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The U.S., Europe and several other western nations are moving to exclude Russia from SWIFT, an international network for banks worldwide to facilitate smooth money transactions globally.

What is SWIFT?

• SWIFT is an international network for banks worldwide to facilitate smooth money transactions globally.
• It is basically a messaging network used by banks and financial institutions globally for quick and faultless exchange of information pertaining to financial transactions.
• The Belgium-headquartered SWIFT connects more than 11,000 banking and securities organizations in over 200 countries and territories.
• First used in 1973, it went live in 1977 with 518 institutions from 22 countries, its website states.

What exactly is it?

• SWIFT is merely a platform that sends messages and does not hold any securities or money.
• It facilitates standardized and reliable communication to facilitate the transaction.

How does it facilitate banking?

• Each participant on the platform is assigned a unique eight-digit SWIFT code or a bank identification code (BIC).
• If a person, say, in New York with a Citibank account, wants to send money to someone with an HSBC account in London, the payee would have to submit to his bank the London-based beneficiary’s account number along with the eight-digit SWIFT code of the latter’s bank.
• Citibank would then send a SWIFT message to HSBC. Once that is received and approved, the money would be credited to the required account.

How is the organization governed?

• SWIFT claims to be neutral. Its shareholders, consisting of 3,500 firms across the globe, elect the 25-member board, which is responsible for oversight and management of the company.
• It is regulated by G-10 central banks from Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, the UK, the US, Switzerland, and Sweden, alongside the European Central Bank.
• Its lead overseer is the National Bank of Belgium.
• The SWIFT oversight forum was established in 2012.
• The G-10 participants were joined by the central banks of India, Australia, Russia, South Korea, Saudi Arabia, Singapore, South Africa, the Republic of Turkey, and the People’s Republic of China.
• Europe, Middle East, and Africa are highest contributors to SWIFT.

What happens if one is excluded from SWIFT?

• US excluding Russia from SWIFT could have serious repercussions on how Russian banks carry out international financial transactions.
• If a country is excluded from the most participatory financial facilitating platform, its foreign funding would take a hit, making it entirely reliant on domestic investors.
• This is particularly troublesome when institutional investors are constantly seeking new markets in newer territories.
• An alternative system would be cumbersome to build and even more difficult to integrate with an already expansive system.

Are any countries excluded from SWIFT?

• Iranian banks were ousted from the system in 2018 despite resistance from several countries in Europe.
• This step, while regrettable, was taken in the interest of the stability and integrity of the wider global financial system, and based on an assessment of the economic situation.

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Context

On February 24, Russian President Vladimir Putin launched “special military operations” with the objective of “demilitarising Ukraine” but not “occupying” it.

Why it was a crisis in the making?

• Redrawing national boundaries by force: After 1945, this is the second time that national boundaries are being redrawn by force; the first was the 1999 North Atlantic Treaty Organization (NATO) air strikes on Serbian forces that led to the creation of Kosovo.
• Russian and Chinese protests about NATO undertaking “out of area operations” without United Nations Security Council approval carried little weight.
• After the fall of the Berlin Wall in late-1989, then U.S. Secretary Of State had assured the Soviet President that “there would be no extension of NATO’s jurisdiction one inch to the east”.
• Rather than look for a new European security framework, the newly independent Baltic and central European states sought security in a U.S.-led NATO.
• Beginning in 1999, NATO has added 14 new members in stages.
• At the NATO summit in 2008, at U.S. President George Bush’s urging, an in-principle opening for Ukraine and Georgia was announced, though France and Germany, conscious of Russian concerns, successfully opposed defining a time frame.
• Later that year, Russia intervened in Georgia on the grounds of protecting the Russian minorities and took over the northern provinces of Abkhazia and South Ossetia.
• Annexation of Crimea:  In 2014 Mr. Putin annexed Crimea.
• For Russia, Crimea is vital as the peninsula hosts Russia’s Black Sea fleet, providing it access to the Mediterranean and its bases at Latakia and Tartus in Syria.
• Despite no timeline for membership, Ukraine was made a NATO Enhanced Opportunity Partner in 2020.
• The presence of British and U.S. warships in the Black Sea began to increase.
• In 2019, the U.K. entered into a cooperation agreement with Ukraine to develop two new naval ports, Ochakiv on the Black Sea and Berdyansk on the Sea of Azov, a move that Russia saw as potentially threatening.
• Beginning with NATO’s bombing of Serbia in 1999, interventions in Afghanistan, Iraq and Libya and colour revolutions to engineer regime changes, the U.S.’ unilateral withdrawal from the Anti-Ballistic Missile (ABM) Treaty in 2002 coupled with missile defence deployments in Poland and Romania, Russia’s grievances were accumulating.

Faltering diplomacy

• France and Germany initiated talks between Ukraine and Russia under the Normandy format leading to the Minsk agreements, in 2014 and 2015.
• The first was for a ceasefire between Ukraine and the Russian-backed separatists and the second was between Ukraine, Russia, the two separatist regions of Luhansk and Donetsk and the Organization for Security and Co-operation in Europe (OSCE).
• Supportive declarations by France and Germany were intended to address Russian security concerns.
• Ukraine undertook to introduce certain constitutional amendments to provide a degree of autonomy to the two provinces and Russia was to assist in withdrawal of all foreign forces.
• However, neither side implemented and positions have only hardened since.
• Russia’s threatening moves made NATO members, especially the Baltic states (Estonia, Latvia and Lithuania) and the central Europeans like Poland and Romania, especially nervous.
• Finally, NATO remained united but unable to provide an off-ramps solution.

Implications for Russia

• NATO has been rejuvenated, the trans-Atlantic unity strengthened and Russia’s economic ties with Europe have been adversely impacted.
• Given Russia’s considerable foreign exchange reserves, of nearly $640 billion, sanctions imposed by the U.S. and EU may not hurt immediately but eventually will begin to bite both the oligarchs and the common people.
• Worse, Russia will become more dependent on China — for political support as well as a market for its energy exports. 
• This will eventually weaken its hand in central Asia.

Conclusion

For Mr Putin challenge is to constrain the adversary’s options while increasing one’s own options and space for manoeuvre. His actions this week may yield tactical gains but hardly pass the test for strategic victory.

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