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A demonstrator holds a poster reading 'Ban Russia from SWIFT' during a protest against Russia's invasion of Ukraine on Feb. 26 in front of the Russian embassy in Vienna, Austria.HANS PUNZ/AFP/Getty Images

The West’s sanctions campaign against Russia reached a new and unprecedented level over the weekend, when the United States, Canada, Britain and the European Union agreed to overcome their internal divisions and cut some Russian banks out of SWIFT – the heart of the global payments network.

They made the announcement as Russian forces surrounded Kyiv and heavy fighting was reported in Kharkiv, Ukraine’s second-biggest city.

The European Commission said the move, on top of ratcheted-up sanctions on Russia’s financial system, businesses, oligarchs and the denizens of the Kremlin itself, was designed to ensure the invasion of Ukraine is a “strategic failure.” European Commission President Ursula von der Leyen said, “Cutting banks off will stop them from conducting most of their financial transactions worldwide and effectively block Russian exports and imports.”

Will it? While there is no doubt the SWIFT weapon will inflict a lot of pain, it is unlikely on its own to deliver a death blow to the banks.

What is SWIFT?

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. It has been around since the 1970s, operates as a co-operative and is based in Belgium. SWIFT is often inaccurately described as a payments system; it actually delivers payment messages as if it were a kind of glorified, secure and fast telex system. SWIFT is massive. It delivers some 40 million payment orders to 11,500 banks and other financial institutions every day, and works on mutual trust.

What is SWIFT’s reputation as a weapon of mass financial destruction?

Formidable, or at least that is its image. Cutting banks out of SWIFT has often been called the “nuclear” option, as if doing so were guaranteed to flatten them. In 2014, when Russia seemed on the verge of exclusion from SWIFT for having annexed Crimea, Alexei Kudrin, a former Russian finance minister, forecast that the sanction would shrink GDP by 5 per cent. The then-prime minister, Dmitry Medvedev, said it would be tantamount to “a declaration of war.” Iran in 2012 was cut out of SWIFT and the pain was fast and furious. After its banks were disconnected, the country lost almost half of its oil export revenue and 30 per cent of its foreign trade, according to Maria Shagina, a sanctions expert who is a visiting fellow at the Finnish Institute of International Affairs.

If eliminating SWIFT would be so effective, what was the resistance to using it against Russia?

Because SWIFT works both ways. The targeted banks would not be able to make payments, but also would not be able to receive payments. This scenario terrified the European countries that imported a lot of Russian gas, notably Germany and Italy. The Kremlin-controlled gas giant Gazprom uses SWIFT to receive payments from the utilities in those countries. Evidently, German Chancellor Olaf Scholz and Italian Prime Minister Mario Draghi feared Gazprom would turn off the taps if its payments went missing. Missing gas was only one worry. Germany, Italy and Austria all have close trade relationships with Russia. Payment for everything from German BMWs to Italian fashion brands could be at risk. Paolo Gentiloni, the EU’s trade commissioner, said Europe “would pay a price” for the various sanctions, including reduced sales in Russia and rising energy costs.

How did the countries in favour of whacking the Russian banks convince the doubters?

Not all Russian banks will get the SWIFT-less treatment (though Sberbank, the country’s biggest retail bank, would). It appears that certain energy-related banks would remain locked into SWIFT to allow payments for gas and oil deliveries to continue, perhaps with some restrictions. Mr. Draghi made it clear even before Russia launched the invasion on Thursday that he did not want Russian energy to be part of the West’s sanctions package.

Will Russia truly suffer without access to SWIFT?

Probably less so than it would have several years ago. Russian President Vladimir Putin has no doubt been preparing for this moment since 2014, when the SWIFT threat first emerged. Besides ensuring that Russia had ample foreign reserves and a low debt-to-GDP ratio, the country created a SWIFT clone called the System for Transfer of Financial Messages, which is similar to China’s version, the Cross-Border Interbank Payment System. The Russian one is small; in 2020, only about 400 financial institutions in 23 countries used it. If Russia and China worked together, they might be able to build a viable competitor to SWIFT, but that would take years. Mr. Putin and his Kremlin finance wizards may have other workarounds that we don’t even know about to offset the loss of SWIFT.

Could the sanctions on Russia’s central bank inflict even more damage than eliminating SWIFT?

Yes, for sure. The new sanctions on the central bank are aimed at freezing its foreign exchange reserves of US$630-billon, equivalent to 38 per cent of GDP, held in various Western currencies and assets, including gold. These holdings are scattered everywhere, some of them in countries that will enforce the sanctions. Hitting the central bank is an enormous blow to Russia. It would, for instance, severely limit its ability to use foreign cash to prop up the sagging ruble. That sanction, combined with cutting the banks out of SWIFT, might prove devastating to Russia’s banks and economy. The question is how Russia will retaliate.

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