On the 2nd of March 2022, in response to the Russian invasion of Ukraine, unprecedented sanctions were brought against Russia, including the equally unprecedented move to ban seven major Russian banks from the SWIFT payment system – a step that many experts thought so drastic it would never come to fruition.

The question now is: what might the consequences of this ban be?

The role of SWIFT

The Society for Worldwide Interbank Financial Telecommunication, or SWIFT, is a co-operative that came into existence in 1973. Until then, international transfers were conducted using handwritten notes, a system that the SWIFT’s founders saw an opportunity to improve upon.

Fast-forward to today, and around half the world’s high-value international payments are conducted on the SWIFT network, which services over 11,000 financial institutions in almost every country on earth. Cutting seven key Russian banks from SWIFT means that they can no longer use the network for international transactions.

How important is SWIFT?

While SWIFT is the pre-eminent international transfer network, it doesn’t hold a monopoly. In what now might be seen as a prescient move, the Bank of Russia created its own version of SWIFT – the SPFS – following its annexation of Crimea in 2014. The problem? Only 400 financial institutions have so far joined, meaning it is of limited use to the sanctioned banks.

The other option is China’s Cross-Border Interbank Payment System (CIPS), which has three times the users of SPFS (though only one-tenth of SWIFT’s user base). CIPS also isn’t a true alternative, as it relies on the SWIFT network for its international messaging.

The limits of the SWIFT ban

In truth, the way around the SWIFT ban, at least for now, is to do things manually. There’s nothing to stop a Russian bank from emailing an international financial institution with a transfer request, it’s just a far less efficient way to operate. While this is a ban of significant inconvenience for Russian banks, it’s not one of total isolation.

It should also be noted that two of Russia’s largest banks - Sberbank and Gazprombank – are exempt from the SWIFT ban, for somewhat unsurprising reasons: they facilitate the Russian-European trade of energy and other key commodities. This means that the SWIFT ban in and of itself won’t be the knock-out blow to Russia that it may have initially seemed.

What will happen from here?

For the moment, the SWIFT ban is largely having the intended effect – making life more complex and costly for key Russian banks. But eventually, the affected institutions are likely to find workarounds. When similar sanctions were levelled against Iranian financial institutions, they eventually found other banks that were willing to act as transactional middlemen.

We, therefore, must be realistic about the effects of the SWIFT ban. It blocks the most direct and efficient financial path but doesn’t make things impossible.

Unprecedented? Certainly. Terminal? Far from it. But then again, that was never the intent

Written by Tal Weiser, VP of Sales at Finastra Israel