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What is SWIFT banking system that could be used as sanction against Russia?

In recent weeks, President Joe Biden has threatened Russian President Vladimir Putin with “severe economic consequences” and sanctions like “he’s never seen” if Russia invades Ukraine.

Now, with Putin taking military action against Ukraine, Biden and U.S. allies may consider imposing one of the harshest financial penalties against Russia: kicking it out of the SWIFT banking system.

But doing so, which some financial analysts have likened to a “nuclear option,” would be an unprecedented move against one of the world’s largest economies.

What is SWIFT?

The Society for Worldwide Interbank Financial Telecommunication, or SWIFT, is a cooperative of financial institutions formed in 1973 and headquartered in Belgium. It is overseen by the National Bank of Belgium with cooperation from other major central banks, including the U.S. Federal Reserve System, the Bank of England and the European Central Bank.

But SWIFT is not a traditional bank and does not transfer funds. Rather, it acts as a secure messaging system that links more than 11,000 financial institutions in over 200 countries and territories, alerting banks when transactions are going to occur. (For instance, American banks have a unique SWIFT code that customers use for incoming wire transfers in U.S. dollars.)

In 2021, SWIFT said it recorded an average of 42 million messages per day, an 11 percent increase from the year before. In 2020, Russia accounted for 1.5 percent of transactions.

What would be the effect on Russia?

For the U.S. and its European allies, cutting Russia out of the SWIFT financial system would be one of the toughest financial steps they could take, damaging Russia’s economy immediately and in the long term. The move could cut Russia off from most international financial transactions, including profits from oil and gas production, which accounts for more than 40 percent of the country’s revenue.

Allies on both sides of the Atlantic also dangled the idea of the SWIFT option in 2014, when Russia annexed Crimea and backed separatist forces in eastern Ukraine. Russia declared then that kicking it out of SWIFT would be equivalent to a declaration of war. But the allies shelved the idea.

Russia since then has tried to develop its own financial transfer system, with limited success.

The U.S. has succeeded before in persuading the SWIFT system to kick out a country — Iran, over its nuclear program. But kicking Russia out of SWIFT would also hurt other economies, including those of the U.S. and key ally Germany.

How likely is Russia to be booted from SWIFT?

Some U.S. lawmakers want the United States to do so immediately, although it’s unclear if or when Biden would go that route.

He would also need the support from his counterparts in Europe, who may be less gung-ho about such a drastic measure since Russia is a key energy supplier to Europe.

In a statement issued in 2014 when it last discussed booting Russia, SWIFT said it is a “neutral global cooperative” and that “any decision to impose sanctions on countries or individual entities rests solely with the competent government bodies and applicable legislators.”

But if U.S. allies don’t want to go along with ousting Russia from SWIFT, Biden can act unilaterally by enforcing a move by the Federal Reserve, which clears transactions, to block Russian companies’ access to American dollars. 

Bill Browder, a British-based financier and Kremlin critic who was once the largest foreign investor in Russia, said removing Russia from SWIFT should only be a last resort.

“They should sanction 50 Putin oligarchs in short order,” he told the Financial Times.

The Associated Press contributed.

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