On February 26, two days after Russia invaded Ukraine, the European Union and its Western allies (the United States, the United Kingdom and Canada) agreed to sanction Russian banks by denying them access to Swift (Society for Worldwide Interbank Financial Telecommunication), an international banking communication platform.
According to Ursula von der Leyen, President of the European Commission: “This action will prevent banks from conducting most of their global financial transactions and therefore Russian exports and imports will be blocked.”
The day before, French Economy and Finance Minister Bruno Le Mer described such a sanction as a “financial nuclear weapon” in order to weigh down the Russian economy and thus limit funding for the conflict in Ukraine. But what are the real consequences that can be expected from this exclusion of Swift?
A basic tool for simplification
The Brussels-based Swift platform was launched in 1973 to facilitate international financial transactions by standardizing the messages exchanged on this network. According to its website, this service provides “more than 11,000 banking and securities organizations, market infrastructures and corporate clients located in more than 200 countries and territories” with speed, confidentiality and low transaction costs for making payments and transfers.
The principle is quite simple. Each stakeholder in the network receives a unique identifier, BIC, which allows its immediate recognition on the network and thus ensures the authenticity of the message. Once the recognition is done, the role of the platform is to transfer messages, all standardized, in order to minimize the time to read the latter, but also to be secure in the requested order. In this way, the Swift message “MT502 from CEPAFRPP” will always correspond to a “buy or sell order” from Caisse d’Epargne.
Therefore, the interest of the platform is diverse: it allows you to quickly ensure the payment or transfer of funds from one organization to another, minimizing transaction costs, thanks to the standardization of messages and identifiers.
It also plays a key role in the fight against financial crime, enabling financial institutions to exchange financial information efficiently. Thus, the Swift platform has become a key tool for financial institutions, especially in the context of international transactions. As our study shows, banks prefer internal transactions, which are considered less risky because collecting and analyzing information is easier.
Double-edged sword
Russia is a major player in this platform with about 300 members, making it second only to the United States. Restricting the access of these 300 institutions to the platform inevitably implies a significant slowdown in financial exchanges with Russia and therefore a significant decline in short-term revenues, in addition to having a significant economic impact on all Russians and all their business partners.
Although not all transactions are reported through Swift (for example, Europe uses the Sepa system for these transfers), the most complex international transactions use it. Therefore, buying a product abroad is based almost exclusively on this technology. This means that if a Russian company wants to make a purchase from France, quickly, confidentially and almost for free, it must use Swift.
However, this also means that a French company wishing to make a purchase from a Russian company will also have to go through this system. Therefore, excluding Russia from the infrastructure is a double-edged sword, because if it slows down Russia’s development, it also slows down all institutions, financial or not, in trade relations with Russia.
Alternative systems
One may then wonder whether such a sanction is really effective for the purpose it pursues. In a globally globalized economy, it is legitimate to assume that the weakening of an economic entity like Russia could have consequences for its economic partners in key sectors of the sanctioned country, such as energy.
In addition, such a sanction could have side effects for other members of the platform, forced to freeze communications with their Russian financial partners. Thus, if, according to Western experts, Russia sees a 7% reduction in GDP as a result of this exclusion, we can expect consequences for the GDP of all trading partners.
In addition, in this case, Russian financial institutions can always use alternative telecommunications systems such as SPFS (Financial Communications Transfer System), developed by Russia in 2014 after the first threats of redundancies. This system now has more than 400 members in Russia, but also several in Belarus and China, which are themselves in the Swift system.
In this way, this system will allow Russian banks to conduct their financial transactions with SPFS-related institutions, which will then pass on the transactions to the Swift system. So yes, adding a financial intermediary to the transaction would increase the costs and delays of transactions, but it would also limit the effectiveness of the sanction aimed at restricting access to sources of funding in support of the conflict in Ukraine.
This article was republished by The Conversation under a Creative Commons license. Read the original article.
