What happens if Russia is banned from SWIFT?

With his half-hour speech on the morning of February 24, 2022, Russian President Vladimir Putin turned the “armed conflict” into a war. As a reaction from NATO, however, there is talk of excluding Russia from the SWIFT system. So far, only banks from Iran, North Korea and Afghanistan have been banned from the world’s most important payment system.

With such an exclusion, you not only hit the state with its political leadership, but also the people who live in Russia and are dependent on trade with the West. In addition to other alternative means of payment, cryptocurrencies could therefore help people to continue marketing their products and thus secure their existence.

What does SWIFT even mean?

SWIFT stands for Society for Worldwide Interbank Financial Telecommunication. This is a politically independent, international cooperative based in Belgium. Nevertheless, like every company in the EU, it has to operate under European law. In addition, no government, not even the US, can decide whether there will be an immediate cap on a banking group.

Every day, international transactions worth billions are processed in the cooperative buildings. (Almost) everyone who wants to carry out an international transaction first ends up with SWIFT, then is often routed via intermediary banks in the USA before the money arrives at the international partner bank. Over 11,000 banks in 200 countries are part of this system.

If Russia is excluded from SWIFT, a transaction of this type will no longer be possible. EU President Ursula von der Leyen said this on February 22, 2022: “Financial sanctions would mean that Russia would be practically cut off from international financial markets”. In your eyes, economic and financial sanctions would be the mobilization of the “most powerful lever available”. These sanctions could go in two directions. Either they lead to a resumption of talks, as in 2014 (Crimea crisis), or dark clouds gather. As Prof. Stefan Kooths, Vice President of the Kiel Institute for the World Economy (IfW Kiel) says:

A detachment from SWIFT system would virtually isolate Russia from much of the world economy. That would be economically the sharpest sword that could be used in response to a full-scale invasion of Ukraine by Russian troops. If it came to a conflict with the People’s Republic of China, a global economic crisis would be unavoidable.

Prof. Stefan Kooths, Vice President of the Kiel Institute for the World Economy (IfW Kiel)

“SWIFT, the nuclear bomb for capital markets”

Nevertheless, one must be careful that Germany, as an energy importer from Russia, does not cut itself in the flesh. In an interview with the Süddeutsche Zeitung in January, Foreign Minister Annalena Baerbock said: “As Western countries, we are looking very closely at which intelligent economic and financial sanctions actually affect the Russian economy and leadership and not ourselves.” Friedrich Merz (CDU) also emphasized to the German Press Agency that “questioning SWIFT could be the atomic bomb for the capital markets and also for goods and service relationships”.

Mr. Hendrik Mahlkow from the Institute for the World Economy forecast that “a trade stop with gas alone would result in a slump in Russian economic output of almost 3 percent”. A halt to trade in oil would also lead to a “slump of a good 1 percent”, “for Germany and the EU the economic damage would be extremely small in both cases”. It is still too early for an up-to-date assessment of the economic consequences of an exclusion. Already in 2014 calculated Dmitry Medvedev, then Russian Prime Minister, said that if SWIFT were excluded, Russia’s economic output would fall by five percent.

Alternative means of payment

Should the event happen that Russia is actually excluded from the SWIFT system in this conflict, people will look for alternatives for international trade. These cross-border transactions would presumably be carried out via “e-mail or anachronistic telexes or faxes are processed”, how capital suspects. According to Russian businessmen, this would be “cumbersome, slow and not particularly secure, but it would work in most cases”.

In addition, Russia is at least somewhat prepared for this sanction. After America had already threatened such a reaction in 2014, it worked out its own banking infrastructure with the neighboring countries. The SPFS system follows a principle similar to that of SWIFT. The system, developed by the Central Bank of Russia, had around 400 members as of February 2021, according to the Russian news agency TASS. Compared to SWIFT, this is a dwarf payment processor.

Crypto for payments across borders

The Chinese payment system CIPS offers another option. This system is far larger than SPFS. Another option China could potentially offer Russia is to use the digital yuan. This central bank digital currency was first released to the international community during the Winter Olympics. So far, however, this could only keep trade with Chinese companies alive.

Cryptocurrencies offer a final alternative. Due to their non-centrally controllable nature, they now lend themselves to being used as a means of payment for cross-border payments. For Russian entrepreneurs, the digital immutable protocols could represent a way of sustaining trade with the West for now without having to rely on political direction. It remains to be seen whether this might be a reason why the Russian ministry has strongly opposed possible crypto bans in recent months. In the last week, however, crypto payments have been capped at a maximum of €6,800. Despite the fact that cryptocurrencies are currently experiencing strong ups and downs, the following may apply to companies and private individuals: some trade is better than no trade at all.