26 January 2022

Bloomberg: Why Swift’s Global Payments Are a Sanctions Pain Point

As the U.S., the U.K. and the EU weighsanctions against Russia should it invade Ukraine, one idea under discussion involves cutting off access to a messaging system called Swift. So central is Swift to the international financial system that any such talk rattles bankers and diplomats alike.

1. What is Swift?

Think of Swift, an acronym for Society for Worldwide Interbank Financial Telecommunication, as the Gmail of global banking. It delivers secure messages among more than 11,000 financial institutions and companies, in over 200 countries and territories. The message traffic -- 42 million a day on average last year -- includes orders and confirmations for payments, trades and currency exchanges. The member-owned cooperative, based just outside Brussels, was founded in 1973 to end reliance on the telex system. 

2. Why is losing access such a big deal? 

A country cut off from Swift can suffer significant economic pain. That’s what happened to Iran in 2012, when its banks lost access to Swift as part of European Union sanctions targeting the country’s nuclear program and its sources of finance. (Many of the banks were reconnected in 2016 after the EU took them off its sanctions list.) When Western nations threatened Russia’s access to Swift in 2014, Alexei Kudrin, a onetime finance minister close to President Vladimir Putin, estimated that it could reduce Russia’s gross domestic product by 5% in a year. Cutting Russia off from Swift could have ramifications for other nations as well, since Russia is a key energy supplier to Europe and countries rely on the Swift system to pay for fuel. Russian officials have repeatedly denied assertions that they intend to invade Ukraine. 

3. Are there alternatives to Swift? 

Not really, or at least not yet. Since 2014, the Bank of Russia has run its own financial messaging system for Russian and foreign banks. But that one has only about 400 users. The People’s Bank of China in 2021 announced a joint venture with Swift that SWIFT Venture Isn’t Defensive Move, Ex-Banker Says" class="terminal-news-story" target="_blank">was seen in some quarters as an insurance policy against being cut off from the global financial system. One fear among Western officials is that banning countries from Swift would encourage the use of such alternatives. Digital currencies and the underlying technology have also been touted as a threat to Swift for several years, but they’re nowhere close to replacing it....

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