What is the Swift payment system and how can Russia be affected by it

In the early days of Russia’s invasion of Ukraine, UK prime minister Boris Johnson had pushed for Russia to be removed from the Swift international payment system.

However, the German chancellor Olaf Scholz, opposed the move even as British officials said Johnson is very keen and pushing it very hard.

Also, the US said that it was too early to consider such a sanction, although no option was completely off the table.

Removal of Russia from the Swift international payment system if implemented, would affect the country’s ability to trade beyond its borders

What is Swift International Payment System?

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a Belgian co-operative, that provides intermediary service between banks worldwide, and facilitates trillions of dollars worth of transactions.

SWIFT with its headquarters in Belgium, was launched in 1977 by a coalition of banks. Central banks in the United States, Japan, and Europe oversees it.

Over 11,000 banks and financial institutions in over 200 countries use the service of SWIFT and it also handles about 42 million messages each day.

The majority of Swift transactions are settled in US dollars, which has helped to strengthen the status of that currency as the global reserve currency.

How will suspension from the Swift payment system affect Russia?

Suspending Russia from the Swift payment system will negatively impact its largest banks as well as the ability of the country to trade beyond its borders.

Russia will also not be able to recover international profits from its oil and gas exports, which are responsible for more than 40% of the country’s revenue.

However, cross-border lending transactions can still occur, but they would be more time-consuming and more expensive.

Countries like Iran and North Korea, which have been cut off from the Swift system, have had to resort to smuggling and bartering for economic survival.

The Swift payment system has also come under heavy criticism such that Russia, China, and the EU have been building up an alternative payment system.

Also, the Financial Times in 2018 while criticizing Swift, said that ‘transfers frequently pass through multiple banks before reaching their final destination, making them time-consuming, costly and lacking transparency on how much money will arrive at the other end”.