What is SWIFT?

SWIFT, or the Society of Worldwide Interbank Financial Telecommunication, is a high-security messaging network for banks and financial institutions. Based in Belgium, it’s sometimes described as the Gmail of global banking.

It was created in 1973, replacing the previous telex system for cross-border payments. The idea was to create a "common language" for banks from all around the world to move money and carry out other transactions.

It has since grown to serve more than 11,000 financial institutions in 200 countries and territories. In 2021, it averaged 42 million messages per day.

Simply add Capital One Shopping to your browser, and shop like normal. This free tool does the work for you.

Install Capital One Shopping

Why is that important?

While the network doesn’t hold any assets or actually move money, access to SWIFT means funds can be exchanged between member institutions easily and securely. Other payment systems do exist, but SWIFT dominates the market.

In addition to payment instruction messages, it also transfers messages between institutions relating to everything from the trade of precious metals to traveler’s checks. Its latest report shows categories other than straightforward payments now account for well over half of its transactions.

What does this mean for Russia?

Barring Russian institutions from SWIFT will certainly impact its economy. How much is hard to say, but former finance minister Alexei Kudrin estimated in 2014 that the country’s GDP could shrink by 5% under a SWIFT ban.

That’s likely a low estimate of the damage that would be done if Russia were cut off completely from the SWIFT system.

When Iran was blocked from SWIFT in 2012, it had a massive economic impact on the country. Oil exports reportedly took a sharp dive from more than 2.5 million barrels a day to just one million barrels within two years, and the country lost around 30% of its foreign trade.

The impact of those sanctions are believed to be a key part in what brought Iran to the table in the 2015 Iran nuclear agreement.

Most people don't realize that with the right moves, you can become a millionaire — it's not a question of "if," it's a question of "when."

Read More

Alternative avenues

Analysts have also speculated that Russia may partner with China, which uses its own Cross-Border Interbank Payment System, or CIPS. Or that it may rely on cryptocurrency, or a digital ruble.

Back in January, Nikolai Zhuravlev, the vice speaker of the upper house of Russian parliament, noted that Russia has alternatives to the SWIFT system. After the threat of sanctions in 2014, it began using its own financial messaging system, SPFS, or the System for Transfer of Financial Messages.

While SPFS will cushion the blow of being cut off, it has nowhere near the number of members as SWIFT. According to Russian news agency TASS, SPFS had 400 members as of February 2021, including institutions from Armenia, Belarus, Germany, Kazakhstan, Kyrgyzstan and Switzerland.

Russia's alternatives are not ideal, says Maria Shagina, a postdoctoral fellow at the Center for Eastern European Studies at the University of Zurich. Shagina authored a paper last year analyzing the impacts removing Russia from SWIFT could have.

More from MoneyWise

“Russia is heavily reliant on SWIFT due to its multibillion exports of hydrocarbons denominated in U.S. dollars,” she wrote. “The cutoff would terminate all international transactions, trigger currency volatility and cause massive capital outflows.”

Shagina noted that only 20% of Russia’s domestic transfers are done through SPFS. And since it’s still limited to weekday working hours and transfer sizes are limited, it’s not yet a suitable alternative for most potential users.

However, the SWIFT ban currently only includes seven Russian banks, and excludes its largest lender, Sverbank, and Gazprombank, which are the country’s main channels for payment of Russian oil and gas.

But that volatility Shagina references could still be in the cards as the U.S. and other countries target its energy exports.

Never overpay on Amazon again

Make sure to price-check online purchases with the help of Capital One Shopping. It’s totally free to use and takes less than a minute to set up.

Last year the service saved its customers over $160 million, and with just a few clicks you can start saving, too.

Download Capital One Shopping today and stop paying more than you have to for the exact same stuff.

About the Author

Sigrid Forberg

Sigrid Forberg

Reporter

Sigrid is a reporter with MoneyWise. Before joining the team, she worked for a B2B publication in the hardware and home improvement industry and ran an internal employee magazine for the federal government. As a graduate of the Carleton University Journalism program, she takes pride in telling informative, engaging and compelling stories.

What to Read Next

Billionaire George Soros just loaded up on these two beaten-down growth stocks

This super investor is going against the herd. Maybe you should, too.

Homebuyers catch a small break on mortgage rates this week

The pandemic buying frenzy is cooling some, but one real estate expert says rates over 5% haven’t locked that many buyers out of the market.

Disclaimer

The content provided on MoneyWise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.