What is SWIFT sanction? Can US use it as massive weapon to cripple Russia's economy?

Russia on February 24 ordered a full-scale war against Ukraine, killing at least 137 in the ex-Soviet nation so far. The deteriorating situation has prompted the West, led by the US, to impose strapping sanctions against Moscow in a bid to thwart further military, weapons, and tech expansion. US President Joe Biden on Thursday unveiled new sanctions against Russia that will prohibit Moscow from dealing in foreign currencies, thus, rendering a heavy blow to its economy. While mulling over expelling Russia from SWIFT financial services, Biden called for "collective" penalties to render a "more consequential impact" on Moscow.

Experts believe that the withdrawal of customary trade and financial relations with other countries would levy a heavy impact on the life and livelihoods of Russian businesses and sanctions on major banks will also affect ordinary citizens. However, kicking Russia out of the SWIFT financial services would have a destabilising impact on Russia's economy. According to financial experts, as cited by NBC News, the unprecedented move against one of the world's largest economies could also turn the face of war towards "nuclear option".

Although before moving to the impact of SWIFT sanction, it is important to understand the role and function of the financial service.

What is SWIFT?

SWIFT is an acronym for The Society for Worldwide Interbank Financial Telecommunication. It is a cooperative financial institution formed in 1973 and is overseen by the National Bank of Belgium in partnership with other major central banks like the US Federal Reserve System and Bank of England. SWIFT has its headquarters in Belgium.

It is pertinent to understand that SWIFT does not function in the usual fund transfer system. The banking service offers a secure messaging system that links over 11,000 institutions in over 200 countries across the world. It is also used for wire transfers. Russia is accounted for 1.5% of 42 million messages recorded by SWIFT per day.

What will happen if Russia is expelled from SWIFT?

Terminating Russia from SWIFT will render a blow on the Russian economy immediately and in the long term, according to experts, reported NBC News. Deemed to be the "toughest" financial sanctions, the move will eliminate Moscow from most international transactions, including recieving payments of oil and natural gas exports, which account for 40% of Russian revenue per year.

Russia's rough actions against its ex-Soviet neighbour have forced the US and its allies to edge towards implementing SWIFT sanctions once in 2014 when Moscow invaded and annexed the Crimean Peninsula. However, Russia had then warned that such a move would be equivalent to a "declaration of war," which forced allies to shelve the idea. Ever since Russia had tried to develop its own financial transfer but in vain.

Can SWIFT be used as US' massive weapon against Russia?

While the US has successfully eliminated Iran from SWIFT banking services, due to its hostile approach against the nuclear deal, the decision to implement it on one of the world's largest economies is hard to reach. Despite pressure from Ukrainian leaders, Biden on Thursday defended maintaining Moscow's access to an international messaging system for banks, stating that Europe is currently not willing to take the move.

"It is always an option. But right now it's not the position that the rest of Europe wishes to take," Biden said during his speech at the White House while announcing additional sanctions on Thursday.

While the US Treasury department revealed that removing Russia from SWIFT will affect the Soviet country's largest financial institutions, including Sberbank, Gazprombank, Rosselkhozbank and VEB, it will also directly hurt European economies like Germany, which is the US' one of the major allies. "The measures today will have a measured impact on the Russian financial system. VEB is a significant bank, but it’s not the bank that banks everyday Russians. It’s a little more niche," said Julia Friedlander, a former Treasury Department official who worked on sanctions policy, as quoted by ABC News. However, the US will require European credentials to drive Russia out of SWIFT, which appears less enthusiastic about the drastic step as EU countries are dependent majorly on Russian gas.

Expecting such foreboding sanctions, Russia has repeatedly been testing its ability to survive without western software since 2014. "The Russian economy has worked to sanction-proof itself," Andrew Lohsen, a former officer with Organisation for Security and Cooperation in Europe (OSCE) has said ABC. So, now it is to see if the "strong" penalties and tougher imposition of sanctions actually threaten Russia.

Russia-Ukraine war

The Russia-Ukraine crisis dates back to 2014 after Moscow invaded Crimea and seized control of the region. Over the past months, Russia continued to escalate its military presence in the eastern European flank, spurring fears of a potential attack, although denying it on several occasions. The standoff transpired into a war on February 24 after Russian President Vladimir Putin declared a full-scale military attack on Ukraine. The simmering tensions between the countries were aggravated after Putin on February 21 declared independence of two break-away regions of Ukraine, effectively violating the ceasefire deal signed between Ukraine and Moscow in 2015. 

Despite a plethora of diplomatic talks between Putin and world leaders, including Biden, French President Emmanuel Macron, German Chancellor Olaf Scholz, and many more, Russia refrained from adhering to the order of international law and now has forwarded to create the "biggest" global crisis in "terms of peace and security," as per the United Nations.  

(Image: AP/Shutterstock)