Russia’s invasion of Ukraine has captured the world’s attention, and the reaction of world leaders has been surprisingly swift and harsh. In an effort to discourage Russia without escalating this invasion into a worldwide conflict, the EU, US, and other important trading partners have instead opted for strict sanctions meant to cripple the Russian economy and the Russian Rouble. Russia has been living with sanctions for the better part of a decade due to its annexation of Crimea in 2014, but the West’s financial reprimands have been much stronger this time around. One of the main weapons in the West’s sanctions arsenal has been the decision to cut Russia off from the SWIFT system.
What is SWIFT?
SWIFT is a messaging technology that allows banks to talk to one another securely, enabling the safe and sure electronic transmission of funds. SWIFT is not a bank, nor is it exactly a payments system. It is instead a way to guarantee that money moves where it is supposed to go. Thus, SWIFT messaging systems are a critical part of international economic infrastructure. They provide extremely secure communications developed over half a century that unite the wide variety of transactions in which international banks engage. Today, SWIFT handles around 40 million payment messages each day. It is thought that SWIFT saves around 100 USD per transaction. This would mean that the system adds a value of around 4 billion USD per day or 1 trillion USD per year to the global economy.
Countries cut off from SWIFT, as Iran was in 2012, are effectively cast back into the pre-computer era and are forced to rely on primitive barter transactions, or physical cash or gold, to fund their governments and their economies. There are alternative systems, such as China’s CIPS network, which was created by the People’s Bank of China for the purpose of cross-border payments, but SWIFT is by far and away the dominant player in this market. Russia could even use WhatsApp to instruct the necessary transactions, but that avenue lacks the sophistication, security, and five-decade development of SWIFT.
A Burly War Chest
Russia imports almost everything its citizens eat, wear, and use. And in the modern digitised world, that money cannot be used without the agreement of another nation’s central bank. Since 2014, Russia has built up its reserves of foreign currency so it can be more resilient to sanctions. Before the war started, its foreign currency reserves sat at around 630 billion USD. Before they saw the severity of western sanctions, including SWIFT blockades that complicate transacting with these reserves, experts believed that this money was more than enough. About 132 billion USD of Russia’s reserves takes the form of physical gold in vaults inside Russia. Russia could pledge that gold or sell it. But to whom? Most potential customers for Russian gold can be threatened with sanctions. Those who might defy the threat couldn’t afford to take very much: the entire GDP of Venezuela, for example, is only about 480 billion USD. Only one customer is wealthy enough to take significant gold from a sanctioned nation like Russia: China. But the question remains whether China would agree to take it. And if they were to agree, how much of a discount would they require to take it, given the geopolitical fallout? Moreover, how would Russia physically deliver that much gold – via train across? Because these are legitimate questions people are asking, they show how absurd and antiquated logistics become when SWIFT is removed from the equation.
Despite being removed from SWIFT, experts agree that it is not enough. Wide-ranging economic sanctions on Russia may be needed for a lengthy period of time, and while ejection from SWIFT is a step in the right direction, further action will be necessary if the West truly wants to cripple the Russian economy.