with a Swift expulsion before - in 2014 when it annexed Crimea. Russia said the move would be tantamount to a declaration of war.

Western allies did not go ahead, but the threat prompted Russia to develop its own, very fledgling, cross-border transfer system.

To prepare for such a sanction, the Russian government created a National Payment Card System, known as Mir, to process card payments. However, only 23 foreign countries currently use it.

 

 

WHY HAS THE WEST BEEN DIVIDED OVER SWIFT?

Removing Russia will likely hurt companies that supply goods to and buy from Russia, particularly Germany.

Russia is the European Union's main provider of oil and natural gas, and finding alternative supplies will not be easy. With energy prices already soaring, further disruption is something many governments want to avoid.

Companies owed money by Russia would have to find alternative ways to get paid. The risk of international banking chaos is too large.

Alexei Kudrin, Russia's former finance minister, suggested being cut off from Swift could shrink Russia's economy by 5%.

But there are doubts about the lasting impact on Russia's economy. Russian banks might route payments via countries that have not imposed sanctions, such as China, which has its own payments system.

 

WHAT ARE THE LIKELY SIDE EFFECT OF THIS SANCTION?

Critics have said there could be likely blowback, not just in Europe, which has deep trade ties and relies on Russia's natural gas exports, but also the rest of the world. Some critics have even noted that this move could severely harm Western business interests such as the major oil companies.

In addition, this move could erode the dollar dominance in global financial system, including fostering alternatives to SWIFT being developed by Russia and world's second largest economy, China. This could no doubt undermine Western power, especially the diplomatic leverage that sanctions offer.

 

©This piece was put together by Olufemi Odeyemi for Abesan News.

Content gathered from Google.com, BBC.com and WSJ.com