With its humble but vital role in the global financial system, international payments network Swift figures prominently in discussions of possible sanctions against Russia Invasion of Ukraine.

The Belgian nonprofit cooperative provides secure messaging for trillions of dollars worth of payments between banks. It has repeatedly been in the spotlight during international crises — notably tensions over Iran’s nuclear program, and in 2012 and 2018 it was forced to block sanctioned Iranian banks from providing its services.

Western allies are now debating whether the Society for Worldwide Interbank Financial Telecommunication should be forced to cut off Russian banks’ access to its networks if Russian President Vladimir Putin orders an attack on Ukraine. But many officials and experts believe such a move would not be the most effective way to pressure Moscow.

Why is Swift so important?

Swift operates a messaging system for banks around the world, transmitting payment requests and recording them on servers in Europe and the United States. It is owned by more than 2,000 banks and financial institutions and processes 42 million such messages per day.

Although other cross-border payment services exist, fast play an important role. The shutdown of some Iranian banks and Swift in 2012 was one of the factors that contributed to the sharp drop in Iranian oil exports, which fell from more than 3 million barrels per day in 2011 to about 1 million barrels per day a few years later.

After Moscow annexed Crimea in 2014, U.S. politicians called for severing Russia’s ties with Swift, but the idea never materialized. Former Russian Finance Minister Alexei Kudrin warned at the time that the move could shrink its gross domestic product by as much as 5 percent.

Russia, which accounted for 1.5% of Swift’s total transaction volume in 2020, has developed its own alternative messaging system called SPFS, which can handle about one-fifth of domestic payments, but has more power and scope than Swift. limited.

How likely is it that Russia will be cut off from Swift?

Swift has always been discuss Sanctions between Western allies over Russia’s buildup of troops on the Ukrainian border.

EU, UK and US have agree Regarding the use of financial sanctions, as part of the benchmark scenario, it could be escalated or de-escalated depending on the scale of any Russian attack on Ukraine. European officials stress that “everything is on the table,” but Swift’s exclusion isn’t seen as the most likely sanction in the baseline scenario.

Swift said it was “neutral” and that “any decision to impose sanctions on a country or an individual entity rests entirely with the competent government agency and applicable lawmakers”.

While the system is technically independent, more than 40 percent of its payment flows are in dollars, former Swift chief executive Gottfried Leybrand told a Financial Times forum last year. Therefore, Washington has effective sanctions on it.

A more likely route would be targeted sanctions on Russian banks and their ability to convert rubles into hard currency. The EU is also coordinating with third countries such as Switzerland to ensure sanctions do not simply lead to Russian financial transactions being diverted elsewhere.

Some experts believe Swift is getting more attention than it deserves when it comes to sanctions. Nicolas Véron of the Bruegel think tank said removing Russian banks from Swift would create “significant operational problems” for them, but would not by itself prevent them from dealing with their American or European counterparts.

What are the alternatives for Western allies?

Targeting significant Russian lenders directly could have a greater impact on Russia than isolating them from Swift. If big banks like Sberbank or VTB were blacklisted by the US, they would effectively be cut off from the global financial system. Banks elsewhere will be forced to avoid them or risk running afoul of U.S. authorities.

Edward Fishman, an adjunct fellow at the Center for a New American Security, a think tank, said any targeted banks would experience “serious liquidity problems” and “serious loss of confidence,” meaning they may need to go through the Kremlin palace. By contrast, simply cutting banks out of Swift would be a “headache” rather than an existential threat, he said.

Sanctions targeting Russian banks and reducing exports from Russia’s oil sector would be the most effective tools, he said.

Dmitry Dolgin, chief economist at ABN Amro ING Russia, said that “isolation from Swift does not mean that cross-border transactions are prohibited”. Instead, he believes that the possible imposition of tough U.S. sanctions on any of Russia’s three major state-owned banks – Sberbank, VTB and Gazprombank – would be the “most severe scenario” because of their key role in handling foreign exchange flows.

He added that smaller banks could survive U.S. sanctions because Bank of Russia In 2014, with Moscow’s backing, it became the main lender to the annexed Crimea and Russia’s wholesale electricity market.

Can Europe pay for Russian gas without Swift?

will be harder. Russian politicians warn that gas flows without payment — Europe depends on 40% supply – oil will stop soon.This will come at a record time in Europe gasoline price And supply shortages, oil prices topped $90 a barrel for the first time since 2014.

“If Russia disconnects from Swift, then we won’t receive [foreign] currency, but buyers. . . will not receive our goods – oil, gas, metals,” said Nikolai Zhulavlev, deputy speaker of the upper house of the Russian parliament.

A senior European banker said a possible alternative would be for Europe to deposit euros in an escrow account at a European bank on behalf of Russian suppliers to access Russian gas after sanctions are lifted. However, this is unlikely given the amount involved and the risks faced by suppliers.

Concerns about disrupting gas exports, in particular, could force the U.S. and European Union Proceed with caution. Cutting off Bank of Russia from Swift “is like using a bazooka, and a rifle could be almost as effective,” he said.

“Arguably, it might be better to designate a few specific Russian financial institutions in a way that essentially isolates them from the global economy,” he added. “You limit any potential collateral economic damage by allowing some of the smaller institutions to allow financing for commerce that is not yet prohibited, possibly including energy exports.”

Additional reporting by Henry Foy in Brussels