Grandstand. The disconnection of Russian banks from the Swift messaging system (acronym for Society for Worldwide Interbank Financial Telecommunication) from March 12 was described in the press as “one of the most powerful tools available to Western authorities to punish Russia”. But while unplugging Russian banks may send a clear political message, the economic impact of this measure alone may not be as effective as claimed.
Swift is a network connecting more than eleven thousand financial institutions in more than two hundred countries. Since its inception in 1973, Swift has become synonymous with international payments. But it’s important to note that Swift does not process payments, or hold or transfer funds: it only allows the exchange of secure payment-related messages between its members. Actual payments are processed by banks, not Swift.
No national impact
It should further be noted that currencies are closed-loop systems. When a foreign transfer is made, the currency is not physically transferred abroad. Instead, banks provide accounts to their foreign counterparts and have their own accounts with their foreign counterparts. Banks rely on the “correspondent banking” network, which involves using multiple banks to ensure payment reaches the intended account holder.
This network allows banks to make payments in foreign currencies. Other payment service providers, for example money transfer agents such as PayPal or Wise, as well as emerging fintech providers, also use the interbank network. Swift is the infrastructure that underpins the correspondent banking network.
However, the impact of the ban on Russian banks might not be as relevant as expected.
First, because Swift is a messaging system, messages about money transfers can flow using other, albeit potentially less secure, networks, including instant messaging or good old-fashioned fax.
Second, Swift’s exclusion does not impact the domestic Russian banking sector. In 2014, the Central Bank of Russia implemented a National Payment Card System (NPCS), through which all Russian domestic payments are processed. Russia also created the national payment card network Mir at the end of 2015, under the impetus of American and European sanctions linked to the annexation of Crimea.
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