On Feb 24th, when Russia attacked Ukraine, a brilliant thread posted on Twitter spoke of SWIFT and the implications of Russia being cut off.
What is SWIFT ?
Explained beautifully in this thread by @SahilBloom – SWIFT ban on Russia
With the rapid deterioration of the Russia/Ukraine situation, you’re going to hear a lot about SWIFT in the coming days…
Here’s a quick breakdown of what it is and why it matters:
SWIFT is short for the Society for Worldwide Interbank Financial Telecommunications.
It’s a global cooperative of financial institutions based in Belgium. It was formed in 1973 when 239 banks from 15 countries came together to establish a way to handle cross-border payments.
Today, SWIFT connects more than 11,000 financial institutions across 200+ countries.
Think of it like a simple email system enabling secure messages across its members. An average of 40 million messages a day—including orders, payment confirmations, FX exchanges, and trades.
SWIFT doesn’t actually do any transfer or holding of funds, but it’s an critical part of the communication infrastructure that enables cross-border money flows. It’s a key part of the global financial system’s plumbing, if you will.
So why is it in the spotlight right now?
While not a political organization, it’s importance to global flows means SWIFT is often looked at as a geopolitical tool as part of sanctions packages. Cutting off a nation’s banks from SWIFT access restricts flows into and out of that nation, resulting in real economic pain.
This happened in 2012 with the sanctions package on Iran in retaliation for it’s nuclear program.
It was looked at in 2013-14 in response to Russia’s actions in Crimea.
Cutting off SWIFT access is viewed as a VERY significant move, so the consideration alone is material. With Russia’s most recent actions in Ukraine, cutting off SWIFT access is very much “on the table” as part of a sweeping sanctions package.
The challenge is that it is a real double-edged sword. Russia is a massive economy with tentacles that reach all around the world…
It is a key energy supplier to Europe and the world. It is an exporter of materials critical to the manufacturing of jet engines, semiconductors, automotives, electronics, and fertilizers. Cutting off Russia from SWIFT would impact the flow of payments for these industries.
Russia has also been building an in-house system since 2014—the last time SWIFT cutoff was threatened—which may mean they are able to temper some of the impact a cutoff would have on its economy.
Though it appears most experts still expect the impact would be significant. A cutoff from SWIFT may also have longer-term second-order effects on Bitcoin and non-fiat currencies.
The base logic: Russia may seek to circumvent the impact of the restrictions via a combination of its in-house system and a push away from the USD-reserve currency hegemony.
Whatever happens in the coming days, there will be a lot of talk about SWIFT and its role in the response to Russia’s actions.
I hope this short thread makes you feel more knowledgeable on the subject.
Follow me @SahilBloom for more simple explanations on business and finance.
Yesterday the West decided to cut Russia off SWIFT. But, Russia has been prepared all along for such an eventuality –85% of Russian payments do not go through SWIFT.
Impact on India
3 years back in Jan 2019 there was an interesting news item – Exclusive: Indian refiners pay for Iranian oil in rupees – UCO Bank executive.
Nobody cared too much about the news item because “paid” media was busy trying to make Modiji look bad before the general elections. Also it had nothing to do with Modiji, the rupee payment to Iran had been tried since 2013 :).
So some temporary disruption is expected but India has a smart proactive government and we should be able to shift to payments in INR. Every move away from using the USD actually dings the dollar as the global reserve currency. Not sure if the US Govt is evaluating that impact at all … am sure they will, but is the political system stopping them from taking “smart” decisions?
We also need to thank the Modi Govt for bringing in the RuPay card and the UPI money transfer system. These are not dependent on any external systems like SWIFT !