SWIFT: Society for Worldwide Interbank Financial Telecommunication
It is a messaging network that connects banks around the world and is considered the backbone of international finance. The Belgian-based consortium links more than 11,000 financial institutions operating in more than 200 countries and territories, acting as a critical hub to enable international payments. Last year, the system averaged 42 million messages a day, including orders and confirmations for payments, trades and currency exchanges. More than 1 percent of those messages are thought to involve Russian payments.
With the russian invasion of ukraine there is a lot of information to digest
In this article we will briefly explain one financial angle of the conflict, something called the SWIFT system which is an important part of making payments across borders has been suggested as something that should be essentially turned off for russia, as a way to impose financial pain for the country, but as of right now russia has not been cut off from swift 100%, people are wondering if you want to impose as much financial pain on russia as possible, why didn’t they get banned from swift
We’ll explain what swift is and why russia may not have been cut off from it,
Let’s start with what swift is ?
Swift stands for Society for Worldwide Interbank Financial Telecommunication
It is headquartered in belgium, and was conceived in 1973 by 239 banks from 15 different countries around the world, to specifically address communications about cross-border payments, the swift system does not actually transfer funds, but rather it transfers messages between financial institutions about where the funds are being transferred,
Why is that so important?
It really comes down to just keeping track of payments, the information about the funds being transferred helps the sending institution tell the receiving institution what account the money is supposed to end up in, and if you are processing hundreds, or even thousands of international payments per day, making this as easy as possible is better for a global economy to function smoothly and efficiently
Now the old system used before swift was called Telex, which is short for teleprinter exchange, a system developed just before world war II, or about 90 years ago, and was one of the original forms of data transmission,
Telex communications between financial institutions were not standardized, and had a free message format which led to a lot of human errors, and made processing times quite long,
Here’s an example of a telex message, the sender would just type out whatever they thought was useful, but without standardization, coupled with language barriers this had its issues, as cross-border payment volumes increased, non-standardization became a drag on efficiency, thus swift was born, and went live in 1977, in its first year it processed over 10 million messages, and very quickly replaced telex as the dominant financial messaging system in the world,
Anyone using the swift network which today is a network of over 11 000 financial institutions, in over 200 countries
Now inputs a standardized swift code, when sending a payment that includes all the information you need in order to direct a payment to the right bank, in the right country, the right city or region, and also the specific bank branch,
These codes are standardized, and that leads to less errors, now just a side note, this code is actually a BIC code which stands for bank identifier code, the swift network assigns a bic code to each bank, but people use the term swift code and bicode interchangeably, but really it’s a BIC code, for use in the swift network
Now what about the actual money, swift doesn’t handle money, just messaging, what happens is that the two member banks of the swift network have what are called Nostro and Vostro accounts that they hold jointly, nostro and vostro are latin for hours and yours respectively, once a swift message has been confirmed the sending bank deposits your funds into the nostrovastra account, and the receiving bank debits the nostrobostro account, and credits the recipients bank account with the funds, so the money transfer and the financial message communication are two separate paths, but they are linked,
Anyways that’s the quick and dirty explanation of what the swift network is, and why it’s so important for cross-border payments?
The next thing we’ll tackle is why people want Russia cut off from the swift network, and conjecture as to why it hasn’t happened yet, if russia were to be cut off from using the swift network, it’s considered the most severe financial sanction that could be levied, this would effectively the ability for the majority of funds to flow in and out of the country, they would have to rely on other ways to process payments which would be extremely cumbersome, and messy and given the volume of flows this would indeed be crippling to their economy, at least in the short term. The suggestions to cut Russia off from swift, are not new, on april 29th of 2021, european parliament passed a resolution -a non-binding resolution- to exclude russia from the swift network if they invaded ukraine, but the idea of cutting them off from swift has been considered for a lot longer than even that, it was also considered back in 2014, and at that time alexei kudrin former finance minister of russia said it would cause russia’s gdp to contract by 5,
So why not do it? The argument is that not only would russia suffer but also much of europe, we can see many countries are heavily reliant on russia for natural gas supply, it’s cold now and cutting off the ability for millions of people to heat their homes could lead to many deaths in and of itself if we look at wheat exports combined russia and ukraine account for one quarter of wheat exports around the world, that’s now already disrupted with the invasion into ukraine, and further crippling payment information messages, and thereby impacting exports, would further strain wheat supply around the world, it’s almost a given that no matter if they get cut off from swift or not at this point, food and energy costs have more upward pressure than they did before, countries opposed to cutting off russia from swift are basically arguing that they can do enough economic damage through other financial sanctions, while others are suggesting the maximum needs to be done right away to have the best chance of pressuring russia to end the invasion.