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While the US and its European allies pushed out a series of sanctions to punish Russia for its military offensive in Ukraine, they stopped short of imposing restrictions on its strategic energy and aluminium industries as this would have reverberations in the global economy.
On February 26, the US in co-ordination with the European Commission, France, Germany, Italy, the United Kingdom and Canada, said they will bar certain Russian lenders from the Swift payments network to “ensure that these banks are disconnected from the international financial system and harm their ability to operate globally”.
In a joint statement, they also pledged “restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions".
"We will hold Russia to account and collectively ensure that this war is a strategic failure for Putin," the statement said.
The joint statement did not list the banks that will be disconnected from the Swift network.
As a global payments network, Swift handles more than five billion financial messages a year, supporting fast and secure cross-border payments, and allowing international trade to flow smoothly.
It is considered a fast, reliable and secure platform for businesses worldwide. A ban could severely affect Russian trade, making it difficult for local companies to do business globally.
Here is a quick rundown on the payments network.
What is Swift?
Based in Belgium since its founding in 1973, the Society for Worldwide Interbank Financial Telecommunication (Swift), is a member-owned co-operative that serves as an intermediary and executor of financial transactions between thousands of banks in more than 200 countries.
It is governed by a 25-member board and the organisation is overseen by G10 central banks, as well as the European Central Bank.
Swift processes transactions worth trillions of dollars everyday. It acts as a messaging system for banks — processing payment requests and keeping a record of them in secure servers in Europe and the US.
Swift does not arrange fund transfers but sends payment orders that must be settled by the correspondent banks or accounts.
More than 11,000 institutions sent an average of 42 million messages a day through the Swift network in 2021, 11.4 per cent more than 2020.
The platform works by assigning each financial institution a unique identification code that specifies the bank name, its country, city, and branch.
The payment network enables people and businesses to take electronic or card payments, even if a customer or vendor uses a different bank than the payee.
How will a Swift ban affect Russia?
When the EU tightened its sanctions on Iran in 2012, Iranian banks were disconnected from the global financial network. Similarly, if a Swift ban is imposed it would limit Russia’s access to foreign companies and global financial markets.
Notable in Mr Biden's speech on Thursday was that European allies were not ready to impose such a ban yet, largely because of how intertwined European economies are with Russia's. But also worth noting is that Swift adheres to Belgian and European law, not US law.
“While sanctions are imposed independently in different jurisdictions around the world, Swift cannot arbitrarily choose which jurisdiction’s sanction regime to follow,” the network says on its website.
If Russia is banned from the platform, businesses in the country would find it very difficult to buy imports and be paid for their exports. Foreign exporters would find shipping goods to Russia dangerous and costly.
A Swift ban could have devastating impact on Russia’s economy and make everyday life difficult for Russians. As is the case with Iran, Russians would not be able to use credit cards abroad and tourists visiting the country would not be able make payments using their cards.
What are Russia’s alternatives?
Any ban on Swift could prompt the usage of Russia's alternative — the System for Transfer of Financial Messages.
“Introduced in response to the first threat of a Swift ban for Russia, usage of the system has grown domestically but has not yet been widely adopted internationally,” according to S&P Global Platts.
In 2014, when a potential ban was first discussed as a response to Russia's role in the conflict in Ukraine, Swift said it was a neutral global co-operative company.
The platform said it would not make unilateral decisions to disconnect institutions from its network as a result of political pressure, but would comply fully with European law as it has with respect to Iran.
Russian banks could also use other platforms for payments such as messaging apps, emails and smartphones.
However, industry experts say such alternatives would be less effective, not secure and could lead to a drop in payment volumes and an increase in transaction costs.
