What would Russia's exclusion from the SWIFT system mean?

In recent days, and as a result of the conflict that is taking place in Europe between Ukraine and Russia, we have seen how some leaders have threatened Russia to suspend it from the SWIFT system. Obviously, this would be a serious blow to Russia, but it would also have consequences for other countries and the world in general.

In this article we are going to analyze a little more in depth the consequences that this may have for the economy of Russia, Europe and other countries.

What is SWIFT system?

Before going further into the subject, it is necessary to know what exactly the SWIFT system is and what it is for. This way we can talk more about the impact this would have on the financial system.

SWIFT ( Society for Worldwide Interbank Financial Telecommunications ) is a cooperative group that was founded in 1973 and which is based in the city of Brussels. SWIFT's main objective is to establish the necessary tools to process financial transactions on an international scale.

That is, this is an interconnected network of more than 11,000 banks around the world. This network is what allows international transfers between all (or most) countries in the world. This network has enabled financial growth throughout the world.

Millions of companies around the world use SWIFT every day to carry out their transactions. Russia is one of the countries, along with the United States, that uses this network the most. This means that if suspended, it would cause a serious financial crisis in the country.

It is important to mention that most transfers made through the SWIFT network are settled in US dollars. So the United States has great influence over this network.

How does SWIFT work?

The operation of this network is quite simple, but at the same time it is very complex. We will explain how it works with a simple example.

Suppose you are in Spain and you want to send a transfer to a customer in the United States. To send this transaction, you will only need your client's bank details along with the bank's SWIFT code.

You must go to your bank branch with these details and make the transfer. In this case, the banking institution in Spain sends a SWIFT message to the banking institution in the United States. As soon as it receives the message, it will credit the money to the destination account.

In some cases, an intermediary bank may be necessary and this is the one in charge of facilitating the transaction. So, if necessary, the transaction first goes through the intermediary bank and then reaches the destination bank.

This entire process happens in the background and does not affect the time in which a SWIFT transfer is credited.

Suspension threats from this system

A few days ago, the United States had advanced the possibility of suspending Russia from the SWIFT network as a sanction if it invaded Ukraine. Already today that has happened and Russia has moved its troops to Ukraine. It has even bombed several cities in the country.

As a result of this, other countries have also called for Russia to be disconnected from the network. However, as of this writing, no moves have been made to do so.

What would a disengagement from Russia mean?

Russia is one of the countries that makes the most use of the SWIFT network and this country does business with many other countries in the world. From the export of oil, gas, minerals and more, the country depends on this network for its transactions.

This is something that would do a lot of damage to the companies in the country, which in turn would put a lot of pressure on the Putin government. Russia knows this and that is why it has threatened to cut off supplies to Europe if it does.

Russia would be totally isolated from the world financial system, which would put many companies in check. In the long term it would mean capital flight from the country, so this is a very serious issue. In fact, some experts have called this measure a “nuclear option”.

There is already a precedent

Although this may be a "drastic" measure, the truth is that doing so would not be the first time. In the year 2012, Iran was disconnected from the SWIFT network, this caused the income of the country to be cut in half.

In the case of Russia, we have that a large part of its income comes from exports, so disconnecting it would mean that it would be in a bad position.

It should also be noted that the country is not entirely dependent on the SWIFT network. Russia has its own system which is known as SPFS, however, only 20% of the country's operations are carried out through this network. This network alone has around 400 users worldwide.

It would not only affect Russia

This is a measure that would not only affect Russia, but would also have consequences for all countries that buy or sell to Russia. Among the countries that would be most affected by these measures we have Germany and the United States.

In addition, that without counting that it would affect most of Europe who buy oil, gas and minerals from Russia. Let us remember that this country threatened to completely cut off the supply if these sanctions were applied.

Not unlikely to apply

So far the international community has not decided whether to apply this measure; however, the option is on the table. But if one thing is clear, it is that this could become a real problem, not only for Russia, but also for many other countries.

The European Union has said that it is ready to apply sanctions never seen before. We will have to wait to see how events unfold and depending on that, it may or may not be applied. However, at the moment it seems unlikely that Russia will be disconnected from the SWIFT network.