Macro Updates

Giving a SWIFT kick to the Russian financial system

On February 22, 2022 in response to Russia's invasion of Ukraine a large collection of nations, including the United States and members of the European Union, decided to selectively ban Russian banks from using the SWIFT system. Suddenly this relative obscure part of the global financial system was cast into the spotlight. So, what is the SWIFT system? Why is it part of the sanctions being placed on Russia? What are the economics involved in banning Russia from SWIFT?

What is SWIFT?

The Society for Worldwide Interbank Financial Telecommunications, or SWIFT for short, is an international financial information system. Before SWIFT came along in early 1970s banks in different countries would communicate with each other through loud, clunky, teletype machines that looked like typewriters on steroids. SWIFT streamlined these global inter-bank communications and created a standard way for banks to communicate with each other.

To see how works imagine that Pryia in Austin, Texas wants to send money to her friend's Meghana bank account in Tokyo, Japan. Pryia would provide to her bank various information about the bank where Meghana has her account, including the bank's SWIFT code or number which is usually 8 to 11 characters long, Meghana's account number, and how much money is going to be sent. The SWIFT system doesn't actually transfer the funds, but it does send very important information about the funds that are going to be sent.

Thus, the SWIFT system plays a very important role in our global financial system. More than 11,000 banks operating in more than 200 countries and territories belong to this member-owned cooperative that is overseen by the G-10 central banks. It is estimated that over 40 million messages are sent through SWIFT every business day.

Without the SWIFT system banks would need to either communicate by phone or some other method. But this could be cumbersome and time consuming. Language barriers, time differences, the need to record the conversation in case disputes arise, are just some of the sand-in-the-gears that arise if banks do not have access to SWIFT.

Access to SWIFT and economic sanctions

Banning banks from using the SWIFT systems has been used as economic sanctions before. In 2012 banks in Iran were banned from the SWIFT system in response to that country's nuclear development. In 2014 after Russia was threatened with being banned from SWIFT due to their actions in Crimea. While the ban was never put in place some argue it shows the importance of the SWIFT system. Without access to SWIFT the level of international trade a country can engage maybe significantly impacted.

This is why so many countries from around the world in early 2022 banded together to cut off most of Russia's access to SWIFT. Interestingly however energy transactions involving Russian banks were still allowed under the sanctions. That was because the EU imports a great deal of the natural gas it uses from Russia. In 2021, the EU imported 45% of its natural gas from Russia. In response to this dependence on Russian oil the EU on March 6, 2022, announced its plan of REPowerEU which seeks to reduce the EUs purchase of Russian gas by two-thirds before the end of 2022.

SWIFT ban expansion

Then on May 30, 2022 the EU voted to expand the SWIFT ban including Sberbank, Russia's largest bank based on number of customers, and two smaller banks Credit Bank of Moscow and Russian Agricultural Bank. The announcement was part of a package that included almost an entire ban of the importation of Russian oil into the EU. The action brings the number of Russian banks banned from SWIFT to ten and includes banks with the closest ties to the Russian government. According to the Financial Times, the ban now covers more than 60 percent of the Russian banking market.

The inclusion of Sberbank on the SWIFT ban list is important since not only is Sberbank the largest Russian bank, based on customers, but it is the main route for payments of Russian oil and gas. The new sanctions however continue to exclude Gazprombank, Russia's third largest bank and a subsidiary Gazprom, the Russian government owned energy company. The bank is the largest facilitator of payments into Russia for exported Russian oil and natural gas.

If the EU is successful at ending its dependence on Russian oil and gas it might make it easier for the EU to expand the SWIFT ban to include Gazprombank. Many experts argue such a move would cause significant damage to Russian exports and by extension greatly cripple the Russian economy.

Why not just create another SWIFT?

Some critics of the Russia ban from SWIFT argue the policy will be ineffective because Russian banks can find ways around the ban including setting up their own version of SWIFT. To a certain extent, this has already happened. In 2015 the People's Bank of China launched CIPS (or the Cross-border Interbank Payment System) as an alternative to SWIFT. Two years later the Russian Central Bank launched SPFS (or in English the Financial Message Transfer System) which uses the same technology used by SWIFT and CIPS.

However, neither CIPS nor SPFS have really caught on. We economists know why. It is called network effects. In order for a bank to want to use CIPS or SPFS to send information the other bank in the transaction also has to use CIPS or SPFS. But, SWIFT has a first mover advantage. As noted above SWIFT is widely used around the world and has been around since 1977.These two other systems don't have any significant technology advantage over SWIFT and thus there is little desire for banks to change to the other messaging services. So, getting around the SWIFT ban may not be as easy as it first appears.

It will be interesting to see what impact the SWIFT ban has on the Russian economy and to see if the ban is expanded to include Gazprombank. It will not be surprising if the SWIFT ban does have a significant negative impact on the Russian economy.


SWIFT is a global financial communication network from which a number of Russian transactions are now banned.

Economics teaches us that workarounds the SWIFT ban will not be easy to accomplish.

The SWIFT ban may be further expanded if EU dependence on Russian oil and natural gas can be reduced. 

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