- The SWIFT financial system is estimated to have processed more than 8.4 billion financial transactions since its inception, and is estimated to process 42 million transactions per day today.
- With its invasion of Ukraine, the Russian state was subjected to global sanctions, the most important of which was the threat and partial implementation of its expulsion from the SWIFT system.
- Getting the banks out of the SWIFT system would mean severe commercial and financial isolation, but there are proposed alternatives that range in effectiveness.
While the name SWIFT was repeated in the global news, it was clear that there was a huge lack of understanding of this financial system, what it is and how it works. Where the system works between banks, financial companies and central banks of countries, which makes it known in the financial circles, but the public does not come into contact with this system and does not affect them directly, which means that most people do not know it.
In this topic, we will discuss what SWIFT is, why it exists, and what is its importance today? We will also wait for the expected results of its use as a financial weapon on the one hand, and for the alternative options that countries subject to severe sanctions, such as Russia today, can resort to.
The system that runs the world of finance: SWIFT
SWIFT is an acronym for Society for Worldwide Interbank Financial Telecommunication which stands for “Society for Worldwide Interbank Financial Telecommunication.” As the name suggests, this system is more like a large network of many banks around the world and aims to provide a secure way to move money globally.
The association was established in 1973 with Belgian efforts and is now owned by its members, as it includes more than 11,000 members from banks, financial institutions and central banks distributed over 200 different countries. Given the sheer size of the SWIFT system, it is estimated that it adds over $4 billion in value each day and over $1 trillion each year.
It is important to understand that SWIFT is a messaging and communications system (currently internet-based) only and does not include any financial settlement infrastructure. Where financial settlements are done through many methods, including settlement from previously deposited accounts, transfer of ownership of the digital balance, or others. So in principle, SWIFT can be treated as a giant WhatsApp chat group between international banks and financial institutions.
SWIFT is not just about money transfers, but it also includes many other financial services. Its main importance lies in being reliable, high security, fast in performance, in addition to being widely distributed. The system prevents cases of fraud by impersonating, for example, and it is difficult to conduct suspicious transfers because it includes many security measures.
Who controls Swift?
While the system is owned by its members and requires them to pay an initial fee and annual fees to continue with it, the members of the system are not equal in rank in reality. There are even several levels of member institutions in the system, and while it is a neutral financial system, it is subject to the supervision of the central banks of the G10 countries.
The G10, contrary to its name, consists of 11 member states: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States. As a result, the group consists of the major economies of the Western Alliance during the Cold War period of the twentieth century.
What does it mean for a country to be kicked out of the SWIFT system?
In 2012 the United States completed a major sanctions package on Iran, and these sanctions included an approved proposal to expel Iran from the global banking system and isolate it from the SWIFT system. The result was very bad for the country and seriously damaged its economy and its ability to access financial instruments, but many economists say that the expulsion from Swift was in fact a formality.
Iranian banks continued to use the system, but in an indirect way, as many relationships with European banks were discovered that acted as intermediaries between the sanctioned banks and the global network in return for commissions. Although these banks have been hit with fines of up to $5 billion from the US government, this type of behavior is believed to continue.
In principle, isolation outside the SWIFT system ensures that any financial institution or isolated country will experience significant difficulties in obtaining the required financial services. It usually means losing access to many sources of financing and the need to move towards policies of self-sufficiency rather than an open market and cross-border production lines.
What can countries or institutions that get kicked out of the SWIFT system do?
In light of the great industrial development of the world today, the idea of self-sufficiency has become difficult, if not impossible, for most countries. As a large part of the world's prosperity is based on the economies of abundance that require more specialization and distribution of supply chains and the world as a whole being a complex network of exports, imports, industrial and commercial centers. In these situations, financial isolation means catastrophic consequences for the prosperity and economy of any country, as evidenced by the rapid collapse of the Russian currency in the days following the start of the war and the imposition of sanctions.
With isolation being a really unavailable option, there are actually several systems available today as alternatives to Swift. Russia has developed its own system called SPFS, but it is still very small with a few dozen banks confined primarily to Russia and Germany. There is also the CIPS system for China and several international systems such as Fedwire, Ripple and CHIPS.
Relying on any of the other banks' communication systems can greatly mitigate the effects of a Swift expulsion, but will not eliminate them. Since all competing regimes are largely limited in terms of the number of countries and financial institutions available through them, even with the best attempts, getting out of Swift is still an effective measure, although its impact will not extend to complete economic destruction.