In the early morning of February 27(Beijing time), the United States, the European Union, the United Kingdom and Canada issued a joint statement announcing that several major Russian banks were prohibited from using the Society for Worldwide Interbank Financial Telecommunication (SWIFT) international settlement system as the latest sanctions against Russia. It also imposed “restrictive measures” on Russia’s central bank to prevent it from deploying its international reserves in a way that could undermine sanctions.

The latest sanctions will ensure that Russian banks are cut off from the international financial system, “damaging their ability to operate globally,” according to a joint statement issued by several countries. This means that Russian banks will not be able to communicate securely and efficiently with foreign banks.

Since the current information transfer of global cross-border payment is basically realized through SWIFT, the exclusion of SWIFT means that cross-border payment settlement will become very difficult, which may affect the smooth development of Russia’s global capital exchanges and international trade.

Therefore, this sanction is also known as the “financial nuclear bomb”.

What is SWIFT?
Are SWIFT sanctions really that bad?
Why do SWIFT sanctions deal a major blow to a country’s economy?
What happens when leaving the SWIFT system?
Can SWIFT be replaced?

What is the SWIFT system?

SWIFT full name: Society for Worldwide Interbank Financial Telecommunication(环球同业银行金融电讯协会管理的银行结算系统)

By nature, SWIFT is an institution headquartered in Brussels, Belgium.
By function, it is a payment and communication tool.

SWIFT has a standardized message system, which is the standard language for international financial information data exchange, and banks all over the world recognize and trust this system.

Are SWIFT sanctions really that bad?

Yes, seriously bad.
If a bank is sanctioned by SWIFT, international business basically comes to a standstill.
If a country is kicked out of the SWIFT system, its import and export trade are basically at a standstill.

Why do SWIFT sanctions deal a major blow to a country’s economy?

Once the message conversion channel is cut off by SWIFT, it is equivalent to cutting off the channel for the sanctioned country to conduct transactions in various currencies with countries around the world.
Being kicked out of the system means that international financial information can no longer be received and transmitted. All funds and financial activities can only be carried out by barter transactions or cash transactions, with cumbersome procedures and extremely high transaction costs.
Therefore, after Russia was kicked out of the SWIFT system, the most direct consequence was that it could not settle funds with others.
Funds cannot be liquidated, and the most affected is the import and export trade, which further affects the economic development of the country.

In this case, if Russia wants to continue to do import and export trade, it has to do business with foreign partners in the traditional way in the past, that is, by fax. And this can be a very time-consuming method.

In contrast, SWIFT has a low sending cost, and the arrival time of international remittances is shortened to about 10 minutes.
Therefore, the SWIFT system has become an important means for the United States to monitor and impose sanctions on individuals, businesses, financial institutions and government funds.

1. Iran was kicked out of the SWIFT system twice.

From 2012 to 2015, after the SWIFT channel was cut off, Iran’s imports and exports fell sharply, causing Iran to lose nearly half of its oil export revenue and nearly 30% of its foreign trade.

In 2018, Iran was kicked out of the SWIFT system, and crude oil exports fell all the way.

At the same time, insufficient imported materials have prompted hyperinflation, and Iran was even forced to trade in barter.

2. Sanctions against Russia

In 2014, the United States issued a medium- and long-term financing ban on Russia’s defense, financial and energy industries, and Russia’s largest bank, Sberbank, was also included in the sanctions list. US proposes motion to shut down SWIFT system against Russia.
The motion was unsuccessful due to EU opposition. But the mere threat has caused serious consequences for the Russian economy, in the form of a series of shocks such as capital flight, a slump in the ruble, and a bank run.

The dollar/ruble exchange rate depreciated from 1:33 at the end of 2013 to 1:85 in January 2015, a depreciation of up to 56%.
In 2014, Russia lost $103 billion in foreign exchange reserves, a 27% drop.
The Central Bank of Russia announced that there were nearly $75 billion in capital flight in the first half of 2014, while the European Central Bank said in May 2014 that the actual scale of capital outflows from Russia was estimated to have reached $222 billion.
Finally, financial sanctions have had a lasting impact on the Russian economy.
The GDP growth rate dropped to 0.74% in 2014 and -2.54% in 2015. In June 2019, Putin mentioned that Western economic sanctions caused the Russian economy to lose more than 50 billion US dollars.

What happens when leaving the SWIFT system?

The international transaction process has become cumbersome, and the time cost and labor cost have increased, returning from “modern” to “primitive”.

Can SWIFT be replaced?

Yes, but now is not the time.

From view of payment tools and communication tools, SWIFT system can easily be replaced.
But from the monetary point of view, SWIFT will become dispensable only if the US dollar fails, and no one cares about sanctions.