Last week, the White House announced that the United States and Allies agreed to block select Russian banks from SWIFT, the Global Financial Messaging System.
Some of the initial reactions are:
- Why didn’t they just remove ALL Russian banks the first day of the war?
- How is this going to be a deterrent from Russia continuing their attack on Ukraine?
To answer those questions, we must first define how SWIFT works, and then go back in history to see the ramifications of this strategy. SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. It is a global messaging system connecting thousands of financial institutions around the world.
SWIFT was formed in 1973, and it is headquartered in Belgium, in addition to the U.S. Federal Reserve System, the European Central Bank and others. It started with 239 banks in 15 countries. By 1977, it expanded to 518 institutions in 22 countries. Currently, SWIFT connects more than 11,000 financial institutions in more than 200 countries around the world!
Back in 2012, Iran lost access to SWIFT as part of economic sanctions over its nuclear program, though many of the banks were reconnected to the system in 2016. When Iran was booted, it lost half of its oil export revenues and 30% of its foreign trade.
Using an example is the best way to understand how SWIFT works. SWIFT assigns each financial organization a unique code that has either eight or eleven characters. The code is interchangeably called the bank identifier code (BIC).
To understand how the code is assigned, let’s look at the Italian bank UniCredit Banca, headquartered in Milan. Their code is UNCRITMM, which breaks down as follows:
- The first four characters: the institution code UNCR (for UniCredit Banca)
- The next two characters: the county code IT (for Italy)
- The next two characters: the location/city code MM (for Milan)
- The last three characters: are optional; however, some banks use them to identify their individual branches
This is why you can easily go to your bank and wire money to another country using a different bank than yours!
Barring Russian banks from SWIFT will damage the country’s economy immediately and cut them off from international financial transactions. This includes Russia’s profits from exporting oil and gas, which makes up 40% of Russia’s current revenue.
Some of my takeaways from SWIFT:
- SWIFT is not a bank and does not hold money or securities
- SWIFT is a “messaging system” that institutions use to securely transmit information and instructions through a standardized system of codes
- SWIFT protects banks and financial institutions from money laundering
- SWIFT is a cooperative organization owned by its members
- Members pay a one-time fee, annual support charges and are charged for each message based on the message type and length
- SWIFT reports it recorded 42 million message per day on average in 2021
- Over $5 trillion passes through the SWIFT system daily
The internet has connected the world unlike any other time in history. This has positives and negatives. If the U.S. and the European Union (EU) made a knee-jerk reaction and removed ALL Russian bank access to SWIFT, it would also hurt European and American companies that do business with Russia. This is why they needed a few days to analyze which Russian banks to remove from the system.