How would the exclusion from SWIFT hit Russia?

Wed Feb 9, 2022

The Ukraine crisis has forced the US and the European Union (EU) to exclude some Russian banks from the SWIFT payment system. The decision came after much consideration as it could cripple payments both to and from Russia.

What is SWIFT, and how does it work?

The Society for Worldwide Inter-bank Financial Telecommuni-cation, or SWIFT, is a platform for banks to exchange information about money transfers. It acts as a carrier of the messages containing payment instructions between financial institutions. Money moving from one account to another often passes through multiple banks before landing in the final destination, particularly if it involves a foreign currency. The Belgium-based system is overseen by G-10 central banks as well the European Central Bank and handles millions of daily payments across more than 200 countries. Iran and North Korea are excluded.

Why is Swift important for countries?

The crucial role of SWIFT can be gauged by the fact that when some Iranian banks were cut off from SWIFT in 2012, its oil exports fell sharply from more than 3 million barrels a day in 2011 to about 1 million barrels a day a few years later. Exclusion from SWIFT could cripple Russia’s ability to trade with the world. Western banks also have an outstanding exposure to Russia which would be difficult to collect if SWIFT is unplugged. Foreign banks have about $121 billion in assets owed to them by Russian-based entities, according to the Bank for International Settlements. Of those, about $14.7 billion are owed to US banks.

What happens if Russia is excluded from SWIFT? 

Firstly, its foreign funding would take a hit. It will be a big blow to Russia’s trade. Russia also has developed its own payment system, which currently has only 23 foreign banks connected to it. The other alternative: Russian banks could route payments via countries that have not imposed curbs, such as China, which also has set up its own payments system.

How will the exclusion impact India? 

India might face interruption and delay in arms imports following the exclusion of Russia from SWIFT. Bilateral trade between India and Russia stands at $9.4 billion so far this fiscal year, against $8.1 billion in 2020-21. India mostly imports crude oil, petroleum products, coal, fertilisers, gold, precious stones, and precious metals. But India and Russia’s bilateral payments are made in Rupee and sometimes in other currencies like Euro for both imports and exports. So, curbs may not have a major impact on payments.

What other actions does Russia face?

The US and its European allies have placed restrictions on Russia’s central bank that would limit the Kremlin’s ability to access the more than $600 billion in reserves there. The EU is freezing any European assets of Russian President Vladimir Putin and his foreign minister Sergey Lavrov. Germany has suspended the regulatory certification process for Nord Stream 2 pipeline. The UK will impose an asset freeze on major Russian banks and stop these firms from raising finance in the UK.

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