U.S. President Joe Biden threatened Russian President Vladimir Putin with “severe economic consequences” on invading Ukraine. Now that Russia has attacked Ukraine, the U.S. and its allies may go with one of the harshest financial penalties against Russia: removing Russia from the SWIFT banking system. With Russia attacking Ukraine, many countries have threatened to put up sanctions against the country for this move.
This move is likened to a ‘nuclear option’ against one of the world’s largest economies.
What is SWIFT?
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a cooperative of financial institutions headquartered in Belgium. The National Bank of Belgium oversees it with cooperation from other major central banks, including
the U.S. Federal Reserve System, the Bank of England, and the European Central Bank.
But SWIFT is not a traditional bank and does not transfer funds. Instead, it acts as a secure messaging system that links more than 11,000 financial institutions in over 200 countries and territories, alerting banks when transactions are going to occur. (For instance, American banks have a unique SWIFT code that customers use for incoming wire transfers in U.S. dollars.)
In 2021, SWIFT said it recorded an average of 42 million messages per day, an 11 percent increase from the year before. In 2020, Russia accounted for 1.5 percent of transactions.
What would be the effect on Russia?
For the U.S. and its European allies, kicking Russia out of the SWIFT financial system would be one of the harshest financial steps that could damage the country’s economy immediately and impact it in the long term. The move could cut Russia off from most international financial transactions, including the profits from oil and gas production, which accounts for more than 40 percent of the country’s revenue.
In 2014, when Russia annexed Crimea, a similar proposal was proposed, but Russia declared that kicking it out of SWIFT would be equivalent to a declaration of war. So, the idea was shelved by the U.S. and its allies.
Russia, since then, has tried to develop its own financial transfer system with limited success.
The U.S. has succeeded before persuading the SWIFT system to kick out a country — Iran, over its nuclear program. But kicking Russia out of SWIFT would also hurt other economies, including the U.S. and key ally Germany.
Some U.S. lawmakers want the United States to do so immediately, although it’s unclear if or when Biden would go that route. He would also need support from his counterparts in Europe, who may be less accepting of such a drastic measure since Russia is a key energy supplier to Europe.
Even if the European Union does not remove Russia out of SWIFT, Biden can act unilaterally by enforcing a move by the Federal Reserve, which clears transactions, to block Russian companies’ access to American dollars.
Edited By- Subbuthai Padma
Published By- Bharat Anand
