What is SWIFT and why is it important for the Russian economy? 

If you have been following the global financial news, you'll have heard of SWIFT. More importantly, you'll have heard of it in connection with Russia. In this article, we discuss what SWIFT is and why it's so integral to the wellbeing of the Russian economy.

What is SWIFT? 

SWIFT stands for Society for Worldwide Interbank Financial Telecommunication. It is essentially a reputed payment system that is governed by various Governmental financial bodies around the world. It is used by thousands of financial institutions and companies in more than 200 countries.

But SWIFT doesn't operate like your normal digital payment system like PayPal, for instance. Rather, think of SWIFT as a messaging system between financial institutions. Each financial institution will have its own SWIFT code, that is, its unique identifier. When a customer wants to make a money transfer from one bank to another, they will initiate a transfer by putting in the recipient's account details. They will also input the receiving bank's SWIT code. Then, the sending bank will use SWIFT to send and receive transaction information from the other bank involved in the process. The recipient bank will confirm all transfer details and approve the transaction.

The advantage of SWIFT is that it allows customers to conduct financial transactions across countries and in banks that use SWIFT. Any and all types of financial and banking transactions can be coordinated between institutions through SWIFT.

Russia's dependence on SWIFT

Just like many other countries around the world, Russia too, uses SWIFT to conduct international financial transactions. SWIFT allowed Russian financial agencies to conduct their banking and other financial transactions with agencies around the world.

But, following Russia's invasion of Ukraine and the resulting violence, the European Union, the United States, and their allies decided to impose multiple sanctions against Russia, one of which was related to SWIFT. In a move that has partially incapacitated the Russian financial system, the allies decided to remove 7 Russian banks and their subsidiaries from the SWIFT system. These banks include VTB Bank, VEB Bank, Bank Otkritie, Novikombank, Promsvyazbank, Bank Rossiya, and Sovcombank.

How will Russia's removal from SWIFT affect them? 

Russia has been a very active player in the import-export trade for many decades. In fact, SWIFT was one of the instrumental support systems that helped Russia grow to a $1.48 trillion superpower in the past few decades.

The removal of Russian banks from SWIFT is akin to completely cutting a person off the internet and the world wide web. Russia's economy will head to a dark age if they don't resolve their political issues with Ukraine.

For the Russian economy, this means that Russia will not be able to participate in any quick and seamless import-export trade until the removal is reversed. As of March 12, 2022, none of these banks can use SWIFT. Plus, none of their millions of customers will have the opportunity to conduct any transaction with the rest of the world.

In order to conduct import-export trade, Russian financial institutions will need to resort to outdated technologies like cross-border transactions, fax systems and even snail mail. Not only will this add days to each transaction, but it will prove to be difficult and expensive to implement such redundant technologies.

Apart from this, there are far-reaching economic consequences for Russia too. How inclined would other governments, companies, and customers be to do business with a country that has an archaic financial system?

It's true that Russia does have its internal Financial Message Transfer System, PFS, which works on the SWITF technology. But, rapid global deployment and acceptance may come too late to stop the breaking down of Russia's Economy.