Exclusion from SWIFT: What it Entails
The U.S., Europe and several other western nations are moving to exclude Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
What is SWIFT?
- SWIFT is an international network for banks worldwide to facilitate smooth money transactions globally.
- It is basically a messaging network used by banks and financial institutions globally for quick and faultless exchange of information pertaining to financial transactions.
- SWIFT is merely a platform that sends messages and does not hold any securities or money.
How does it facilitate banking?
- Each participant on the platform is assigned a unique eight-digit SWIFT code or a bank identification code (BIC).
- If a person, say, in New York with a Citibank account, wants to send money to someone with an HSBC account in London, the payee would have to submit to his bank the London-based beneficiary’s account number along with the eight-digit SWIFT code of the latter’s bank.
- Citibank would then send a SWIFT message to HSBC. Once that is received and approved, the money would be credited to the required account.
How is the organization governed?
- SWIFT claims to be neutral. Its shareholders, consisting of 3,500 firms across the globe, elect the 25-member board, which is responsible for oversight and management of the company.
- It is regulated by G-10 central banks of Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, the UK, the US, Switzerland, and Sweden, alongside the European Central Bank.
- Its lead overseer is the National Bank of Belgium.
- The SWIFT oversight forum was established in 2012.
- Europe, Middle East, and Africa are highest contributors to SWIFT.
What happens if one is excluded from SWIFT?
- If a country is excluded from the most participatory financial facilitating platform, its foreign funding would take a hit, making it entirely reliant on domestic investors.
- This is particularly troublesome when institutional investors are constantly seeking new markets in newer territories.
- An alternative system would be cumbersome to build and even more difficult to integrate with an already expansive system.
- Iranian banks were ousted from the system in 2018 despite resistance from several countries in Europe.
Impact on Russia:
- The move against Russia is only partly implemented for now, with only some Russian banks being covered.
- Targeting only some Russian banks seems to be aimed at both keeping the option of further escalation open, while ensuring that the sanctions have the maximum possible impact on Moscow, but prevent a major impact on European companies dealing with Russian banks for payments for their gas imports.
- Moscow has been building up a cushion of foreign currency with reserves touching a record high of $630 billion in January 2022. The new measures will significantly decrease the reserves available to the country’s central bank.
- However, Russia, too, has worked on alternatives, including the SPFS (System for Transfer of Financial Messages) — an equivalent of the SWIFT financial transfer system developed by the Central Bank of Russia.
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