How Significant Is Russia’s Partial Ban from SWIFT?

On the evening of Thursday, February 24th, shortly after Russian forces began the invasion of Ukraine, leaders of the European Commission held an emergency meeting to discuss which financial measures member countries should take to punish—and, ideally, discourage—Russia’s military assault on Ukraine. There was little consensus among members around how extreme the steps, such as sanctions and asset freezes, should be. One option that generated controversy was the idea of banning Russian financial institutions from SWIFT, the global messaging system for financial transactions. Several leaders, including the German Chancellor, Olaf Scholz, and the French finance minister, Bruno Le Maire, advocated extreme caution. Le Maire described a SWIFT ban as a measure of last resort and “the financial nuclear weapon.”

According to news reports, the President of Ukraine, Volodymyr Zelensky, joined the E.U. meeting by video conference and pushed for harsher measures. Dmytro Kuleba, Ukraine’s minister of foreign affairs, made an explicit plea on Twitter. “I will not be diplomatic on this,” he wrote. “Everyone who now doubts whether Russia should be banned from SWIFT has to understand that the blood of innocent Ukrainian men, women and children will be on their hands too. BAN RUSSIA FROM SWIFT.”

Then, over the weekend, there was a dramatic turnaround in the Commission’s position, and on March 2nd the E.U. announced that it was barring seven Russian banks from the network as part of a broader package of sanctions. The effectiveness of the move became an immediate subject of debate; the seven banks on the list are already subject to sanctions, but many other Russian banks are able to use SWIFT. Nevertheless, this was an almost unprecedented step toward blocking Russia’s ties to the international financial system. “It’s not a small thing to start taking banks off of SWIFT,” Daniel Glaser, a former Assistant Secretary of the Treasury Department, who worked on issues related to disrupting terrorist financing, told me. “The fact that they’re doing it at all, when they were explicitly saying a week ago that they weren’t going to, demonstrates the seriousness of this effort. And it’s another signal to the international financial community that you’ve got to be really serious with any Russian bank.”

SWIFT—the Society for Worldwide Interbank Financial Telecommunication—is a network that links eleven thousand financial institutions in more than two hundred countries. It was created in 1973, went live in 1977, and is headquartered in Belgium. The system does not handle the transfer of money itself, nor does it hold assets or settle transactions. Rather, it functions like a secure e-mail system for financial transactions, containing instructions for the movement of funds, along with bank codes, routing numbers, and other identifiers. Prior to the adoption of SWIFT, most communication about cross-border payments occurred using telex machines, which were similar to fax machines and were capable of transmitting and printing out messages over telephone lines. But the system was slow and prone to technical glitches. Approximately forty-two million messages are now transmitted over the SWIFT system each day. It is rare for countries to be blocked from using it; in 2012, for example, Iran was removed from SWIFT after sanctions were applied in response to concerns about the country’s nuclear program. “SWIFT goes to the heart of the international financial system,” Glaser said. “There are a lot of countries out there doing a lot of bad stuff, and their banks are on SWIFT.”

The E.U. agreement will take effect on March 12th, in order to allow time for the system’s administrators to prepare for the transition and take steps to limit the impact on other countries and businesses. But, because of the limited nature of the ban, the practical effects are likely to be limited. Russian financial institutions that are on the sanctioned list can use alternative messaging systems, and banks that aren’t on the list can help the ones that are. Eventually, large companies and wealthy individuals will likely find workarounds, although these may be slower and costlier. “It adds a bit of grit in the wheels, but for the larger sums it would make no difference,” Alistair Milne, who studies payment systems and is a professor of financial economics at Loughborough University, in Britain, said. “I’m not against doing it, but you want to be realistic about what it will achieve.”

Milne noted that many banks in Iran have found ways to make international transfers by finding banks in other countries willing to serve as middlemen in exchange for payment. (The U.S. has fined companies such as the French bank BNP Paribas billions of dollars for various violations of the sanctions against Iran, among others.) In Milne’s view, the U.S. and other Western countries need to go further if they want to put a stop to Russia’s aggression through nonmilitary measures, by passing legislation that would make doing business with the Russian regime a crime. “What do Putin and his henchmen expect? They knew sanctions were coming. They’ve been preparing for sanctions for ten years,” Milne said. He noted that Russia has built up a vast “war chest” of foreign reserves, and has made concerted efforts since 2012 to increase domestic grain production, in order to reduce the country’s dependence on food imports. He outlined three choices that Western leaders face. The first is military action. The second is economic and financial action, on a far greater level than the limited SWIFT measures. “Or you do nothing,” Milne said. ”And that is a huge blow to democracy. The flame of democracy will die.”