SWIFT off? Not so easy

Russia is not Iran. That reality has hit the West hard in the face as Putin attacks Ukraine.

The US and its allies had slapped a raft of sanctions on Russia following its invasion. But they have refrained from using the ultimate 'Chakram' – the SWIFT, the messaging network that the world uses to complete foreign transactions. If barred from SWIFT, Russia would face insurmountable difficulties in foreign transactions. Or would it?

SWIFT is supposed to be an independent organisation based in Brussels. Founded in 1973, it is a member-owned cooperative that connects over 11,000 banks and organisations in more than 200 countries. One of the members of its governing body is Russia as well.

So a country that is disconnected from this web of network is simply a lost case as it happened with Iran or North Korea.

In 2019, SWIFT cut off access for nearly all Iranian banks at the insistence of the US. As a result, Iran's oil exports plunged from around 2.5 million barrels per day in 2011 to around one million barrels per day by 2014. Its total exports also plunged sharply, causing immense financial strains for the country.

That the US can always wield SWIFT as a weapon of mass destruction (although SWIFT had rarely banned countries) was always a concern for other aspiring powers like Russia and China. And so both countries have been trying to develop their own messaging network.

China thinks big with its CIPS, a cross-border transaction system. Compared to SWIFT's 11,000 plus members, it is connected to a piffling 80 plus members. Nevertheless, its transactions last year amounted to $50 billion, just one-eighth of SWIFT's.

Russia, also wary of American sanctions, has developed its System for Transfer of Financial Messages (SPFS) for cross-border transactions. When hit by US sanction, Iran had hooked on to the SPFS.

Later the Kremlin had announced plans to develop a joint financial messaging and clearing system with China to hook on to numerous international banks to deter the threat of Western economic sanctions.

So all these factors were considered when the US and its allies refrained from going for SWIFT embargo that other than cutting Russia from international finance could lead to massive capital flight and currency collapse.

Cut off from SWIFT, Russia would have switched to its own SPFS. And street smart Russia would certainly now invest more in making the transaction network robust. So the SWIFT ban would have limited impact.  

Moreover, as we said in the beginning, Russia is not Iran or North Korea. Russia's economy powered mainly by its gas is greatly vaster than Iran's. For example, Germany relies on Gazprom gas for 50 percent of its energy production. Other European countries also heavily depend on Russian gas to the extent of 35 percent of their total demand.

Moreover, European companies have big investments in Russia. For example, various German firms, such as electric utility company E.ON, also own shares in Gazprom. So any run on ruble would hurt Europe as well.

As such a transaction disruption would hurt the West as much as Russia. And so, SWIFT off is not an option.